Using your UK Company Overseas

Most contractors who are offered overseas assignments will more than likely already own and operate a UK limited company from which, IR35 permitting, they hopefully derive dividend income and salary in order to maximise take home pay. Although the UK authorities have recently attacked the tax advantages that operating a limited company can offer, they do continue to show a tolerance to this simple and effective legal arrangement. Unfortunately, many other countries are not quite so happy with this separation of income from the person actually providing the service.

Further more, contractors run the very real risk that even if they themselves do not become resident for tax purposes overseas, their company might. This is because most contractors effectively control their UK Company, either by way of their share ownership and/ or directorship in the company. Unfortunately, unlike the tax treaties that allow individuals a period of time before becoming tax resident in another country (usually six months) a company does not enjoy such a generous local 'tax holiday.' If the effective day-to-day management of a company moves abroad, then the company will become tax resident in that country from the moment that its management arrives and starts to generate income on its behalf. Thus the risk is that not only will the income of the company be regarded as the income of the individual, but also there may be a liability to Corporation Tax both here, in the UK, as well as in the overseas country, without the same opportunity to relieve this double taxation as effectively as can be achieved with Income Tax for an individual.

Bearing this in mind, the first phase of planning to work overseas will probably involve discussions with your accountant on the topic of whether to suspend or close down your UK company. The final decision as to which of the two options is best rests largely with you, however, if you intend to be away from home for three years or more, then my advice is that it is probably best to close down your company and start a new one when you return, depending on your circumstances at the time.

Of some comfort is the knowledge that you do not need to rush this decision. Bear in mind that you have ten months from the date of your next company year-end in which to file your company's accounts and then another year after that date for filing the ensuing 'dormant' year's accounts. If you have only just begun a new financial year, these dates are some 20 and 32 months away. My suggestion is therefore to suspend trading your company for the time being and defer a decision to close it down until much later on, or at least until you are confident that overseas contracting is right for you and will continue for some time.

Suspending trade will most probably include informing the Inland Revenue to suspend your company's PAYE scheme as well as Customs and Excise to de-register for VAT. If deregistering for VAT, remember that company assets on which you have recovered VAT in the past must be notionally 'sold' and the resulting VAT on the sale added to your final VAT return. For this reason, it may be sensible to wait a few months before making such an important decision as de-registration, particularly if you are unsure of how long your contract will prove to be or of your enthusiasm for contracting abroad.

My advice is to liase closely with your accountant throughout this process but to be sure that a decision is made one-way or the other. Remember that if you do not inform the Inland Revenue or Customs and Excise of your plans, your company's liability to file returns will still continue after your departure and failure to make timely returns may result in avoidable fines. Of course you can choose to remain registered and make nil returns, but the temptation to forget a return is, in my experience with overseas contractors, too great a risk to run for the long term.

Dealing with your UK home

Before we look at alternative ways of working overseas other than through your own UK Company, we must not loose sight of other potentially troublesome domestic issues to ensure that you have a trouble free period working abroad; probably the most important being your home. If you own (or even part own) a property, then it is sensible to inform your mortgage provider that you are leaving the country temporarily on business and expect to be away for some time. If you intend to sublet your property and anticipate rental income (Schedule A income) as a result, the good news is that you can claim mortgage interest and other property costs against the rent you will receive, possibly reducing any liability to tax on this income to nil.

If you intend to use the services of a rental agency to look after your property in your absence, unless you appoint an approved UK Tax Agent to look after your affairs while you are away, then the rental agency will be required to deduct basic rate income tax from any rental income they collect on your behalf. I strongly advise that you plan your cash flow accordingly.

Other Domestic Issues

If your company is not closed or suspended by the date of your departure, make sure all-important mail is forwarded to you or your appointee, and that the company continues to exist from a UK address, where its records can be inspected and official Company House mail can be sent. It may also be sensible to give a trustworthy friend or member of your family your 'power of attorney' in order to sign important documents on your behalf in your absence. (This can be easily arranged through a local solicitor). As a minimum, someone should be empowered to sign company cheques in your absence.

If you have a partner and/ or children and intend to take them with you, it is probably worth making an advance trip to look into schools and suitable accommodation. By experience, there is nothing quite like an unhappy partner to cause an early return to the UK, possibly damaging well made plans to mitigate your tax in the process.

For many contractors there will be several other personal matters to organise before your departure (i.e. Is your car leased? Do you have H. P. commitments? Are there sufficient funds in your bank accounts to cover ongoing UK commitments?, etc...), whatever personal arrangements are needed for you to ensure a trouble free period of working overseas. I do hope that this second article on the subject has provided you with some food for thought.

You will realise that most of my advice assumes that you will be out of the country for some time. However, most overseas contracts today are seldom for a period greater than six months. This puts you in somewhat of a 'catch 22' situation as your contract appears to be for a period that requires little tax planning (other than my caution about working through your UK company), but in the event that your contract is extended, you must be in a position to minimise your liability to tax. Most tax mitigation arrangements cannot be made retrospectively. All you can do is to discuss the likelihood of a contract extension with your agency and also consider the possibility of looking for a new contract overseas if the current contract is not renewed. With so many things to consider, unfortunately it is not possible to simply jump on a plane and start work in a foreign country and pretend that little has changed. The difference between Birmingham and Brussels is more than just six letters. The more you can think about and plan before your departure, the more trouble free your overseas contract will be.

Readers may be forgiven for thinking that I am not in favour of contracting overseas. Nothing could be further from the truth. Properly organised and well planned, your overseas contracting experience will prove to be emotionally and financially rewarding. However, ignoring basic issues before you go could prove costly and, as the saying goes: "Forewarned is forearmed."

As to the most important planning issue of all: 'How best to organise your contract,' I am afraid you will have to wait until the third article in this series to find the answers to that.

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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Barry Roback, © Shout99.com 2002