What to ask overseas contracting 'solution' firms
Using a limited company registered abroad in the UK is clearly a confusing issue for contractors but so too is exactly the opposite – using a UK company when abroad, writes Mike Philips of its international.
Overseas contracting via PSC
We’d go so far as to say that many UK contractors are initially caught unawares of tax liabilities in the country of work, often because they don’t bother with professional advice. And because they don’t know about the liabilities, they don’t normally know whether their UK limited company is going to be tax-efficient for operating an assignment abroad.
The bottom line is that both contractor and company should be registered in the host country otherwise, on discovery either during or well-after the assignment has completed, the local tax office could demand outstanding corporate and personal taxes. This sting in the tail-end of contracting overseas would likely come with substantial fines and penalties.
To avoid this nasty surprise:
Ask your accountant, or a professional tax adviser with knowledge of your host country, what your tax liability is going to be.
Overseas contracting via umbrella
But to avoid this unenviable fate, don’t jump out of the frying pan and into the fire. Too many contractors do – they don’t fancy their PSC abroad and so get taken in by overseas umbrellas promising, but ultimately not delivering, fully-complaint tax solutions. The advertising these unscrupulous outfits target contractors with is strikingly similar to the ‘too good to be true’ advertising claims that underhand brollies in the UK once put out.
As a former taxman has recently advised when suspicious of UK umbrella companies, with those brollies you might need for overseas opportunties:
Ask the provider to settle any concerns about their compliance that you may have and obtain their set-up in writing so, in your own time, you can verify it is compliant by asking HMRC, or your own tax adviser.
We have seen supposedly ‘safe’ overseas ‘solutions’ for contractors selling their skills abroad relying on undeclared income in the host country, thereby exposing individual contractors to the trauma – and cost – of dealing with an investigation by foreign tax officials. Be very wary – while local rules vary, a tax avoidance investigation can allow a foreign tax office to review and possibly reassess declaration going back a decade! Worse still, if tax evasion is suspected, this 10-year ‘look back’ by the taxman can be extended to the individual contractor’s first ever tax return.
Overseas contracting via agency umbrella
Sometimes contractors are given a little help jumping from frying pan to fire. So in the event that your recruitment agency insists that you choose an overseas umbrella company from its PSL, remember you’re within your rights to:
Ask if and how your agency accepts accountability should its recommended umbrella’s ‘solution’ expose you to evasion.
Both recruiters and end-users can nowadays find themselves on the radars of foreign as well as domestic tax offices purely on the basis of unresolved tax issues that you - one of their contractors - may have.
Meanwhile some agencies may allow you to contract with any umbrella independently chosen by you. Stay on guard to any umbrella’s ‘solution’ which claims simplicity with very high retention.
Ask if the entire contract rate is declared in the country of work.
If it is not:
Ask where and how you should be declaring that income.
Although such ‘split schemes’ are often legal in the country where the umbrella is based, they may not be legal in your country of work. Should a substantial and unexpected tax liability fall exclusively on you and remain outstanding, the tax authorities in your country of work may widen their net by involving HMRC.
The simple answer, almost regardless of whichever structure you choose for supplying your services overseas, is to always:
Question seemingly unrealistic net retention or other ‘too good to be true’ claims.
Lastly, always seek advice from experienced, international and regulated service providers or independent sources of reputable, contractor-specific guidance. The excitement of contracting overseas is always alluring but doing some ‘pre-flight probing’ on tax compliance could save you a lot of ‘post-assignment pain,’ and worse.