Dear Contractor Doctor,
I contract via my own limited company, mostly working in Azerbaijan. The contract chain is a bit tortuous: I have to work through a UK agency, then a local contractor agency in Azerbaijan. Although my UK company invoices the local contractor agency, the Azerbaijan tax authority will only recognise me as an individual as expat personal service companies are not recognised in Azerbaijan. My wife and I then draw a salary and dividends from our UK company.
As a result, I pay tax in Azerbaijan personally and receive a tax certificate. UK and Azerbaijan have a double taxation agreement, but my accountant says my company cannot receive corporation tax relief in the UK on the tax paid in Azerbaijan as the certificate is made out to me, not the company.
Can I use a tax certificate to offset tax in the UK?
Contractor Doctor says:
“Operating through a contractor limited company when contracting overseas isn’t often recommended as it tends to generate unwanted tax complications just like Pete’s,” explains Mike Phillips, marketing director of contractor tax consultancy firm ItsInternational.
“In this instance, the contractor will not be able to offset his company’s corporation tax liability in the UK because he has been taxed as an individual in Azerbaijan. However, using the information on his Azerbaijan tax certificate, he should be able to offset the tax paid in that country against the UK income tax attributable to his income from Azerbaijan as declared on his UK tax return.”
What is a tax certificate?
An income tax certificate is a document that a contractor can request from local tax authorities when working overseas that provides proof that they have paid tax on the income received for the work the contractor completed in that country.
“It’s similar to a P60 that an employee would receive at the end of each tax year,” notes Phillips. “An income tax certificate will state the contractor’s name and their personal income, as well as a summary of the amount of tax they have paid. Whilst it may not spell out quite all of the same information as a P60, it serves a similar purpose.”
Contractors who contract abroad often find that they are being taxed on their income both in their country of work and in their country of residence. In which case, obtaining a tax certificate can assist in claiming double taxation relief from HMRC.
When might I need a tax certificate?
As a result of the varying tax laws contractors will encounter in expat contracting locations, it is generally a good move for contractors to request a tax certificate whenever they work abroad. This provides confirmation that their tax affairs are compliant with local tax regulations.
The UK has double taxation agreements with most popular contracting destinations which ensure that people working overseas avoid paying tax twice on the same income. Double taxation agreements specify which country holds taxing rights over an individual in certain circumstances.
In many instances – this scenario being one of them – a contractor may initially find themselves paying tax both at home and abroad. However, being able to present a tax certificate upon returning home will help you get the double taxation relief you may be entitled to.
Tax certificates are not awarded automatically
“A tax certificate is not necessarily awarded automatically by local tax authorities,” Phillips explains. “You have to request it from the taxman, but it’s not difficult to obtain. You can acquire a tax certificate in any country in which you’ve paid tax.
“They can be obtained directly from the country’s tax office. Alternatively, if you happen to be using a local accountant or tax adviser, they should also be able to obtain a tax certificate for you, so it’s not complicated.
Phillips adds that it is always sensible to secure some form of official proof of tax payments when working overseas, because you never know when you might need it.
Can I use a tax certificate to offset corporation tax liability?
Unfortunately for contractor Pete, one person limited companies are not recognised in Azerbaijan, and a personal tax liability cannot be converted into a corporate tax liability.
“You can’t offset the personal tax paid in Azerbaijan against the UK company’s corporation tax liability as there are two separate legal entities involved,” Phillips notes. “It’s as simple as that.”
Using a tax certificate to offset tax in an overseas country
The UK has tax treaties with the majority of countries around the world, so contractors should have no reason to be concerned they will lose out if they find that they are being taxed twice on their income. Contractors will find that a tax certificate should assist their accountant in retrieving the money that is rightfully theirs.
“Because this contractor is a UK tax resident, he is liable for tax on worldwide income, meaning that he has a liability to HMRC for all of the money that he earns in Azerbaijan.”
Phillips concludes: “But clearly he doesn’t want to pay twice. So his duty is initially to pay tax in his country of work at the time, which he has done. He can then bring his tax certificate back to the UK as evidence of the tax paid in that country. This would normally be provided to his accountant who can forward it on to HMRC if requested.”