In my first article on working overseas, I looked at the fundamental tax concepts that govern the way we must organise your overseas contract. In my second article, we looked at various domestic issues that need consideration before accepting an overseas assignment, but most importantly, the dangers of using your own Limited Company to organise your overseas contract. In this third article, we look at alternative 'arrangements' that exist to facilitate such a contract.
Shout99.com readers will have gathered by now that I am not in favour of using a private UK Limited Company when contracting overseas. But what are the alternatives? In some countries, notably the USA, Switzerland and Canada, you may not even be given a choice. These countries require a work permit in order to legally work within their jurisdiction and in order to obtain such a permit, you almost certainly will require sponsorship from a resident local employer. Under this scenario, you must be employed by a local company and subject to local tax and social security costs from the outset.
Some countries, such as Saudi Arabia, encourage foreign workers and have a low or nil tax regime for foreign workers that makes the use of a UK Limited Company redundant. You may work in these countries quite openly as an individual, often treated as self-employed or locally employed, with little or no tax consequence other than, of course, your underlying liability to UK taxation (do not forget that until you are working outside the UK for a complete tax year, you still remain liable to UK tax on your worldwide earnings).
But the vast majority of countries, especially our European neighbours, have high or very high employment costs and some form of tax mitigation is desirable, albeit with a precondition to be totally compliant and in accordance with prevailing tax regulations.
Perhaps the most common alternative to operating through your own limited company is the arrangement whereby the assignment is contracted via an already established management company, which will then assume the responsibility of invoicing your time as well as deducting tax and other payroll costs directly from your earnings. However, be warned! As the saying goes, 'there are management companies and there are management companies.'
Sometimes, these management companies are based in so called "tax havens" such as Jersey, Guernsey and The Isle of Man, etc. Aside for the obvious suspicion that such location for a base causes - particularly amongst local foreign tax inspectors - many UK agencies now refuse to deal with such management companies. This is principally because these 'offshore' arrangements often involve an under-declaration of total earnings, often when only part of the 'employment' earnings are taxed at local rates, with the balance paid at the end of the contract as some form of terminal or performance related bonus, without deduction of tax. In most cases, the employment agreement also allows for 'staff loans' which are then forgiven at the end of the contract and are also not declared for tax purposes.
There are several drawbacks that I see with this type of arrangement. Firstly, the taxability or otherwise of any payment made to an employee without the deduction of tax, such as a forgiven loan, is clearly a 'benefit in kind' due to employment - and taxable! Secondly, the taxability of pre-arranged and contractually agreed terminal or performance bonus. If the authorities in the local country were fully aware of such a pre-defined arrangement, it is doubtful that it would successfully escape local taxation. Thirdly, although sometimes unjustifiably, arrangements made through so-called 'tax havens' arouse suspicion and are therefore tainted from the very outset. And lastly, why would you allow your finances to be handled by a comparatively expensive Management Company based in a foreign jurisdiction where you have little or no recourse to their mismanagement of your funds unless you were intending to hide income?
By contrast, the preferred method of organising an overseas contract is through a Management Company based either in the UK or in the country where you will be working. In both cases, you should be assured that your income is subjected to proper deduction of taxes, that expertise exist to assist you in dealing with local tax and other work related issues and that maximum advantage is taken of whatever tax breaks or expense deductions are legally available. Even then, be suspicious of any strange or 'too good to be true' arrangements. Always ask for references and where obvious, details of tax approval and evidence of tax payments. If all else is equal, my advice would be to opt for a UK-based Management Company so that any disputes or tax reconciliation work can be resolved even after your return to the UK.
One other relatively popular method of dealing with an overseas assignment is to register locally as a self-employed contractor. Unfortunately, as attractive as this may sound it is advisable to steer well clear of such arrangements. Most countries where you will be offered work have their own IR35-type legislation and believe it or not, the UK Inland Revenue tests for proving self-employment are relatively soft compared to the draconian rules that exist in many other countries. Operating as self-employed is very tempting and paying tax on all your 'self-employed' earnings is reassuringly comforting - until the day that your contractual arrangements are closely scrutinised by a local tax inspector!
In my final article (to be published in a few months time) I shall summarise the general principles of working overseas and take a very brief look at a few country specific oddities, such as Germany's 'Body Leasing' regulations.
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.