First of all, what do you need to think about if you are going to be planning on contracting abroad? Some UK contractors may decide they would like to try contracting overseas. There are benefits to this such as better weather and, in some cases, and sampling foreign cultures. However, what are the implications for contractors who are:
- Working through their own UK limited company; and
When you work abroad, can you claim for your costs in relation to this as tax-deductible business expenses? If the answer here is yes, what sort of expenses can you claim for? Any such costs could indeed add up when you are working abroad. Therefore, it is good to know which expenses will be tax-deducible.
A good contractor accountant will help you operate tax efficiently. They can also advise you what to bear in mind if you do work abroad. In this article we will go over the rules that cover this and what you need to think about here.
In a worldwide economy, many projects will exist with working team members spread across the globe. While bearing this in mind, there may come a chance for you to go contracting abroad through your business. When you work overseas, you can experience different tastes and new cultures.
If you land a contract in a foreign country, you are going to jump on a plane. When you get there, you are going to meet up with an overseas client, face to face.
If you work under PAYE or through an umbrella company you may also be asked to work abroad for a period of time. If you do, your employer will advise what you can claim for as your expenses. However, you may be able to claim for more than what your employer allows through your tax return. You can do this if they do not cover what you could ordinarily claim while working away.
The rules for claiming expenses
As a business owner, you should be familiar with the rules when it comes to claiming an expense back home in the UK. These are as follows:
- It must be `wholly, exclusively and necessary’ for your business; and
- You should obtain and retain receipts, just in case the taxman ever asks to see these in the future.
When you are contracting abroad, or you undertake a foreign business trip, the types of costs that you can claim for will be:
There are also benchmark rates available (see below). In addition, you can also claim for Personal Incidental Expenses (PIEs) at £10 per night, when you work abroad.
We also have a separate guide that covers relocation costs. This covers where you are actually moving your primary place of residence.
Contracting abroad -expenses
As part of working abroad, the same principles that are set out above apply, with regards to claiming for your expenses. Therefore, when you incur any expenses, it is key that they are `wholly, exclusively, and necessary.’ Please remember, you always need to ask for a receipt too when you pay for an expense. Your receipts should be kept with your business records.
What’s more, while you are away, you can experience the different food and drinks. Please note, though, the taxman is on the lookout for any expenses that are not exclusively for your business. The taxman is on the lookout even more when you work abroad compared to your UK expenses.
In addition, where there is a duality of purpose, a cost is not an allowable one. `Duality of purpose’ means there is a mix of business and personal element to a claim. Therefore, you cannot claim for this. In this instance it could mean you were taking a week abroad for a holiday with only one day or part of one day meeting a potential business contact.
What should you bear in mind
Contracting abroad or working overseas -initial thoughts
First of all, we would not advise you to mix business trips with holidays. If a contractor delays his return home to spend a few days on the beach or spend some time sightseeing, then he cannot reclaim any of the costs as a business expense. Likewise, if the contractor takes his wife and she spends her time in the hotel spa while the contractor is meeting with the client again, he cannot claim the cost as a business expense. This is because a `duality of purpose’ has been established.
The best method that you can use to avoid any confusion is to book the business and personal related expenses one by one. If the contractor books separately both the:
- Outward and return flights; and
- Business and personal elements of the hotel stay
….he or she can claim for the outward and return flights and hotel stay that relates to the business element and pay for the other costs personally. Likewise, if the contractor books his or her trip, and their spouse books theirs separately, the contractor can claim for his or her expenses.
Please take account of the above as these are key when claiming for such costs.
Indeed, this may all seem quite over the top. However, these are HM Revenue & Customs’ (HMRC) rules. When you have a receipt or invoice that includes spending for a personal benefit, you cannot claim for it.
Contracting abroad -further things to think about
Key to note, when you incur expenses while working abroad, please treat the foreign costs just like you would when you spend back in the UK. Therefore, please keep the receipts and claim the whole amount back.
