Placing UK
individuals on freelance assignments in Europe
In his third article for the site, David
Houston of Global K provides some words of advice to UK Recruitment Agencies
who are involved in placing contractors overseas, especially if such
placements are not part of their routine business.
The first hurdle UK recruitment agencies will come across when placing
contractors on overseas assignments is deciding on the entity with whom they
should make out the contract. Contractors will present them with many varied
options through which they wish to take the contract – here are some
pointers as to what to look for –
A. Who you are signing a contract with
1. Advise your contractor to avoid the traditional UK Limited Company
A one-man company (director-controlled company) will normally deemed tax
resident where the “management and control” are physically present. So if
Joe Bloggs is in, for example, Belgium, carrying out a contract, Joe Bloggs
Limited is more than likely to be deemed tax resident in Belgium. That
means, quite simply, that all payments into and out of Joe Bloggs Limited
would be subject to Belgian taxes at source. This is a fact of international
tax law, and no “183-day” rule applies in these circumstances.
Furthermore, your contractor will not avoid the implications of IR35 simply
by taking a foreign contract.
2. Avoid offshore companies
Any contractor undertaking a contract in Europe through an “offshore”
company (Isle of Man, Channel Islands, BVI, Gibraltar) is 99.9% certain, in
all bluntness, to be involved in a “fiddle”. No matter what excuse may be
offered, or what background may be presented, offshore companies cannot
comply with EC social security legislation and are used in practice to
funnel funds away from their tax source, in the classic “I'll never be found
out anyway” blind approach of many UK contractors.
3. Avoid contractors who say they are “self-employed”
There are very few situations in Europe where it would be legal for a
contractor to claim UK “self-employment” as a means of avoiding their
overseas obligations. Most European countries have IR35 type legislation
defining self-employment, and contractors don't generally comply. In certain
circumstances overseas registered self-employment may be valid, but check on
the background to this before issuing the contract, and in all cases of
self-employment, look for some independent verification of the status.
4. The best option is a management company solution!
The management company will normally be UK
based or will be based in the country where the contractor will be carrying
out his contract.
The management company will normally be
run by accountancy firms, or others of similar background.
The management company will normally
ensure that the individual is registered locally where required, and
complies with all local requirements.
The management company will normally
absolve the agency from all obligations as regards tax and social security
compliance.
The management company will attempt to
achieve the best “bottom line” for the contractor, taking account of all the
circumstances.
B. Client requirements
Sometimes overlooked in an attempt to get a contractor's “bum on seat”, you
should always pay attention in the first instance to the requirements of
your client, before pointing the contractor in any particular direction.
In certain countries clients will insist that contractors on their site are
appropriately registered and may insist on certain local legal practices
being adhered to. For example in The Netherlands most clients will insist
upon evidence that the contractor is registered on a Dutch payroll and is
accounting for Dutch wages tax.
And in Germany there may be an insistence on German labour licensing being
complied with, as it is illegal to “hire out” employees to third parties
without a licence to do so.
In Italy there may be an insistence that local social security withholding
is applied, without which the freelancer cannot generally be operating
legally.
Before you place a contractor at a client, always try to address your
client's concerns / requirements first, and then find a solution /
management company for the contractor that can provide a solution which
satisfies the client's requirements.
C. Local registrations
It should be recognised that for your contractor to be “legal” in his
destination country, certain local obligations must be complied with.
Local registration requirements vary from country to country. Most countries
have a form of “national insurance number”, which usually doubles up as a
tax registration number and you should ensure that your contractors obtain
such a number, as this is the only way of proving that they have registered
for local taxes.
Certain countries also have a requirement to obtain a local ID card, without
which they cannot rent a property, get connected to the electricity supply,
hire a car etc.
Lastly, beware of non-EC nationals, many of southern hemisphere origin (!!),
who believe they can work their way around Europe simply because they had an
English grandmother. Non-EC nationals require work permits to work within
the EC, and you should be sure to check this out if you suspect the
individual does not have an EC passport.
Footnote: All of the registration obligations set out in paragraphs A to C
above carry some risk to the recruitment agency if not observed rigorously.
Foreign tax authorities are often empowered to seek recourse to the “biggest
pocket”, and if unpaid taxes and social security cannot be recovered from
Joe Bloggs, they will seek to recover from you, the agency, or potentially
even more damaging, from your client!
D. UK tax position on departure
Contractors may believe that all their UK tax problems end on departure from
the UK. This is not true!
No matter where a contractor goes to work, he or she will have a continuing
liability to UK tax until he / she has completed a full tax year outside the
UK. So, for contractors moving overseas just now (May 2002), they cannot
avoid UK tax implications unless they work for almost 2 years outside the UK
before they escape any liability to UK tax (until April 05, 2004).
The optimum departure time for a contractor wishing to avoid UK tax is
therefore March, where a one year stint overseas will more or less satisfy
the requirement to be out of the country for one full tax year!
In any event, you should be advising your contractors, before moving
overseas, to take advice on their potential UK liability in conjunction with
their overseas liability.
E. Anticipated bottom-line in Europe
You should be wary of contractors who adopt a “gung-ho” approach a la “I'm
going abroad to escape the taxman” approach. Ensure that your contractors
don't have any false illusions about their anticipated bottom-line in their
European contract:
Overseas tax rates are generally higher
than those in the UK
Overseas social security, especially
employers' social security, is generally significantly higher than in the UK
(up to around 35% employer's social security)
The contractor may have an ongoing
liability to UK tax while overseas (see D. above)
Expenses deductions vary from country to
country.
The contractor's personal circumstances will dictate at all times his
exposure to local taxes and ongoing exposure to UK taxes.
No two contractors are the same and it is often difficult to give a general
answer that will apply across the board, however serious professional
advice, if sought (and offered by you), will generally give the contractor
some peace of mind.
The good news
There are positives to working in Europe from the contractor's perspective:
-
1. Pay rates can be more attractive (as I'm sure you know!).
2. Accommodation costs / cost of living tend to be less than London or other
main UK cities
3. Cheap flights home thanks to budget airlines
4. Culture!
And from a tax planning perspective: -
It is possible to minimise your exposure
to tax by sound tax planning
Excessive foreign social security can
often be avoided by utilising European Community E101 legislation
In the best cases “bottom-lines” of above
70% of contract income can be retained (favourable compared to IR35
compliant bottom-lines in the UK)
With the help of a competent management
company all tax concerns / compliance issues can be handled on behalf of the
contractor.
Global K
provides
tax planning and solutions to contractors taking up a contract assignment in
a foreign location. For further information on the tax implications of your
proposed assignment, including contains full contact details,
click here.
The author accepts no responsibility for any loss which may
be suffered by anyone taking action based on advice given or solutions
offered in the contents of this article. Personal professional advice should
always be sought by anyone deciding to undertake a contract overseas.
Contact us >>> Global Tax
Planning
& Administration
for Freelance Professionals
