Expat contractors who are still tax resident in the UK face a financial shock if they are working for their own companies overseas.
Tax laws changed on April 6, 2016, for personal service companies – often one man businesses for contractors who work for a single client.
The new measures relate to who has the right of ‘supervision, direction and control’ (SDC) of the contractor at the workplace, even if the right is not exercised.
The new measures
If SDC falls to someone other than the contractor, then a raft of tax measures start to apply:
- Contractors working for recruitment agencies, umbrella companies or other third parties have restricted travel and subsistence expenses.
Basically they cannot claim home to work travel, nor accommodation costs.
This can blow a big hole in the bank balances of overseas contractors
- A personal service company that fails the SDC test comes under IR35 rules.
These rules say the contractor must pay income tax and national insurance or the deemed amount they earn on a contract to HM Revenue and Customs
This is complicated for overseas contractors who might already have paid tax and social security overseas that is offset against payments in the UK under double taxation rules
- HMRC assumes contractors automatically fail the SDC test unless they prove otherwise – which involves having contracts approved by an HMRC helpline, review panel or professional third party
Finding out more about the changes
HMRC has published lengthy SDC guidance for contract workers – and the definition can cover chefs, builders, HGV drivers and oil rig workers as well as IT contractors.
“The guidance is based on our interpretation of decisions made by the courts over the years,” said an HMRC spokesman.
“We base our understanding of control on the court findings and this follows through to defining someone’s employment status.”
The guidance explains that deciding who is responsible for supervision, direction and control of a worker is the first decision to be made when determining tax status.
The law changes have arisen from public sector workers plying their trades as personal service companies in an effort to reduce the tax and national insurance they paid.