Further to the above, HMRC will approve certain business expenses when it is clear that it was for a business purpose. Indeed, this will be a purpose that motivates the expense and no other clear purposes. Where there is a minor amount of personal element to a business trip such as sightseeing in their spare time, HMRC would be unlikely to dispute a claim. HMRC will challenge expenses when they have a reason to believe an expense has a dual purpose, therefore please be careful.
HMRC’s benchmark rates
When you are contracting abroad or working overseas, HMRC has benchmark rates for most countries in the world. This includes all major cities. It is important to note that these benchmark rates are not fixed-rate allowances. You can only claim for the amounts that are set by HMRC, if you incur expenses that cost up to those amounts.
The worldwide benchmark rates can be viewed here.
The 24 month year rule
You should also note too that the usual 24-month / 40% rules apply when contracting abroad. Just like they do when you are working in the UK. Under this rule, you should not expect to be travelling to a worksite for longer than 24 months. This rule is providing you spend more than 40% of your working time at the site.
Receiving payments from a foreign customer
When your customer or client is abroad, you should seek professional advice from your accountant as to whether your business should charge the customer VAT or not. The reasoning here is that the rules with regards to charging customers who are based abroad can depend on the place of supply (of your work) along with other factors.
Secondly, you may currently have work in place with a foreign client and they will be paying your business in a foreign currency. Therefore, you will need to consider your banking arrangements. If the client pays your invoices to you UK bank account, you will likely be hit with:
- You will also be given a lower rate of exchange, compared to the actual market rate out there.
The secondary point above can mean quite a difference in what your business would have received before the conversion.
Therefore, when you do have a foreign paying client, it is a good idea to set up a bank account (with your current bank) in the currency that you are being paid in e.g., Euros, USD etc. When the money comes in, you will not be hit with a foreign exchange cost and when you transfer the funds with your bank between your foreign and £ Sterling account, the overall charges will be much less.
As with all work that you perform as a contractor, you need to be aware of your IR35 status. If you are working for a large or medium business in the private sector it is their responsibility to determine your status. However, if you are working for a small business, the IR35 rules do not affect them. As defined by the Companies Act 2006, an entity is a small business where it meets two of the following criteria:
- The annual turnover is no more than £10.2 million.
- The total of fixed and current assets (before deducting current liabilities, long-term liabilities and deferred tax provisions) is not over £5.1 million.
- There are more than 50 employees.
Contracting abroad or working overseas -additional tax considerations
When you are UK based and work through a UK company, both your and your company will pay UK tax and National Insurance contributions. However, in contrast to UK working, if you live and work abroad for prolonged periods of time, there may come a time when you are no longer UK tax resident. The UK residency rule is not straightforward and there are various tests to apply before you can determine someone’s UK residency status.
As a contractor, you may be living and working in a foreign country and you have been there for a while. When this is so, the best course of action is to seek specialist advice from a contractor accountant. This is because your tax situation could become much more complicated. The tax implications could mean you are no longer UK tax resident. When you are non-resident, you are no longer subject to UK tax law. Furthermore, depending on the country you are working in, after a period of time you will become resident and be liable to pay tax in the country you are in now.
Therefore, when your future tax liability will arise in the country that you are based in, you will pay taxes under that country’s tax system. In this instance, when you know you will be taxed in the country you are now in, you will need to seek tax and planning advice from an accountant who is based in this country.
Buying goods from abroad
When you are working abroad, you can take advantage of the lower prices for goods. This will be the case, as long as you pay the correct taxes. The goods will include things such as laptops or other pieces of equipment.
Please note, most foreign countries have facilities for people who travel to reclaim the sales tax. They can do this either when they buy the goods or when they leave the country. Therefore, you declare the asset when you return to the UK and pay any applicable VAT. If you are VAT registered and you are operating under the normal VAT scheme, you can claim this VAT back on your next VAT return.
As you can see there are many aspects to contracting or working abroad. There are certain tax rules to bear in mind. There are also other factors to take into account if you will be working outside of the UK for a longer period of time. In these cases, you will be best place to consult your contractor accountant or indeed a foreign accountant.
Link to Contractor Advice UK group on