Key Considerations for Contractors: Navigating Tax and Compliance
Here we have gathered some important questions and answers for contractors working overseas, with a particular focus on tax and compliance.
Can I use my UK Personal Service Company when working overseas?
Whilst it is possible, in most European Countries it is inadvisable, as the use of a UK Personal Service Company does not offer the benefits that the company would enjoy for UK Assignments.
There are many issues to consider, such as where the company is tax resident, whether expenses are tax free, where Income Tax and Social Security is due and on what. In most cases when the overall taxation, social security and compliance costs are detailed, an Employment Income only model tends to be the more attractive model.
I Believe I Am Exempt from Local Taxation as My Assignment Will Be Less Than 183 Days in the Country. Is This Correct?
In most cases, an individual on assignment is liable for taxation on income earned in the country where they are working from day one. Some countries may disregard stays of a month or less, but generally, after 183 days, the individual becomes a tax resident in both the country where they work and the country where they live. This means that the order in which income is taxed, and in some cases the tax rate applied, is determined by the relevant Double Taxation Treaty.
I Only Ever Pay Tax in My Home Country, No Matter Where I Have Worked, and I Have Been Paid Gross.
Paying tax to the wrong tax authority does not exempt you from paying tax to the correct authority. The tax authority to whom the tax was correctly owed will seek to collect the full amount, along with interest and penalties. You would then need to submit a repayment claim to the tax authority to whom you have incorrectly paid.
I Have Paid Tax to the Tax Authority Where I Was Working; Does This Make It Tax-Free Back Home?
Generally, if you remain a tax resident in your home country, you may be liable for additional taxation if the tax liability on the same income is higher in your home country. The tax you have already paid will be considered, and you will only need to pay the difference.
I Am Non-Resident in the UK for Tax Purposes on My Foreign Income.
If you work in a country where the tax rate is significantly lower than in the UK, you may find that you owe additional tax in the UK, resulting in further payments to HMRC. Under certain conditions, you might consider declaring yourself non-resident in the UK for tax purposes. This is a serious decision that should not be taken lightly, as there are many factors to consider, including limitations on how much time you can spend in the UK.
It is advisable to seek professional advice, considering all current personal and contract circumstances, when deciding whether you should be considered non-resident in the UK for tax purposes.
I Am Employed by a UK Business, Not Based Where I Am Working, So I Should Pay Tax Where My Employer Is Based, Right?
If you are employed by one organization but working for another, the jurisdiction of the entity paying for your services is what matters. If they are based in the country where you are working, they are considered your “Economic Employer,” and you would be liable for tax from day one unless exempted by the local tax authority.
I Don’t Need to Worry Because I’ll Be Out of the European Country Long Before They Realize I’m Working There.
This is a misconception. Each European tax authority has the right to ask another European tax authority to pursue a debt on their behalf. The Mutual Assistance Recovery Directive (MARD) has caught many professional contractors by surprise when, for instance, HMRC starts pursuing a debt owed to a foreign country.
Can I Choose Where I Pay My Social Security?
Social security contributions are typically due in the European country where you are working, unless you are exempted by the issuance of a Certificate of Continuing Liability (A1/A2) from the competent authority in your country of habitual residence and where your employer is based.
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¨Read more about working oversea in Norway and work in Sweden