UK Tax Guide For Contractors:
An Executive Summary
This is an introductory guide for Contractors, linking in
to our full UK Fact-File. If you'd rather dive right in to
the Fact-File, you can use the navigation on the right of
this page, or start from the UK home page.
Business Formation: Many contractors operate
very successfully as individuals but they need to register
as self-employed with the
Inland Revenue, although there are special rules covering
the provision of sub-contract workers in some sectors. Other
than that, you don't need anyone's permission to start a business,
and you won't have to register or license your business unless
you form
a limited company, or unless you require a
special license. Limited companies do have to be registered
of course, and have to report
annually, although for a small company the requirements
are not onerous. And remembering that the only two certainties
in life are death and taxes, inevitably you'll have to make
annual tax
returns, whether you're a limited company or not. If you're
really in a small way of business, you won't have to bother
with VAT,
which applies to most types of goods and services in the UK.
Of course if you take on staff, life becomes more complicated!
Businesses of any size will probably gain from incorporation
for a variety of reasons.
Domestic Taxation: The big issue is whether
to be taxed as an individual
or as a company.
With individual taxes going up to 50%, the corporation tax
rate of 30% looks attractive. Needless to say, it's more complicated
than that, especially if you are a director of your company.
And special considerations affect the choices of a contractor,
who may have some fairly complex relationships with customers
and sub-contractors. Staying out of the relative glare of
limited company life may sometimes be advisable. Husbands
and wives can play some interesting variations, and get
the best of both worlds. If you're a 'non-dom', ie not born
and bred in the UK, another goal is to remain non-resident,
which means not having a permanent
establishment (fixed place of business) so that you get
taxed only on UK-source
income. If there's one aspect of your business on which
you should consider taking paid-for advice, it's probably
the tax structure. It's so important to get it right at the
beginning!
International Taxation: If a contracting
business has a static location, you'll trade from there, but
one of the advantages of the business is that you're not necessarily
tied to one spot, and you may have the opportunity to base
yourself in a low-tax location. Selling services to corporates
across borders can be complicated because the foreign country
may take a bite out of your returns, called withholding
tax. Then you have to turn to double tax treaties to try
to get the money back. It's all a bit of a jungle. And if
you're big enough, VAT
is an extra complication. If you set up a branch in a foreign
country, you need to try to avoid the 'permanent
establishment' trap, and you may get bogged down in local
VAT.
If you send staff - or yourself - to work in foreign countries
you need to think hard about their tax situation in advance,
both in respect of local income taxation and perhaps because
of withholding
tax, which may well apply to payments you make from the
UK to your overseas workers.
Tax-Efficient Structures: Faced with relatively
high individual and corporate tax rates, many British contractors
devote careful attention to forming tax-efficient structures.
If you remain tax-resident in the UK, the use of offshore
trusts is no longer effective, although they can still be
useful for asset protection. Ownership of companies in low-tax
jurisdictions has also become pointless due to ever-more stringent
CFC
(Controlled Foreign Corporation) rules. What remains is
actual emigration, to one of a variety of 'low-tax' or 'offshore'
locations. Cyprus, Malta, Ireland, Jersey, Guernsey, the Isle
of Man, Monaco and Andorra all have their pros and cons as
operating bases for contracting businesses. But as recent
cases have made clear, becoming non-resident requires a very
clear break with UK ties. Non-resident contractors meaning
to operate in the UK can also use offshore structures, as
long as they avoid the 'permanent
establishment' trap.
Business Incentives: There is a wide variety,
almost a bewildering variety of support
schemes operated by various levels of government, some
of them in association with the European Union, offering direct
grants to support employment, rebates on taxes, tax credits
for investors in small businesses, and R&D
tax credits. Grants are available from several sources, including
the UK government, the European Union, Regional Development
Agencies, Business Link and local authorities. Many grants
are limited to small and medium-sized companies. Not many
of these schemes will be relevant to the business of contracting,
but it is well worth investigating what's on offer. However,
the saying: 'He who sups with the devil needs a long spoon'
comes to mind. The schemes are well-intentioned, no doubt,
but they can be intensely bureaucratic, with very intrusive
qualification procedures, and a long 'tail' of reporting requirements.
Employing People: Many businesspeople will
just tell you: 'Don't do it'. 'Marry in haste; repent at leisure',
they say, and it was never so true than when it comes to employment.
Don't kid yourself that employees will feel that they owe
you anything. Today's workers, encouraged by a slew of anti-business
legislation from Brussels, and the general nannying attitude
of government, often feel that the world owes them a living.
Many employers of course bring problems on themselves by treating
employees as little better than slaves. Although in some circumstances
the law may force contractors to employ their sub-contractors,
try as hard as you can to use self-employed people rather
than employees. The Revenue has plenty to say about that,
of course, so if you are left with no choice, realize that
you will have to operate 'PAYE',
provide various statutory social benefits, and that it is
extremely hard to dismiss
an unsatisfactory employee once you have taken them on. Of
course, there are plenty of exceptions to these rather sweeping
generalizations. Lucky you if you find some!
Welfare And Lifestyle: Meaning, for the
contractor himself. Obviously, state social welfare schemes
apply to contractors as much as to anyone else, although there
may be problems if you operate across national borders. Many
business-people will want to have improved (meaning private)
health
benefits, and almost all will want to find tax-efficient
ways of making provision for their pensions. It's important
to separate these from your business itself, in case of failure.
If you have it in mind to retire to somewhere warmer and less
highly taxed, then the time to start is now, in terms of building
up a pension away from the grasp of the
Inland Revenue.
International Aspects: Perhaps
you plan to live out your life as a respected and contented
member of your local community. The salt of the earth, one
might say, if that's not patronising. But some people, and
perhaps especially contractors, will find themselves drawn
intentionally or otherwise to an international existence,
doing business and/or living in other countries.
There are many challenges: apart from the difficulty
of arranging your tax affairs satisfactorily, there are the
problems that go along with property
ownership, education
of your children, international removals, health
care and pension
provision, just to take some of the more obvious issues. Of
course no one can predict the future with any certainty, but
there are all too many stories of people who have trapped
themselves in the wrong investment in the wrong currency in
the wrong place, with multiple taxmen on their backs. Most
such problems are avoidable, with forethought.
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