Contractors' Questions: Is my limited company still necessary, to supply the UK from Columbia?

Contractor’s Question:  I’m a French national living and working in Colombia, South America. Several years ago, I was living in the UK where I set up a limited company, but I haven’t gone to the UK other than for a few days in the last five years. 

Meanwhile I don’t have a company in Colombia and I have been using my UK limited company ever since to work remotely -- mostly for UK customers.

In terms of liabilities, I have been filing UK corporation tax and UK self-assessments every year; and I have also been filing self-assessments in Colombia where I am registered for social security, a pension and the like. 

So I sort of pay double taxes and although I’m not in love with this whole situation, my UK-based accountant was unable to help much. The niggling feeling I have is that while I don’t have the knowledge to know definitely, I have suspicions that I’m operating in neither an efficient nor a compliant manner. Please advise!

Expert’s Answer: Let’s try to unravel your interesting but complex situation.

As a resident of Colombia and, from what you say, not a resident anywhere else, you need to file self-assessments only in Colombia. You are liable to pay your income tax, social security and make your retirement provisions. Resident individuals are taxed on their worldwide income.

Distribution

But I am not sure why you continue to keep your UK limited company, and there seems to be no reason to retain it unless your clients insist that they contract only with it. My advice would be to close your company and distribute the assets to yourself in Colombia, if there are any assets. 

It would be best to ask your clients to contract instead with you, and you bill them as a sole-trader. Your earnings are declarable in Colombia and not in the UK. You needlessly pay Corporation Tax in the UK, and we see no benefit to you in doing this. 

Currently, you pay UK Corporation Tax at 19% on the profits in your company less any income that you pay to yourself after meeting any expenses that you have. The income plus any dividends will be subject to Colombian income tax and any relevant social security, which is complex.

Want to sleep better at night? Then design out your company

By designing out the company, all your income from your clients less your expenses will suffer Colombian taxation. But not being an expert in this specific area, I cannot definitively tell you if this raises or lowers your tax burden. What hanging on to your UK incorporated business certainly does is; complicate your affairs, increases your professional fees, and give you a company to worry about without a discernible upside! 

Mandatory contributions made to the Colombian pension system funds by an employee are not treated as income or capital gains. They are not part of the withholding tax (‘WHT’) basis. Additionally, along with mandatory contributions to the health system, these mandatory pension contributions are considered non-taxable income.

Voluntary contributions made by the employee or the employer to mandatory pension funds are considered non-taxable income for the employee and are not part of the WHT basis, provided these amounts do not exceed 25% of the employee’s employment or taxable annual income nor TVU 2,500 (COP 90,770,000).

Ask your Columbian accountant how you'd be better-off

The top income tax rate in Colombia is 39%, Corporation Tax is 31%, and local dividends attract tax at 10%. We recommend you ask your Colombian accountant to compute if you are financially better-off operating as a sole trader or through a Colombian limited company. This will depend on your income level.

If you decide self-employment rather than a Colombian company is for you, you must register as a self-employed person. To do this, you have to register with the ‘DIAN’ (Colombian Tax and Revenue Department). You will obtain RUT (Registro Único Tributario), a tax registry, and your business will be added to the tax system, giving you a unique tax number. Fortunately, RUT is enough to prove your business legitimacy. You can optionally register with the Camara de Comercio (The Chamber of Commerce), but you do not have to. Good luck -- I hope the guidance herein helps to simplify your affairs!

The expert was chartered accountant Kevin Austin, managing director of overseas work advisory Access Financial.