Contractors' Questions: How to move to Spain but retain my UK client?

Contractor’s Question: I will soon be moving to Barcelona, Spain, to live for 6-12 months, but I will keep working for my current UK client as a freelance contractor.

Where will I have to pay tax; Spain or the UK? If it’s Spain, will I have to register as self-employed or form a company with the Spanish authorities? And if it’s worth me paying an accountant or lawyer to set up everything for me, how much will I likely pay?

Expert’s Answer: Under the current residency rules of each country and assuming you are British, I believe your stated period for living and working in Barcelona will ensure you become tax resident in Spain while remaining tax resident in the UK. Being British, there are (currently) no immigration barriers.

Even though your client is UK-based and the project income is likely to be paid into your UK bank account, you will have to declare your Spanish assignment income in the country of work; Spain. This requires the submission of a Spanish tax return -- one for 2016 and then one for 2017 -- and full settlement of those declared liabilities.  

That same income also has to be declared on your UK tax return. The current double-tax relief allowable by treaty between the two countries means the amount of settled Spanish tax can be offset against your UK liability on the same Spanish-sourced income. In practice, you will end up paying the higher amount.

In Spain, being genuinely self-employed allows you to choose from two operating structures. Either become an autónomo (a freelancer) or operate through your own Spanish limited company -- the most popular type being the SL (Sociedad Limitada). Seek expert advice before determining your modus operandi. 

And yes, as someone seemingly new to contracting overseas, I strongly recommend you appoint a locally-regulated accountant to complete the registration processes; give current guidance on tax-deductible expenses; and ensure timely and accurate tax returns.

Then, and soon after you arrive in Barcelona, you must obtain your foreigner’s identity number -- Número de Identidad de Extranjero (NIE number) -- from a local police station that has an Oficina de Extranjeros (Foreigners’ Department). You complete the application form, show your passport and pay a fee. You then pass the NIE number to your chosen accountant so they can commence the registration programme.

It may help you to know that there are more than three million locals and expatriates in Spain operating as autónomos. As in the UK, tax is settled through the local income tax system. As well as settling due income tax and social security, autónomos also have to pay into a recognised health insurance fund.

As to the SL, this is an incorporated structure requiring the submission of corporate tax returns, statutory accounts, VAT returns as well as personal income tax. Generally speaking, the SL is not as tax-efficient in Spain as the UK Personal Service Company can be in the UK.

In terms of professional fees, an autónomo can expect to pay a one-off of between €300 (£262) and €500 (£436), for completing the statutory registrations. Annual fees for a basic ongoing service start at around €1,400. And average hourly rates for extra services start at circa €90 per hour. In addition, setting up a SL starts at €500 with ongoing services based on a minimum hourly rate of €100. All rates exclude VAT. 

Due to these fees, and other reasons of course, many expatriate contractors elect to operate overseas through international umbrellas or management companies. But if this structure sounds of interest to you, be very cautious. While some of these enterprises are genuine, caring and fully-compliant service providers, many are ‘cowboy’ operators trying to exploit UK contractors. A hallmark of them is that they promise amazingly high retentions from seemingly simplistic ‘solutions’. Remember; if and when you come to the attention of a Spanish tax office, any compliance issues will rest exclusively on your shoulders. The cowboy’s chief weapons are solution ‘guarantees’ and ‘warrantees;’ more often made vocally than in writing. Either way, their words are unfortunately worthless. So buyer beware; if it all sounds too good to be true, then it almost certainly is.

The expert was Mike Philips, a director at its international, a consultancy specialising in tax and finance for UK contractors who work overseas.