New rules mean UK contractors should work overseas for a full year to be certain of compliance
This means that contractors will comply with a new, stricter residency test introduced in 2013, which provides the simplest route for contractors working overseas to minimise their UK tax liabilities, according to Von Essen (see box out for full details).
Von Essen explains that other options are available through the residency rules to ensure foreign earnings are exempt from UK tax, but says that they are so complex that contractors risk falling foul of them.
This means that contractors face a race against time to agree an overseas contract before the new tax year starts on April 5th.
Lydia Marref, Partner at Von Essen, comments: “The labyrinthine UK tax system can make it hard for contractors who work overseas with family in the UK to know where they stand.”
“A lot of contractors we work with make it easy for themselves by working overseas for a full tax year. That way, they definitely don’thave to pay UK income tax.”
“There are lots of options for contractors working overseas on how to structure their affairs to minimise the amount of tax they pay, but for UK contractors the easiest option now is to contract abroad for a complete UK tax year.”
“Contractors wanting to take advantage of this simple route to zero UK tax on their income have a race against time to agree an overseas contract with an employer.”
Von Essen says that contractors working overseas may still have to pay tax in the country they are working in, but the level of tax they pay will vary from country to country.
Lydia Marref continues: “A large number of UK contractors are opting to work overseas to benefit from an attractive mix of interesting work, high income, the excitement of working in a new country and, in many cases, very favourable tax regimes.”
“We are seeing a growing number of internationally mobile professionals opting to work in the Gulf, where they often pay no income tax. Tax isn’t the only factor for them, but when they find out how much of their income they get to keep it’s certainly an important factor.”
“Contractors working in countries where they do pay some kind of local income tax do not want to be taxed again in the UK, which is why they have to be quite proactive in managing their affairs."
Why contractors working overseas for a full year don’t have to pay tax in the UK on their income
Von Essen explains that contractors working full time overseas without a significant break
during the tax & lsquo;rear axe exempt from paving UK tax on their income if they spend fewer than 91 days in the UK and work fewer than 31 days working in the UK. These rules were introduced through the Statutory Residency Test that came into force in April 2011. Von Essen points out that full time contractors would be highly unlikely to clock up enough days in the UK to risk having to pay UK tax on their income. Lydia Marref adds: “An initial overseas contract may not last a full year, so UK contractors taking advantage of these rules need to be careful that they don’t spend too much of the time between additional contracts back in the UK."