Contractors' Questions: Can my Ltd escape in a zero tax nation?

Contractor's Question : If I become tax resident in Saudi Arabia, where there is no income tax, can I just pay myself everything left in my limited company as salary with no tax? I expect the rules for National Insurance contributions are a little more complicated but I assume I should also be able to avoid paying NICs, as well as corporation tax. If a company makes no profit because its turnover goes in salary, would there be any tax owing for the year?

Expert's Answer : The questions are interesting, and some might say understandable in the current climate, but the crux of the issue here is not tax residency. Even if you lose your UK tax residency (see HMRC document 6 for more information on the modalities of this) and expatriate yourself to a country with zero tax, your UK-sourced income will not be exempt from UK tax.

Tax residency governs where an individual pays tax on their worldwide income. The income mentioned here is to be paid as salary from a UK limited company for work already executed (I assume) in the UK. That being the case, this will be considered UK-sourced income, and therefore taxable in the UK.

On a more general level income should, in the vast majority of cases, first be taxed in the country where it is earned. The sole exception to this is for full-time employees on a temporary assignment abroad. Once tax has been paid in that country, it must then be declared to any country (or countries) where the recipient is deemed to be tax resident. These countries will then decide whether any further tax is due.

In countries with Double Taxation Treaties, the tax paid in the country of earning will typically count as a tax credit in the country of tax residency, although no refunds will be granted. So, in answer your question, no; expatriating yourself for tax reasons to Saudi Arabia, or elsewhere, will not allow you to avoid UK tax on UK-sourced income.

The expert was Matt Walters, partner at Capital Consulting

Wednesday 2nd Dec 2009