The residence of your employer

I will go on at length in a forthcoming article about personal residence, which can be influenced by a large number of factors. However, when it comes to using your own UK company while overseas, then corporate residence becomes a factor. The residence of a company is generally defined by the location of its “centre of control and management”. Broadly speaking, the centre of control and management of a company is the place where its controlling directors are physically located, in effect the place from where they are controlling the company.

Therefore if you have a UK one-man company, which is obviously controlled and managed by you, and you are physically located in Paris, Brussels or some other European city, then your UK company could be deemed to be resident in France, Belgium etc.

The net effect of this is that your company is taxed as though it is registered in the foreign country! It would be subject to foreign corporate taxes on its profit (much higher than the UK's 20%), and all payments by your company to you would be subject to foreign tax at source.

So as you can see, using your own one-man company while overseas does not represent sound tax planning!

“I can avoid IR35 by going overseas” ...

There are two main points to be made here.

The first is that IR35, or special tax status for personal service companies, already exists in most major European countries and has done so for many years. In the UK we were in a unique position in being able to take dividends to avoid national insurance, or in being able to split income with (e.g.) a spouse to avoid higher rate tax. The traditional UK concept of contracting has, until recently, been quite alien to overseas employers, who were more inclined to use “software houses” or “big 6” consultants to man short-term projects.

Secondly, harking back to the previous section, you can't avoid IR35 implications on your UK one-man company simply by moving overseas. The rules apply to UK personal service companies. There is nothing in the legislation that states the rules are restricted to UK personal service companies operating in the UK!

So, it's plain to see, simply moving overseas is not going to magically remove you from the IR35 net, a bit more thought and planning is required!

“I can avoid UK tax by moving overseas”...

This statement is only true when certain pre-conditions are met, the principal one being that you have achieved non-resident status in the UK. To achieve UK non-residence, in its most simplistic form, you will have to satisfy a number of conditions. The main criteria is that you spend an entire tax year outside the UK, where it was not your intention to come back permanently to the UK.

During the complete tax year outside the UK, you are allowed 90 days back in the UK, but use these for vacations only and avoid taking up or even seeking employment during that period, as this would contradict any commitment not to permanently return to the UK.

If you plan to leave the UK in say February / March, in a particular year to take up employment overseas then the full tax year requirement is not so onerous, as only 13 –14 months overseas is required to achieve the full tax year (i.e. up to April 05 in the following year). However if you are contemplating going abroad in April or May, and want to avoid UK tax, remember you need to stay out of the UK until after April 05 almost two years down the line!

“If I go to a country for less than six months I won't have to pay any tax” ...

This one's a little bit closer to the truth, but only if the statement ends with “in that country, and where certain conditions are complied with”.

Most countries have a “183 day” rule, which entails that you will not be deemed to enter their tax system as long as you work for a foreign employer and spend less than 183 days in total on your assignment there. However if you work for a resident employer you will not get out of the system (and remember your own one-man company could be deemed a resident employer).

But don't forget, 6 months in a foreign country is not enough to get you out of the UK tax system, so expect to be hit with a UK tax bill when you get home.

"I'll be better off if I go overseas"...

And finally, having gone into some of the nitty gritty of the tax implications of moving overseas, try to consider the cost of living in a foreign country!!! Think of renting an apartment in an expensive European capital, think of the cost of travelling home to see family / friends, think of the increased telephone costs involved in keeping in touch, add these and other additional costs together and take them into account in evaluating the all-important "bottom line".

I always try to emphasise this, as too many naïve contractors are blinkered by trying to reduce exposure to tax while forgetting all the other associated costs of moving / living overseas.

Conclusion

To sum up, don't be fooled into thinking that a move overseas is as simple as some recruitment or financial seem to make out. There are a number of things to be considered, not least of which is the tax and social security liability arising on your new contract. However, the good news is that contract rates overseas tend to be higher than those in the UK, and with careful planning and structuring you can certainly minimise your exposure to European (and UK!) tax and social security and achieve what you would regard as a reasonable “bottom-line” to reward you for making the move to a new location.

Global K provides tax planning and solutions to contractors taking up a contract assignment in a foreign location. For further information on the tax implications of your proposed assignment, including contains full contact details, click here.

The author accepts no responsibility for any loss which may be suffered by anyone taking action based on advice given or solutions offered in the contents of this article. Personal professional advice should always be sought by anyone deciding to undertake a contract overseas.