Contractors’ Questions: Where do I pay tax if I live and work both abroad and in the UK?

Contractor’s Question: I’m stuck on where I need to pay tax if I am mostly living and freelancing abroad but also spending (and working) enough time in the UK to seemingly meet the UK tax residency requirements.

I am from the UK but have lived in Romania for less than two years - and have begun freelancing from Bucharest. However, I plan to visit home to spend time with my family, living in our family home in the UK, where I will continue working while I'm there. I plan to spend at least three months there (so over the 91-day period but less than 183 days and within the UK tax year). I took an online test and I believe that these circumstances would allow me to qualify for UK tax residency. Am I right?

But if I am UK tax-resident, does this mean that I am liable to UK tax only, and for the full UK tax year, even if I technically spend more days in Romania?

I checked the Double Taxation Agreement between the two countries and it seems to say that if there is a 'fixed abode' in either 'contracting state' that is regularly available for use, then that is where the tax is liable. I am not sure if this would apply to my family home? Or is there another, more important test I should be looking at, such as fiscal periods?

Expert’s Answer: Working as a freelancer or independent contractor on an international basis can be quite complicated, and therefore a good starting point is to decide where you want to be considered tax resident.

Irrelevant

It sounds like you spend time between the two countries and although you are planning to go to the UK for over 91 days, that really isn’t relevant at this stage. What we don’t know is where you have paid tax for just under two years on the income you have earned whilst living in Romania.

Your liabilities will depend on whether there are countries other than the UK and Romania which you work in, but it appears that you are correct to look into Double Taxation Agreements (DTAs), which should help you understand where you should be paying tax. As you may know, DTAs are designed to ensure you only pay tax on the income once. Yet it is also possible to have a ‘dual residence’ situation which causes double taxation. Fortunately, most treaties contain a series of “tie breaker” tests, to help determine which country’s residence takes precedence and under Article 4 of the UK-Romania tax treaty, there is reference to what I’d call the ‘winner’ country. As you’ve probably guessed, this is the country where you are resident for the purposes. See more on this here.

Telephone the taxman

It appears to me that you are liable to pay tax on your worldwide income in the UK which would consider any income earned in Romania. So we would recommend that you telephone HMRC directly to discuss the full details of your situation, to get an accurate assessment as they can be particularly helpful here. Our assessment however, is that you would be considered resident for tax in the UK.

Towards the end of your question, you mention fiscal periods.

Please be reassured, fiscal periods are not something for you to worry about, as the country to which you are tax resident will look at all income earned in the period relevant to that jurisdiction and tax you accordingly.

Final considerations (including don't get banned)

Finally, we always advise individuals to take tax advice from a certified tax adviser before starting work in a new jurisdiction to ensure there is no falling foul of tax obligations. While working internationally as a contractor is very appealing, there are several complexities to consider and the penalties are harsh for getting it wrong. Be aware, these penalties can even include being banned from working in a jurisdiction. Very lastly please remember, if you are an independent contractor or freelancer, tax liability is down to the individual and you are liable for any shortfall in tax that is unpaid.

The expert was Janet De-Havilland, chief executive of compliance and contingent employment consulting firm Pendragon Consultancy.