Overseas income

Taxing_2

I will shortly be spending a year abroad in Abu Dhabi. My contract will pay a salary of USD$80k, plus a further USD$75k in expenses (I can keep whatever I don't spend of that, which will be at least half of it). I have lived in the UK all my life and am British. I will need an offshore bank account for my salary and expenses to be paid into.

Where can I find information on minimising my tax liability? It would appear that I will still be liable for paying income tax in the UK for money I earn in the UAE. I'm trying to be tax efficient rather than evade paying! After my year is up, I may stay in the UAE or I may return to the UK. I expect to leave the UK for good within 5 years if that makes any difference with regard to residency/domicile issues? If the tax benefits were significantly greater should I not come back to the UK then that would be an option - I have no great ties here.

Thanks very much in advance for any help. I would consider myself financially savvy but am struggling with this one!

The_Tax_Man

Simple answer is that you need to break residence in the UK which involves leaving the UK with an intention to remain outside the UK for at least one complete tax year, and not returning to the UK too often after leaving (183 days in any one year or 90 days averaged over four years).

If you do this then you will not be taxable on anyhting you make in Dubai. It would be very worth your while to ensure you meet these conditions. In addition you will be able to keep (but not contribute to) any ISAs you have and you will retain your personal allowance in case you have any rental or investment income in the UK.

The fact that you will leave the UK permanently at some point in the future isnt really relelvant at the moment.

Taxing_2

I'm 26, no property or investments except £5k in a cash ISA and £2k in a high interest savings account. But I also have £14k of debt at 0% (ie negative net worth of -£7k, down from -£17k , I've been paying it off after having a financial reawakening 2 years ago!) The contract would be Nov 08 - Nov 09.

Would that mean I'd be able to avoid the tax liability if I didn't return to the UK until April 2010? Or would I have to stay away for a large portion of the next 4 years? Would I be able to avoid all of it, or just the April-Nov 09 portion? Realistically I don't yet know where I'll go at the end of the contract, whether I'll get another contract or return to the UK (default option). But if it would save me thousands to spend until April 2010, or later, in another country then it could well be worth doing!

Also, what about moving money back to the UK to pay off my 0% deals as they run out?

Thank you very much, I am extremely grateful for this information. I realise it's a complex subject, so if there's a link you can direct me that'll save you typing it all out then that'd be great too. I just find that all the info I find relates to offshore savings/investments rather than offshore earnings.

The_Tax_Man

Taxing wrote: »

I'm 26, no property or investments except £5k in a cash ISA and £2k in a high interest savings account. But I also have £14k of debt at 0% (ie negative net worth of -£7k, down from -£17k , I've been paying it off after having a financial reawakening 2 years ago!) The contract would be Nov 08 - Nov 09.

No problems there. I would recommend maxing your ISA before you go as you can't contribute to it while non-resident in the UK (see later). The fact that you are in debt is not relevant for tax purposes unfortunately.

Would that mean I'd be able to avoid the tax liability if I didn't return to the UK until April 2010? Or would I have to stay away for a large portion of the next 4 years? Would I be able to avoid all of it, or just the April-Nov 09 portion? Realistically I don't yet know where I'll go at the end of the contract, whether I'll get another contract or return to the UK (default option). But if it would save me thousands to spend until April 2010, or later, in another country then it could well be worth doing!

The key to breaking residency is showing that you are intending to go and work abroad for a period which includes one complete tax year. Unfortunately simply remaining outside the country won't do so your circumstances, as they stand, will mean you will remain liable to UK tax. If you were to take an 18 month or two year contract, or take a one year contract and extend it for a period which extends past April 2010 then you will have broken residency and your overseas income will not be taxable.

Also, what about moving money back to the UK to pay off my 0% deals as they run out?

THere is no problem with this. Where the money ends up is not the issue in your case, it is your residency position when the money is earned which will dictate how it is taxed.

My personal advice, if this is something you would like to do, is to go out there and stash 40% of each month's salary in a place you wont touch it. That way come the end of the contract you will be in a position to decide whether you want to come back or stay and the funds to pay any tax will be there for you.

You may also have an obligation to pay National Insurance for the first 52 weeks of any absence as well but I'm not 100% on that. If you want more information search for IR20 in Google. It is the HMRC publication and is written quite clearly. Finally, if you want to do things completely by the book and decide to leave for a complete tax year you might want to fill in and submit Form P85. This will tell HMRC you are leaving and should help your case if HMRC ever did try to recover tax from you (provided, of course, you had met all of the other conditions).

