Expats and tax: own company could help contract worker

Short-term contract worker

Personal status:
family man who travels for work on his own
Expat Status:

short-term contract worker, usually for four to six months and in the UK one to three months between contracts
Financial status:
contract terms vary, approx. £80,000 tax-free

Our intrepid contract worker is UK-resident under both the existing residency test and the new Statutory Residency Test (SRT), which has just been introduced.

His family lives in the UK and he spends, on average, four months a year in the UK in-between contracts. He is not employed – because he is self-employed – so cannot fall within the full-time work overseas exemption.

It is possible for a person who is a contractor to become non-UK resident if their work is performed overseas in a way that is equivalent to someone working full-time overseas. But our contractor's work is sporadic and he spends too many days (more than 90) in the UK. So he is counted as UK-resident, despite carrying out all his work overseas.

It is quite likely that his income would also be taxed in the country in which the work is performed. If the income were taxable in both countries, for example in the UK, as the country of residence, and France, as the country where the work is performed, a double taxation agreement (DTA) could determine which country has the right to tax his income.

Unless the contractor has a fixed place of business, say an office, in the other country, his country of residence would normally have the exclusive right to tax his income.

UK tax could be mitigated by making contributions to a UK-registered pension scheme such as a self-invested personal pension (SIPPS). Contributions to a registered scheme attract full UK income tax relief as long as they do not exceed £50,000 per annum (reducing to £40,000 from next year).

Tax-efficient structuring could be achieved by setting up a company. It would be possible to use an offshore company but this would have to be managed and controlled from offshore, which would necessitate him employing overseas directors. He would also be subject to various anti-avoidance rules so would need to carefully structure the ownership of the company to avoid these. The expenses of both are unlikely to be justified for this level of earnings.

He would, however, benefit from incorporating a UK company to contract with the various firms he works for. The company would pay tax of only 20pc on profit. From the gross income, the company could deduct all reasonable expenses according to normal UK rules including any payments made to his SIPPS.

He would obviously need some money to live on and so would need the company to pay him a salary. This could be kept relatively low to take advantage of the lower tax rates. He could also arrange for the company to pay dividends to top up his total income as and when required.
As long as his total income was below £41,000 per annum there would be no further tax payable on dividends received. This arrangement would give him great flexibility to be paid what he wanted when he wanted and take advantage of differing and lower tax bands. Any income he left within the company would suffer no further tax.

Arrangements similar to this can be caught by IR35, which is an anti-avoidance provision to stop what were essentially employees being paid through a company to avoid tax. Readers may recall the stink when it was revealed that many senior BBC figures had set up corporate structures through which they took their income. IR35 would not apply to our contractor, as he is bona fide self-employed, so incorporating would give him tax savings and much flexibility.