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Contracting Overseas Part 1: Before you go...
by BarryRoback at 14:34 07/05/02 (Conference Papers)
JSA LogoIn this first article in a series of four concerned with contractors working overseas, Barry Roback, JSA Chief Executive, explains some of the ground rules relating to working abroad, especially those that can have a disastrous effect on your pocket - if you get them wrong.
Aside from IR35, probably the most talked about topic in contracting today is the do's and don'ts of working overseas. As if moving from a secure, employed environment into contracting is not stressful enough, the move from the familiar UK 'Limited Company' contract environment to an unfamiliar overseas working environment can prove to be more traumatic still - but only to those Contractors who have not done their research first. The aim of this series of articles is to help you properly plan your time overseas and to explore the different options available for you in order to best structure your working experience - some good, some bad and some downright suicidal!

Properly structured, an overseas contract should prove to be both financially and emotionally rewarding. But before we look at the practical issues concerned with contracting overseas, we must first understand and then organise our working practices around the underlying tax rules, both those at home and in the country where you will be working - bearing in mind these will be different and often at conflict. Even though many of our politicians would like to have us believe we are a 'United States of Europe,' in fact nothing could be further from the truth when it comes to taxation.

Interestingly, one of the most common mistakes that contractors make when planning their work overseas is to believe that by working away from their home country, they will acquire a tax- free status for a certain period of time. No doubt this mistake stems from the fact that in most countries where you may be asked to work, the tax rules in place will often allow you to work in that country without paying tax there for a period of up to six months.

Although this is generally true (with some notable but important exceptions), what is conveniently overlooked is that where this situation exists, you will remain taxable on the income earned overseas - but in your normal country of residence. For clarity, unless you fraudulently arrange your international tax affairs, you will always be liable to tax somewhere on your earning. The skill is in ensuring that the amount of tax you end up paying has been minimised within the scope of legal tax avoidance.

Using a UK tax resident as our example, let us take a quick tour of the underlying rules:

Non-resident for tax purposes

Most people understand the relatively simple concept of becoming 'non-resident' for tax purposes. Simply stated, a normal UK tax resident must be living and working overseas for a complete tax year, i.e. between the periods from the 6th April in one year to 5th April in the next year, to become non-resident for tax purposes and not liable to declare overseas income on a UK tax return.

Provided that visits home during this period of non residency average no more than three months per tax year and are not more than six months in any single tax year, the only UK taxable income is income actually derived here, such as: dividends, interest or rental income, (but more about rental income later).

Please be aware that each country will have a different set of rules on this issue - for example, as a US citizen you would NEVER loose the requirement to submit a US tax return, no matter how long spent outside of the USA. Also bear in mind that most countries adopt a (more sensible?) calendar-based tax year i.e. January 1st to December 31st.

The 365-Day Rule (now defunct)

Most overseas contracts do not coincide with the UK's tax year. The result of this is that it is possible to find an individual who becomes non UK tax resident after living and working overseas for a period of say 13 months while another remaining UK tax resident who may work overseas for a period of 23 months - depending on the month in which the contract commenced.

This apparent timing inequity was solved in the past by a special set of tax regulations known as the '365-day rule,' but were withdraw in the late 1990's and are yet to be replaced. Thankfully, the Chancellor has indicated in his last 2001 Budget speech that the Government intends to review the whole complex area of tax residency and domicile when hopefully we will see this present day anomaly being addressed.

Liability to Tax Overseas

The UK Tax Residency rules will generally not be your main concern when arranging your affairs in the most tax advantageous manner while working overseas. What might appear as a somewhat generous UK tax break is in reality nothing more than a simplified administrative arrangement to help individuals working abroad. Under most foreign tax rules, such individuals will become liable for tax in that country after only six months of commencing work there. To repeat: At no time will foreign earnings be tax-free.

So, after as short a time as only six months, your liability to UK tax becomes the least of your problems. If you think UK taxes are bad, just wait until you calculate your liability to employment taxes in say Holland or France. But do not despair. With careful planning and a good understanding of your options, some (legal) tax mitigation is still possible. (More about that in Part Three of this series of articles). The most important thing is to realise and accept is that you will become foreign tax resident, and to organise your affairs accordingly.

One last comment on paying taxes overseas: Under double taxation agreements that exist between the UK and just about every other country that you are likely to work in, you will not be required to pay tax twice on the same earnings. Where you are liable to pay tax in two countries on the same earnings, for example where you work in say Belgium for nine months - thus breaking the Belgium six month rule regarding residency for tax purposes but not achieving the UK tax year exemption - then the double taxation agreement between Belgium and the UK will prevail. Under this agreement, you will be liable for tax first in Belgium based on your Belgium income and their tax rules. You will also be liable to tax in the UK based on the same income, but less any tax already paid on it to the Belgium authorities. That is, you will end up paying tax on your Belgium income at the higher of the two countries tax rates, albeit possibly spread over two different countries.

In next month's article, Barry will be dealing with the thorny issue of using your UK Limited Company abroad and other domestic issues such as what to do about your mortgage while working overseas.

Acting exclusively for contractors, the JSA Group of Companies, incorporating JSA International and JSA Business Services, offers an unparalleled range of Limited Company and Umbrella Managed solutions to meet the varied needs of contractors working both in the UK and Overseas.

Neither Barry Roback personally, the JSA Group of Companies nor this organisation can be held responsible for any action or inaction taken as a result of this article. The information provided is for general guidance only and it is strongly recommended that individual advice be obtained if you are intending to work overseas.


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Contracting Overseas Part 1: B... BarryRoback - 7/05
    Not necessarily true NigelHall - 9/05
       Not necessarily true brianc - 18/05
          Response to my article BarryRoback - 24/05
       Response to my article BarryRoback - 24/05
    Holland Taxes kaz - 16/05
       Response to my Article BarryRoback - 24/05
       Hollandís Tax IS High/Low depe... wonko - 12/06
          Working in Holland BarryRoback - 14/06
             I digress.... wonko - 14/06
                A little cynical? BarryRoback - 14/06
                   Cynical? - Perhaps! wonko - 14/06
                      You win! BarryRoback - 17/06
                         Damn - I like being wong best wonko - 17/06
    Why me and not Andersons BarryRoback - 28/05
    Re: Contracting Overseas Part ... BenPowell - 16/11
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