Dear Contractor Doctor
I’ve been contracting via my own limited company for over ten years, and have decided that now is the time to take a year out to do some travelling abroad.
Having built up a reasonable cash balance in the company, I’d like to continue to pay myself a small salary during the trip. I’m not planning to work overseas during my break and it is unlikely that there will be any fees coming into the business, although there will be some bills to be paid while I am away.
Can I continue to pay a salary and save tax if I take a career break overseas?
Contractor Doctor says:
“The key issues for Nandan are where the salary will be taxed and whether his limited company can benefit from a corporation tax deduction for his salary,” explains James Abbott, tax partner at contractor accountant Abbott Moore.
“The length of the trip will also impact on where the salary is taxed and HMRC’s view on whether the contractor limited company is still trading.”
Tax residency rules
According to Abbott, UK tax residency laws are undergoing a major revamp and, at the time of writing, the new draft rules are out for consultation. However, his view is that, if the trip lasts fewer than 12 months, the contractor’s salary will be taxed in the UK.
“If a contractor’s main home remains in the UK, the trip overseas is only temporary, and there is the intention is to return, then the contractor’s salary will be paid and taxable in the UK,” Abbott says.
If the trip was likely to be longer than 12 months, then the contractor’s continued UK residency might be called into question, particularly if the contractor has no strong family ties in the UK or is spending the entire trip within a single overseas tax jurisdiction.
Corporation tax deduction
“If the contractor’s intention is to return the UK and resume contracting after 12 months, then HMRC will accept that the limited company continues to trade,” continues Abbott.
“It is also likely that the contractor will still need to perform their director’s duties and maintain some company paperwork during the period, such as VAT and tax returns and company accounts. And presumably most contractors would maintain contact with potential clients and agencies, keeping them warm and ready for activation on the contractor’s return.”
Contractors planning longer trips may wish to consult their accountant or tax adviser as their tax domicile may change and HMRC may declare that their limited company has ceased trading
James Abbott, Abbott Moore
On this basis, assuming the contractor was drawing a salary of up to his personal allowance, Abbott believes that there is a strong case to make to HMRC that the salary qualifies for a corporation tax deduction.
Carrying forward losses
There may be other tax benefits arising from this scenario, as Abbott explains: “It is entirely possible that the contractor will make a loss during the financial year that they are abroad. That may well be the case if there are no fees coming in and the contractor is paying a salary, insurance premiums and other company expenses.
“The contractor then has the choice of carrying the loss back to the previous financial year and applying for a corporation tax refund on tax already paid. Alternatively, the contractor can carry the loss forward to the next financial year to offset corporation tax.”
If the contractor plans to be away for more than 12 months
Abbott warns contractors planning to be away for periods longer than 12 months that they may be facing residency issues and might find it harder to make a case to HMRC that the company continues to trade.
“Contractors planning longer trips may wish to consult their accountant or tax adviser as their tax domicile may change and HMRC may declare that their limited company has ceased trading.”
He concludes: “Contractors can take breaks from contracting, continue to pay a salary and benefit from ongoing tax efficiencies as long as they continue to fulfil their director’s duties and intend to resume trading on their return.”