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. This has benefits, such as better weather and, in some cases, sampling foreign cultures. However, what are the implications for limited company contractor who is:
- Working through their own UK limited company; and
When you work abroad, can you claim your costs in relation to this as tax-deductible business expenses? If the answer is yes, what sort of expenses can you claim? Any such costs could indeed add up when you are working abroad. Therefore, it is good to know which expenses will be tax-deductible.
A good contractor accountant will help you operate tax efficiently. They can also advise you on what to consider if you work abroad. In this article, we will go over the rules that cover this and what you need to think about here.
Initial thoughts -contracting abroad
In a worldwide economy, many projects will exist with working team members spread across the globe. While bearing this in mind, you may have a chance to contract abroad through your business. When you undertake some contract work overseas, you can experience different tastes and new cultures.
You will jump on a plane if you land a contract in a foreign country. As a result, you will meet up with an overseas client face-to-face when you get there.
You may also be asked to work abroad if you work under PAYE or through an umbrella company. If you do, your employer will advise what you can claim 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 and limited company contractor, you should know the rules when 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 going to do some contract work abroad or you undertake a foreign business trip, the types of costs that you can claim will be:
There are also benchmark rates available (see below). In addition, you can also claim 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 moving your primary place of residence.
Contracting abroad -expenses
As part of working abroad, the same principles above apply regarding claiming your expenses. Therefore, when you incur any expenses, it is key that they are `wholly, exclusively, and necessary.’ Please remember that you always need to ask for a receipt when you pay for an expense. Your receipts should be kept with your business records.
Moreover, while you are away, you can experience the different food and drinks. Please note, though, that 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 a mix of business and personal elements is included in an expense. Therefore, you cannot claim 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?
Contract work abroad or work overseas -initial thoughts
First, 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, 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.
As a result, they can claim for the outward and return flights and hotel stay related to the business element and pay for the other costs personally. Likewise, if the contractor books their trip and the spouse books theirs separately, the contractor can claim for their 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
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 cost and no other clear purpose. HMRC will unlikely dispute a claim if there is a minor personal element to a business trip, such as sightseeing in their spare time. 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
HMRC has benchmark rates for most countries worldwide when you do contract work abroad or work overseas. 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 HMRC sets if you incur expenses that cost up to those amounts.
The worldwide benchmark rates can be viewed here.
The 24-month rule
You should also note that the usual 24-month / 40% rules apply when you do contract work abroad, just like when you work in the UK. Under this rule, you should not expect to be travelling to a worksite for longer than 24 months. This rule provides that 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 is that the rules regarding charging customers abroad can depend on the place of supply (of your work) and other factors.
Secondly, you may currently have work in a place with a foreign client, and they will be paying for your services in a foreign currency. Therefore, you will need to consider your banking arrangements. If the client pays your invoices to your UK bank account, you will likely be hit with:
- You will also be given a lower exchange rate than the actual market rate.
The secondary point above can mean quite a difference in what your business would have received before the conversion.
Therefore, when you have a foreign paying client, it is a good idea to set up a bank account (with your current bank) in the currency 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 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 work 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, you 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, there may come a time when you are no longer a UK tax resident. The UK residency rule is not straightforward, and there are various tests to apply before determining someone’s UK residency status.
As a contractor, you may live and work in a foreign country and 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 a UK tax resident. When you are a non-resident, you are no longer subject to UK tax law. Furthermore, depending on the country you are working in, you will become a resident and be liable to pay tax in the country you are in now after a certain period of time.
Therefore, when your future tax liability arises in the country where you are based, 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 based there.
Buying goods from abroad
When working abroad, you can take advantage of the lower prices for goods. This will be the case if you pay the correct taxes. The goods will include things such as laptops or other pieces of equipment.
Please note that 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, when you return to the UK, you declare the asset and pay any applicable VAT. You can claim this VAT back on your next VAT return if registered and operating under the standard/normal VAT scheme.
As you can see, there are many aspects to contracting or working abroad. There are specific tax rules to bear in mind. There are also other factors to consider if you work outside of the UK for an extended period. In these cases, you will be the best place to consult your contractor accountant or a foreign accountant.
Link to Contractor Advice UK group on