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When providing services from abroad to customers in the UK, it is crucial to consider the terms of any double tax treaty that may apply. The UK boasts more tax treaties than any other European country, making it an attractive location for holding companies. However, it is important to note that tax havens such as the Bahamas, the Cayman Islands, St Kitts and Nevis, and Andorra typically do not have tax treaties with the UK.
Claiming relief for withholding tax on interests or royalties often depends on the specific terms of a tax treaty. We will discuss the implications of tax treaties for individuals residing overseas but providing services in the UK. Typical scenarios include contractors offering IT or other professional services in the UK. They may choose to operate as employees or as independent service providers. The preferred option and the impact of tax treaties on each will be discussed below.
Self-Employed Service Providers: If you are self-employed and a UK resident, you will generally be taxed on your worldwide income. Tax treaties can override UK domestic legislation and apply in both the UK and the overseas country of residence. Permanent establishment or fixed place of business criteria can impact how income is taxed in different jurisdictions. In many cases, international teleworkers providing services via the Internet may argue that they have no fixed place of business in their country of residence, avoiding double taxation.
Employed Service Providers: If you are a UK resident and an employee, your salary will generally be subject to UK tax regardless of where your duties are performed. However, double tax treaties may override these domestic provisions, allowing for different tax treatments based on the country where the employment is exercised. To gain exemption from taxes in another country, you would need to:
- Be a UK resident by meeting the statutory residence test.
- Be present in the other country for less than 183 days in 12 months.
- Be paid by a non-resident entity that does not have a permanent establishment in the other country.
Comparing Self-Employed and Employed Status: Both self-employed and employed international workers could obtain an exemption from overseas tax if they limit their time spent in the other country and ensure no fixed place of business there. The self-employed status might be preferred in purely tax terms, offering a wider range of tax reliefs and lower national insurance charges. However, non-financial factors such as employer pension contributions, paid holidays, and sick pay should also be considered.
Another option is forming a UK or offshore company to provide services. If structured correctly, this could avoid a 45% income tax charge and be subject to a lower corporation tax charge. Please contact our specialist tax advisors to review specific facts and circumstances to ensure proper tax treatment and compliance with UK tax laws.