Contractors' Questions: Overseas contract - what is my UK tax burden?
I was wondering if anyone could offer some advice. I've won a nice long-term contract with Microsoft in Belgium. It won't be as financially lucrative as a UK contract due to the additional expenses of travelling and renting accomodation out there and the additional tax burden (explained below) but I'm prepared to accept that to get "worked for Microsoft" on my CV.
At the moment no contracts have been signed so I can still pull out if necessary (not that I want to, but...)
The problem that I have is that since being offered the role, I have found out that I cannot operate legally over there and use my UK based limited company.
The most tax-efficient way to work out there is therefore to use a native management company to register me with a form E101 and act as a Swiss national (sort of).
What this basically means, is that I will be hit with tax and other contributions of around 35% of my top-line which is considerably more than in the UK.
I'm currently trying to negotiate the rate to make it worthwhile as given my family (kids and wife) won't be joining me, I'll be travelling and coming home at weekends.
So, presuming we can get the rate to something that I like (and I think it's possible) what is my UK tax burden?
My understanding - and I fully acknowledge that this could be erroneous - is that there is an EU understanding in place that means I would only be liable for any additional tax in the UK if what I pay in Belgium is less than what I would pay in the UK.
As I would normally expect to pay around the 20-25% margin, then 35% means I'll be paying around 10-15% more than I would here. Can I get a rebate of that additional 10-15%?
Thanks very much.
This is a very well thought-through question, and covers almost everything that needs considering. You have been correctly informed that you cannot use your UK limited company in Belgium, and management companies are indeed a good way of running your local tax affairs in a compliant manner.
There are two questions here: that of tax residency and that of the double-taxation avoidance treaty between the UK and Belgium.
From a tax residency perspective, this individual, as he's leaving his family back in the UK and returning regularly, will remain a UK tax-resident throughout his Belgian contract and will therefore remain taxable in the UK on his worldwide income. His first liability for tax on his Belgian income, however, will be to the Belgian authorities, either as a resident or as a non-resident taxpayer.
The double-taxation avoidance treaty between Belgium and the UK (it is a specific relationship, rather than an EU understanding) dictates that any tax paid in Belgium cannot then be levied again in the UK. Let's have a look at an example using fictitious tax rates:
A contractor earns a certain amount in Belgium, which is taxed at 40%. On his UK tax return, he then declares the amount earned as "foreign earnings", and also declares the tax paid on those earnings. If the UK level of tax on those same earnings is higher, HMRC may ask the contractor for top-up tax to the UK level. If the UK level of tax is lower, there will be no extra tax to pay. The contractor will not, however, be able to claim back the higher tax from Belgium or the UK.
Update: further to your initial question, you asked whether you could offset travel expenses against tax while working overseas. Basically, yes: any travel between your home and your temporary place of work can be offset against your Belgian tax liability.
For more information on compliant set ups in Belgium, or to discuss this example in more detail, please contact Matt Walters at Capital Consulting .