Working Abroad Tax Advice
Many people are now offered the opportunity to go and work overseas. One of the key considerations should be achieving the tax advantages that can go with working overseas.
What are the tax advantages?
The main tax advantage is that if you can be classed as non-UK resident and non-UK ordinarily resident, you will be exempt from UK income tax on your overseas salary income. If you're working in a nil or low-tax environment such as Dubai, this means you can receive your salary totally tax free.
Other tax benefits of establishing non-UK residence status include:
- Being able to receive UK bank and building society interest free of income tax. By submitting a form R43 available from the Revenue website you can also elect to reclaim tax that was wrongly deducted on interest from the UK as a non-UK resident and non-UK ordinarily resident individual.
- Being able to receive UK dividends free of any UK withholding taxes
- Only being subject to UK tax on bank interest and dividends to the extent that tax is deducted at source (ie effectively nil if you’re not a UK ordinary resident) for the tax years after you emigrate
- Being exempt from UK capital gains tax on any assets that you acquire after you leave the UK. When you sell assets that you already owned when you left the UK you will usually be subject to the five-year non-residence requirement if you want to avoid CGT.
There is no firm guideline laid down in the tax legislation as to when an individual is and is not UK resident and the courts have traditionally given residence its ordinary dictionary meaning.
Therefore, they take the view that to reside somewhere means to 'dwell permanently or for a considerable time’, and to live in or at a particular place.
In this respect, the courts/commissioners could look at a person’s ties to the UK, the regularity and length of visits to the UK, past and present habits of life and freedom of attachments abroad. As such, if you go to work overseas and have no real visits to the UK in the period since departure, you’d clearly be non-UK resident. If, on the other hand, you retained a UK property, came here for around 5-7 days per month and lived with close family, it is likely you would be UK resident.
In fact, though, this strict legal position is modified by Revenue practice/concessions, but it’s still worth bearing the strict legal position in mind because the Commissioners can and do ignore the Revenue practice if they choose to.
If you leave the UK to work full-time abroad under a contract of employment, you are treated as not resident and not ordinarily resident if you meet all the following conditions:
- your absence from the UK and your employment abroad both last for at least a whole tax year
- during your absence any visits you make to the UK
- total less than 183 days in any tax year, and
- average less than 91 days in a tax year. (The average is taken over the period of absence up to a maximum of four years. Any days spent in the UK because of exceptional circumstances beyond your control, for example the illness of yourself or a member of your immediate family, are not normally counted for this purpose.)
If you meet all these conditions, you are treated as not resident and not ordinarily resident in the UK from the day after you leave the UK to the day before you return to the UK at the end of your employment abroad. You are treated as coming to the UK permanently on the day you return from your employment abroad and as resident and ordinarily resident from that date.
If you meet ALL these conditions, you are entitled to claim non-UK resident and non-UK ordinary resident status from the day following departure from the UK for full-time work abroad as above. That status continues as long as you continue to meet all of these conditions.
As soon as you cease to meet these conditions in a tax year, you would then not be entitled to the concessionary treatment.
It's therefore essential that, in order to claim the benefit of the concession (essentially to expedite your non-residence application and to prevent the strict legal position being initially considered), you are:
- working overseas under a full-time contract of employment
- overseas under the contract of employment for at least a full tax year
- able to meet both the 90 and 183-day requirements
If you're not, the Revenue will usually be quick to point out the concession does not apply.
This is not defined and there is no minimum number of hours specified. However, the Revenue regard a working week of 35-40 hours as full time and can accept lower hours if it’s reflected in local conditions. Several part-time jobs can also constitute full-time work.
If you own a company, there is nothing to prevent you from establishing non-UK residence by drafting a contract of employment with an overseas subsidiary. Provided you then meet the above conditions, the fact that you are a shareholder in the company would not prevent you establishing UK residence. Clearly you'd have to be an employee and be able to show that there was a genuine full-time employment.
When can the conditions be breached?
There are lots of circumstances where the conditions can be breached aside from the obvious breaches of exceeding the 90-day requirement or not ensuring the employment contract lasted for a complete tax year.
The Revenue have stated that '...If there is a break in full-time employment, or some other change in your circumstances during the period you are overseas, we would have to review the position to decide whether you still meet the conditions...' and '...If at the end of one employment you returned temporarily to the UK, planning to go abroad again after a very short stay in this country, we may review your residence status in the light of all the circumstances of your employment abroad and your return to the UK...'
You would also need to ensure that there were no UK duties other than 'incidental' UK duties. Incidental has been strictly construed for this purpose and, for example, a pilot whose flights required occasional stopovers in the UK was held to have more than incidental UK duties.
You would also need to ensure that your employment was full time. If, for example, you had a significant period away from the overseas office and spent this in the UK, it is likely the Revenue would argue that you were not in full-time employment. Therefore, there are cases where the Revenue have challenged individuals having 80 days spent in the UK in a tax year to visit aged relatives etc on the basis that they were not in full-time employment.
Whenever you’re considering an overseas employment, paying careful attention to the above details can ensure UK income tax is significantly reduced, or even avoided in full.