Taxing_2

Well, I got the job and have been in Abu Dhabi since November 08. My 12 month contract runs out in November 09, at which point I will find out if it will be renewed. If it is renewed then it will be for either one or two years, taking me past April 2010, which I understand is the key date as I'll have then been out of the UK for a complete tax year. Is this correct - if my contract is renewed then I'm fine, no tax liability at all?

However I'd like to plan ahead now for what will happen if my contract is not renewed in November 09. I haven't spent any of my salary yet, and have spent less than my allowances so been able to keep the change. If I returned to the UK then I'd be liable for tax on the lot (salary and expenses or just salary portion?). How could I avoid this? I don't mind not returning to the UK for months or years. Could I take another job in another country, not the UK? Would it have to be a job in the same country as this one, i.e. the UAE? I gather I do have to work - I couldn't just travel for a few months?

I haven't filled in form P85 yet but was thinking about doing so now.

Thanks in advance for any advice, it is very much appreciated. I will be seeing an IFA soon but like to have done my own research first.

Cook_County

Well done!

If you do not break UK residence you will owe UK tax on income earned abroad.

What qualifications does the IFS have? In which country is s/he registered?

Taxing_2

Cook_County wrote: »

If you do not break UK residence you will owe UK tax on income earned abroad.

I know! I'm after advice on exactly what I have to do to break residence so that I DON'T owe the tax. Obviously my contract being renewed will do it. But I won't find that out until November, and I'd like to find out my options now. If I don't get offered a follow-on contract, can I still break residence and what would I have to do - get another job, does it matter in which country, do I even need a job or just to stay out of UK?

Cook_County wrote: »

What qualifications does the IFS have? In which country is s/he registered?

I haven't booked an appointment yet. I'm asking friends in Abu Dhabi for recommendations, and also looking at the option of seeing an IFA in the UK instead, during the one week that I will be there this year.

Thanks

Cook_County

To break residence in the UK one needs to demonstrate that one has actually moved to another country for a settled purpose (eg employment) for a period that includes a complete UK tax year.

Taxing_2

I have been settled here since November 08. My job lasts until at least November 09. If my contract was not renewed but I stayed here unemployed past April 2010, would I still have broken residence in the UK?

I'm trying to work out what situations "count" as me having broken residence, so that I can meet the criteria. If the situation in the first paragraph does not count, then is there another situation that would, e.g. me going travelling or taking another job in a third country (i.e. neither the UAE nor the UK)?

Cook_County

The UK does not have a statutory residence test. Guidance to the answer you seek can only be found as a consequence by relying on a series of confusing tax cases and unofficial HMRC guidance such as HMRC 6 - which the Courts may and do disagree with frequently.

Reed v Clark suggests you need the full time employment for the complete UK tax year.

TM1976

Cook-County is right when he says there is no statutory residence test in the UK. The tax cases aren't likely to be that relevant to you because if you don't come back to the UK and start earning money until the 10/11 tax year it's very unlikely that anyone will look at your case at all. You don't have to make any sort of declaration of your overseas income while you were non-resident so they won't really have any idea what you have done.

On the tax law and the situation that might arise if someone looked at your case I'm going to quote the previous poster on this thread:

"The key to breaking residency is showing that you are intending to go and work abroad for a period which includes one complete tax year. Unfortunately simply remaining outside the country won't do so your circumstances, as they stand, will mean you will remain liable to UK tax. If you were to take an 18 month or two year contract, or take a one year contract and extend it for a period which extends past April 2010 then you will have broken residency and your overseas income will not be taxable."

They key thing here is intent which is difficult to prove. If you had indicators that you had no intention of leaving the UK permanently such as having a home there/a wife and kids who didn't attempt to relocate, that would count very favourably on the taxman's side for saying you didn't really give up UK residency.

As you don't appear to have any of these your intent would probably be judged on what you say you were actually going to do. This is good in some respects because you can tailor your story to fit the rules, however if you don't know the rules you could easily catch yourself out.

In short if you were to say:

If you were to say "I went to the UAE on a year's contract did a bit of travelling to stay out of the country for a full year then came back to the UK." They would probably say you were resident and tax your UAE income.

If you said "I went to the UAE initially on a year's contract, I wanted an extension but I didn't get it, took a holiday, looked for work in the UAE/other countries but couldn't find anything suitable, eventually decided to come back to the UK in May 2010." You probably wouldn't get taxed.

As Cook_County says there is no hard and fast rule but this is basically how it works.

The date you make the decision is key here too though, if you said you decided in March 2010 they would probably tax your UAE income.