Don’t dismiss your ‘Ltd’ when contracting abroad
Looking at the answers of respected contractor accountants and compliance specialists, newbie contractors might think that their limited company’s usage ends at the UK’s shoreline. But this is not necessarily the case, writes Mike Phillips, a director at ItsInternational.
In fact, many British contractors are currently on assignments abroad – especially in EU countries – operating through their own UK Personal Services Company (PSC). But to avoid the prospect of any nasty, expensive surprises, the smart contractors will have considered all the tax implications for them, and their companies, before arriving in their host countries.
As responsible contractors, they would have sought out qualified and regulated experts whose advice is crucial for using a limited company abroad. Such contractors must firstly ensure compliance with the Double Tax Treaty (DTT) between the UK and the host country. Then, and especially important if you want to use your company, you would need to ensure compliance with the Permanent Establishment (PE) rules. As these rules are constantly evolving, they need to be carefully monitored to ensure compliance at all times.
Your PSC (which is UK resident) risks having an immediate PE in the host country if it is decided by a local tax office that your company meets one or more of the following conditions:
- It has a ‘place of business’ there
- It has a ‘fixed’ place of business there
- It engages in an activity with a ‘degree of permanence’ there
Once a PE has been established, it only ceases to exist when the assignment is ended.
Where PE is established, both you and your PSC become liable in the host country for all due taxes and social security from day one of the assignment together with accrued interest from late settlement.
Worse still, if the local tax authorities believe you purposely (rather than innocently) defrauded the tax office, you could also face substantial penalties, fines and, ultimately, a criminal record – irrespective of being able to show ongoing full declaration on your UK company account submissions and UK self-assessments.
It is largely because of the PE and DTT rules that the appetite for using a PSC abroad appears to be only small. But the truth is that, much like using a limited company in the UK, usage of such a limited liability structure abroad simply requires contractors to give proper attention to the local regulations – an observance they are very much familiar with here in the UK.
Such an adherence to the rules when overseas may mean that you, the contractor, must register your existing UK PSC in the host country and submit to the host country’s tax and payroll obligations. Once you work out how much in time and taxation you’ll need to fork out as a result, it may be that it’s not viable for you to use your ‘Ltd’ abroad. But that’s very different, of course, to saying that it’s simply not possible to use a PSC outside the UK. Given that unscrupulous umbrella companies are not just confined to our shores, knowing that your existing PSC could be just the ticket to carry out that next contract in the sun is a worthwhile fact to remember.
So in short, using your limited company in Lisbon, Lima or Leipzig might be less of ‘no-brainer’ than using it in Liverpool but it’s not off-limits. Your company will be recognised as a legal entity by the authorities in any one of those three foreign cities but, just as it does in the UK, it may face a tax liability and, as usual, the shrewd contractor will take legal steps to mitigate it.