Every year many UK staff are placed overseas in industries such as financial services, information technology, engineering or oil and gas. Consideration must be given to the best way to structure their contracts to ensure that no unnecessary amounts of tax are paid. Staff may go abroad as employees of a UK company, use their own UK company or act as unincorporated providers of business services. They could also become employees of an overseas company that may be a subsidiary of a UK entity or an independent company. These situations give rise to tax issues relating to deductions from salary under the foreign tax deduction rules or deductions of withholding tax from payments for services and may also affect the taxable profits of the business in the foreign country. People going to work abroad and agents who may be concluding contracts for their services therefore need to consider the tax implications and make sure that unnecessary double taxation does not arise.
Staff who are sent abroad also need to ensure that they are continuing to protect their pension and other rights in the home country. This may mean for example that they continue to pay national insurance contributions in the UK, as a deduction from salary or as voluntary contributions. In some cases an international agreement may provide for foreign social security payments to provide the relevant cover.
The tax position in the host country and the existence of any double tax treaty with the UK will be decisive in determining how the contract is structured. The article of the treaty concerning income from employment should be studied and for those who provide services through their own company the provisions on withholding tax will be important. The tax law in the host country and the treaty article relating to the definition of a permanent establishment will also be important in determining how the host country will tax income from services performed within its borders. The contractor must consider the implications for the structure of the contract and whether payment is to be made from a UK company, an umbrella company, a personal service company or a subsidiary of the agency in the host country.
About the author: Peter Hann is an accountant based in Croydon, UK who specialises in international taxation.