Contractors' Questions: Will HMRC try to tax my pre-UK contract income?

Contractor’s Question: I’ve been an Isle of Man (IOM) resident since 1989. The company I contract through (which I own) is also IOM-based, as is my work as a contract PM. 

Although I have never worked in the UK, it may be necessary due to family reasons for me to be in the UK for a few months of 2015 and maybe early 2016 so, ideally, I’d like to work.

What’s the most tax-efficient way to do this? I'm happy to pay UK tax on the money I earn in the UK but I would not want what I’ve previously earned outside the UK (all my income) to start to be taxed by HMRC. If that happens, working in the UK would not be worthwhile.

Expert’ Answer: There are two main questions here: the taxation of earnings and your tax residency. For the sake of this response, I will assume that as you mention you have never worked in the UK, that at present you have no tax liability there.

The primary consideration in understanding where tax is due is to establish where the income is earned – this is typically the physical location where the work is being done. So if, as in your example, you are contracting in the UK, you need to have a means by which income tax can be paid to the authorities in the UK. The typical options to enable tax payments would be to either establish your own UK limited company or to use an umbrella employment provider who would manage everything on your behalf (on a PAYE basis).

The above takes care of earnings generated as a result of the UK contract but still leaves the question of your Manx company’s other earnings during this time. This again will depend on where the income is deemed to be sourced and your tax residency at the time.

From the information provided, if you were to work in the UK for only a few months it would be likely that the primary tax burden due to HM Revenue & Customs would be from only the income generated in the UK. It would however be prudent to understand further specifics in regard to other income: where and how the income is being generated; would you be working to generate this income while being based in the UK; how much income and so forth. The answers to these questions will have an impact on how you will be taxed and should be investigated further by you with a qualified tax professional.

Finally, let’s address tax residency. As you may know, tax residents in the UK are generally subject to UK income tax on their worldwide income, whereas non-tax residents are liable to income tax on UK-sourced income only. The preference in your case would naturally be the latter. However there are criteria to be met. Individuals are considered UK tax resident if, amongst other criteria:

• they spend 183 days or more in the country during the tax year
• they visit the UK over four consecutive tax years for an average of 91 days or more per year. In this case the individual is regarded as resident from the beginning of the fifth year. However, if the visits were planned from inception then the individual may be regarded as resident from the beginning of the visits.

In conclusion, if indeed the assignment is only for a month or two in duration, you will probably find that a contract management company is a simpler solution for your UK earnings; any longer and then likely you will find benefit in establishing your own UK limited company. In either case, however, you should seek specialist advice on how your Manx company’s earnings and assets will be treated by HMRC in light of your specific circumstances.

To clarify, the above guidance is based on the information provided and doesn’t consider other circumstances. Before accepting a role and making the move, I recommend that you seek considered advice from a specialist to ensure you have all the relevant information.

The expert was Steve Blow of Capital Consulting, a leading advisory to UK contractors working overseas.