Contractors' Questions: How to work tax-efficiently from Spain?

Contractor’s Question: Due to an inter-family property purchase in Spain I began before Brexit, I've achieved Spanish residency, alongside still being a UK passport holder.

I've now returned to the UK for a brief time but with the residency in Spain achieved, I plan to see out my days working remotely from near Barcelona for UK businesses. I’ve set up a UK limited company but wonder if there’s a more tax-efficient way of working, than via my new PSC?

I did plan to remotely serve Spanish firms, but the pay rates are lower than UK businesses pay, so I imagine my clientele will end up in the UK, and outside of Spain.  

But do I need to watch the time I spend here in the UK with family due to the 183-day rule, or will HMRC have less interest in me now that I've got Spanish residency, so am only half Hector's problem now!?

Expert’s Answer: Thank you for this exciting question, and well done for registering in Spain in time!  

Dual pursuit

As you plan to live most of your time in Spain, your company will form a permanent establishment and become subject to Spanish corporation tax. But HMRC will also pursue you for UK tax as they presume that any UK-registered business should pay UK corporation tax.

The result will be that you will end up paying the higher of the two rates. You will therefore have to negotiate with HMRC and the Spanish tax authorities where the taxes are due. I am not sure this bother is justified! 

Tax rate medley

There’s quite a bit more to consider unfortunately with the route you’ve started. The main UK rate of corporation tax is due to increase to 25% for the financial year 2023, starting on April 1st 2023. However, companies with profits of £50,000 or less will continue to pay corporation tax at the rate of 19%. 

The general Corporate Income Tax (CIT) rate in Spain is 25%. Other tax rates may apply, depending on the type of company that is taxed and its type of business. For Permanent Establishments (PEs) in Spain of foreign companies, Non-Resident Income Tax (NRIT) is levied on income that may be allocated to the PE -- at a 25% tax rate. 

But be aware, NRIT is also chargeable on non-established foreign companies/individuals that obtain income in Spain. Fortunately for you, it looks unlikely that this will apply to you if your clients are not in Spain. 

New company tax is also among the nitty gritty

Further in Spain however, the authorities tax newly created companies at 15%, albeit for the first tax period in which they obtain a profit, plus the following tax period. Then there is the business and professional activities tax to consider. It’s a local direct tax levied annually on the performance in Spain of business, professional, or artistic activities. The tax payable is up to a maximum of 15% but depends on several factors.

Standing back from the nitty gritty, it becomes clear to me that this is complicated for what you wish to achieve, and not particularly tax-efficient. Our advice would therefore be for you to register as an ‘Autonomo’ or self-employed person.

Don't disregard duration

As to timeframes, the duration you may spend in the UK once you have become a non-resident can be considered under the Statutory Residence Test. You can follow the link here for more details: https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt 

In general, once you have established UK non-residence and you want to avoid regaining it, you typically cannot spend on average as many as 180 days in a tax year in the UK. Good luck!

The expert was Kevin Austin, managing director of Access Financial.