Most British consultants seeking assignments abroad currently turn their UK-based contracts through a UK personal service company [PSC] – often referred to as a “one-man limited company” – and they appropriately engage the services of a regulated UK accountant to help ensure the PSC’s and their own tax liabilities are declared in line with UK law.
Although a “no-brainer” solution for your UK-based consultants, is the PSC suitable for an assignment overseas?
The answer is “yes”, but with the following provisos;
Although the PSC is legally structured and recognised abroad as such, it may have a tax liability in the country of work
To avoid the future prospect of unpleasant and expensive surprises, it is vital your placement considers all tax implications before starting work in their host country. As a responsible recruiter, you must encourage your placement to take advice from qualified and regulated experts.
Some recruiters still hand their placements a PSL comprising poorly researched and unregulated ‘management companies’. Such an act could reflect a paucity of ‘contractor care’ by those recruiters.
Although it is normally the consultant who exclusively faces the wrath of a tax office over perceived income tax evasion, the recruiter could be open to a loss of goodwill by the client who has to deal with a visit from the local taxman checking for signs of possible collusion between client and ‘contractor’ at the place of work.
When your placement performs services in another country, there is a likelihood tax will be due (not withstanding the Double Tax Treaty [DTT] between the UK and the host country) in that country on the income generated by those services.
Put simply, if the services are performed by the individual in their name (i.e. as a self-employed person), they are personally taxed as the self-employment is deemed to have a fixed base in the host country.
However, if you elect to contract with your placement’s PSC, he or she must firstly ensure compliance with the DTT between the UK and the host country (DTTs are designed to protect against the risk of double taxation where the same income is taxable in two states) and, especially, Permanent Establishment [PE] rules. As these rules are constantly evolving, they need to be carefully monitored to ensure compliance at all times.
Furthermore, and especially relevant to this article, your placement’s PSC (which is UK resident) has an immediate PE in the host country providing it meets all the following conditions:
1.It has a “place of business” there
2.It has a “fixed” place of business there
3.It engages in an activity with a “degree of permanence” there
Once a PE has been established, it only ceases to exist when the assignment is ended.
What risk does your placement face by maintaining the status quo?
Both your placement and the PSC become liable in the host country for all due taxes and social security from day one of the assignment together with accrued interest from late settlement. However, if the local authorities believe your placement purposely, rather than innocently, defrauded the tax office, he or she could also face substantial penalties, fines and, ultimately, a criminal record – irrespective of your placement being able to show ongoing full declaration on their UK company account submissions and on their UK self-assessments.
Today, Belgium is particularly in focus. Having had to mandatorily register under Limosa (an international anti-fraud and unfair competition information system) your placements (and their PSCs) are now exposed to the Belgian tax office and immediate action is required. Its International has set up emergency procedures just to deal with this one issue so please refer your placements to the full article at www.itsinternational.ltd.uk.
The consequences can be extremely serious. Dependent on how long the PSC has been operating in, for example, Belgium, it could become liable for tax in Belgium going back up to 3 years (if only deemed a civil misdemeanour) or up to 7 years (if the non-declaration is deemed a fraudulent act).
its International is an international tax and financial consultancy, regulated by the ICAEW (The Institute of Chartered Accountants in England & Wales).