Contractors' Questions: Will a home and abroad IT contract be taxing?

Contractor’s Question: I’ve worked in Saudi Arabia for the last three years, mostly on the basis of one month in Saudi, then one month in Scotland, having been employed from Edinburgh. But now I've just started a new IT consultancy role in Dubai, and have been given my residency and employment from there. I will be working similarly to before, this time on a 35-days-Dubai, 35-days-Scotland basis.

Will I pay UK taxes at the normal rate? I have an accountant who I have to send my payslips to, so that he can calculate how much I pay in UK tax. I have a base salary and a daily bonus for everyday in Dubai. Am I taxable on all income or just my base salary, so not the bonuses? And anyway, how would the UK authorities know my earnings if I’m employed from outside the UK?

Expert’s Answer: When working internationally and splitting time between different locations it is important to understand how your tax liabilities add up.  Your question touches on tax residency, double taxation, as well as the reporting of overseas income, so let me address each of these in turn.

Whether you are contracting overseas or in your home country, some things never change; tax will be due where the money is earned. However, ensuring your tax compliance with the relevant international tax legislation can be more complex - especially when multiple countries and tax authorities are involved.

At the centre of this are the rules regarding tax residency. Individuals need to be aware of these to ensure that they pay the correct tax to the correct authorities, thereby remaining tax compliant.

In your situation, given that you are usually resident in the UK (Under UK law, your usual residence is the country considered to be your permanent home, even though you may be temporarily reside in another country) this scenario of a rotational working pattern would mean you are still classed as a UK tax resident and therefore liable to pay UK tax at the normal rate on your worldwide earnings.

Typically, the UK authorities will look at your international income and compare this to the same income level earned in the UK to work out what level of taxation should apply. Any tax paid in a country with which the UK has a double taxation treaty will then be deducted from the total tax bill, meaning that you effectively only pay ‘top-up’ tax in the UK. In your circumstances, as there is no income tax in Dubai the full salary would likely be taxed at the normal UK level, along with any other UK or international earnings.

Becoming a non-tax resident in the UK normally entails completing a P85 when departing, cutting all ties to and leaving the UK permanently for a complete tax year (6 April to 5 April), spending less than 183 days in the UK during the tax year, and limiting your visits to the UK so as to not exceed an average of 91 midnights or more per tax year over a maximum of 4 years.

It is important to understand your tax liability, how tax residency is treated in the countries where you are working, and how those countries interact with your home country’s tax system. If this is correctly understood and implemented from the outset, it will considerably reduce the risk of a surprise tax bill at the end of the year.

The final element to your question regards how the UK authorities would be aware of your overseas earnings. Taxable income includes: salary, bonuses, commissions, overseas allowances, and any other revenue generated by the contract and not specifically categorised as non-taxable by the local authority, so your daily bonus or allowance while in Dubai, however it is termed, should be taxed as income. It is your legal duty to report all your earnings in your end of year tax return for as long as you are a tax resident. The onus is on you to make an accurate declaration, so it would be unwise to omit any earnings from your UK tax return.

If you are in any doubt, or if you need to confirm you have the correct understanding of your particular situation, I would highly recommend having a conversation with a tax professional specialising in international taxation.

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

Editor’s Note: Related Reading –

Contractors’ Questions: Can I be a UK contractor even if non-resident?

UK statutory residence test – overview for contractors

Contractors’ Questions: Can I just pay UK tax on my overseas contract?