Many people will spend time working abroad in the course of their career. When they do, they must stay compliant with tax legislation in their home country and the country where they’ve come to work.
Regardless of where someone resides or generates income, they’ll have to account for their earnings and pay any tax due. But there can be confusion about what needs to be declared and how to go about it.
Back in May, in our blog Overseas Income #1: Are You a UK Resident with Overseas Income to Declare?, we looked at tax from the perspective of a UK national with financial interests overseas. This time, we consider the reporting obligations on a foreign national who comes to live and work temporarily in the UK.
An assignment to work in the UK may be short-term – perhaps just a year or two, but it will be crucial for the assignee to understand their tax position and responsibilities while working in a foreign country.
Who pays what & how?
An individual from overseas living and working in the UK is automatically classed as a UK resident if they spend 183 or more days in the UK during the tax year (which runs from 6th April to 5th April the following year). Residency status means they will normally have to pay UK tax on all their income.
They’ll have Income Tax deducted from their salary by their employer. Unless they can provide documentation proving they pay social security in an EU country or a country that has an agreement with the UK, they’ll also have to pay National Insurance.
So that’s the UK side of tax sorted. But someone who comes to the UK to work for a while – and is a UK resident for tax purposes – will be liable to pay tax on their worldwide earnings. In other words, wherever income is generated, it must be declared, and any tax that’s due must be settled with authorities in the relevant countries.
One area that can often catch people out is property. If someone owns a home in their country of origin, they may well decide to let it out while they’re working away. Even if they don’t do so immediately, they might choose to later on, should their contract be extended beyond the period initially anticipated.
A foreign national may believe that because they’re paying tax in their home country on income earned from letting out their property, they don’t need to declare their earnings to HMRC in the UK. But this is incorrect – rental income earned in this way (along with any other overseas income from savings and investments) must also be declared in the UK, even if tax is being paid overseas.
Although the income is being declared in two countries, in most instances, tax will only be payable once, as long as the country the individual comes from has a double-taxation agreement with the UK.
Failing to complete a tax return and to declare rental income to HMRC may result in fines or penalties, and collaboration between international tax authorities – including the UK, means non-declaration is unlikely to go undetected for very long. Automatic Exchange of Information Agreements allow the routine sharing of financial information between international tax authorities and financial institutions, including banks and building societies.
Foreign nationals working on secondment in the UK and letting out property overseas must declare rental income at home and in the UK. If you’re in this position yourself, or you’re assisting someone else who is (perhaps you’re a UK-based letting agency), Inca can provide help and advice to make sure you – or your client – comply fully with international tax regulations.