Contractors’ Questions: Does being paid in foreign currency affect my tax residency status?

Contractor’s Question: I’m German but have been living in the UK for almost five years.

Since April this year, I have been working as a contractor with my main client being a German foundation run out of Hamburg.

For this work with the foundation, I am to be paid in installments over the next few months. But after they made my first payment recently, the foundation said it was rather costly to pay my fee into my UK bank account.

They would therefore prefer to pay me into my German bank account, but would that in any way change where I would have to pay tax? As I am a tax resident in the UK (having lived here for more than six months), I would expect to pay tax on my worldwide income here. Am I correct?

Expert’s Answer: Having confirmed that you are considered tax resident in the UK, you would declare your income to the UK tax authorities through which you will pay tax on your worldwide income.

No change in tax position

In relation to query about the client wanting to change payment from your UK account to a German bank account, this has no impact on your tax position. Indeed, this is quite a common occurrence with clients who are overseas!

Typically, at the beginning of an engagement, the client is happy to take on the cost of exchanging currency, but after a while -- and especially when currencies are volatile, it becomes more costly to the client and they start to look for ways to reduce their costs.

Volatility, responsibility, consideration

You have been introduced already to one such option. The engager (the foundation) looks to reduce their exposure to the volatility of the currency markets by paying into a German account in Euros, rather than pay into your UK account in GBP.

While there are no tax implications with them changing the payment currency and therefore the invoicing currency for you if you are agreeable to it; as I pointed out at the outset, you are a UK resident for tax purposes. So you alone will still be responsible for bringing that income back into the UK, into a UK bank account to pay the correct taxes.

The currency exchange rates then become your issue to deal with and you will bear the cost of exchange. Therefore you need to consider how their proposed shift affects the income you receive from the foundation, amid ongoing currency fluctuations. In my experience advising contractors such as yourself, it is likely you will benefit at times but, on other occasions, you will bear any loss too, notably when the pound is extremely weak against the Euro.

Negotiate to mitigate the financial impact

In summary, and positively in your eyes I imagine, there are no additional tax implications with this payment-related change. The income should continue to be declared on your self- assessment tax return as part of your worldwide income. But to compensate you for agreeing to accept the change you may – at some stage -- want to think about negotiating a slightly higher rate with the client to cover the currency peaks and troughs. Whether they agree to such a higher rate is, of course, another matter. Good luck!

The expert was Janet De-Havilland, chief executive of compliance and contingent employment consulting firm Pendragon Consultancy.

Tuesday 9th Aug 2022
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Written by Janet De-Havilland

Janet De-Havilland ACIPP, has specialised in supply chain compliance and contingent employment for over 25 years. Janet is a leading authority on contingent employment in the UK and Internationally. Janet regularly speaks on global engagement and employment matters for workers engaged through a recruitment supply chain or direct hiring arrangements. She is CEO of Pendragon Consultancy, a compliance and contingent employment consulting firm.

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