The first risk to take into consideration is the possibility of double taxation. The host country may tax any income earned on its territory and the local tax law should be checked. A double tax treaty may restrict the possibility of double taxation by limiting taxation to a permanent establishment of a foreign company, such as a branch or office. However the concept of a permanent establishment may also in some treaties cover services if the provision of the services continues in the host country for a certain minimum period of time (for example 183 days). In this case the income from services could be taxed in the host country and although double tax relief could be claimed in the UK there is a risk of some additional tax burden if the local tax rate is higher than the tax rate in the UK.
If a payment for services is made directly to the UK from the host country the local tax law may impose a withholding tax on the gross amount of the payment. The double tax treaty should be checked to see if there is any limit on the amount of withholding tax that may be charged. The withholding tax may also create an additional tax burden despite the availability of double tax relief in the UK, because the tax is applied to the gross amount of the payment and is therefore likely to be greater than the tax imposed in the UK on the profit from the host country. Therefore not all the foreign tax can be offset against the UK tax liability and the withholding tax results in an extra tax burden.
Editors note : There is also a potential risk to your client. If the contractor or their UK company is found to owe tax which they have not paid and the local tax authorities are unable to recover, they may view your client as liable to pay it.
If an individual is performing services abroad through a UK limited company there are some non-tax considerations that must be taken into account when drafting the contract for services. The contract must clearly set out in detail the services to be provided and the time commitment in terms of working hours or days in the week. The contract must set out the remuneration to be paid for those services, and some provision must be included in respect of reimbursement of expenses paid in the course of providing the services. It may be useful to include a provision in the contract for the contractor to provide the client with a monthly statement of fees and expenses to be paid. Also, there must be a provision relating to termination of the contract in certain circumstances and setting out any compensation to be payable in this event.
The contractor must determine to what extent the insurance arrangements of the client will cover the contractor in the event of injury. As this is not a contract of employment the responsibility is on the contractor to make sure that risks are insured. The contractor will therefore need establish the scope of the client’s insurance arrangements and take out insurance for risks not covered by the client’s insurance.
Consideration must be given to the national law that will govern the contract. The contractor should try to include a provision for UK law to apply if possible. Before the contract is signed the parties must be clear about the legal system applying to the contract and that will be applicable in the event of any dispute about the terms of the contract. If the contract is translated into another language the contractor must be clear about which version of the contract will take priority or if both versions are of equal validity.
About the author: Peter Hann is an accountant based in Croydon, UK who specialises in international taxation.