With the array of booming economies worldwide, it’s no wonder that so many skilled workers are seeking employment abroad. However, whilst there are plenty of reasons to look for opportunities overseas, there are a variety of potential risks that contractors face, particularly surrounding compliance across borders.
Here are some key points that contractors need to be aware of, written by Michelle Reilly, CEO of 6 CATS International.
Misuse of A1 forms
With the current confusion around Brexit, the misuse of A1 forms is something that contractors need to be aware of. These certificates are meant for the clarification of which social security legislation applies to an employed or self-employed person who chooses to work in another EU country. Under EU rules the A1 form stipulates that an individual is only subject to the legislation of one country at any one time and has no obligation to pay social security contributions in the second country. However, some contractors have been caught using these certificates in order to reduce the amount they pay for social security by, applying for A1 forms in countries they haven’t even visited. However, authorities have been taking tougher stances on this of late, with some contractors facing backdated liabilities that go back as far as 2009. Professionals should steer clear of any company or contractor management service advocating this kind of solution to increase take home pay.
For clarity, the current rules regarding A1 forms are that these are shorter than 24 months, and the individual must have pursued activity in the country issuing the form for at least two months before moving overseas. The latest advice for contractors working in the EU in the event of a no-deal Brexit is that if you have an A1 form with an end date that goes beyond the day the UK leaves, you will need to contact the relevant EU social security institution to confirm if you must pay social security contributions in that country, as well National Insurance contributions in the UK.
Myths of the 183-day rule
The 183-day rule is another commonly misunderstood compliance concern. This long-standing rule stipulates that contractors operating in a foreign country for less than 183 days aren’t required to become tax residents and therefore do not pay any taxes in the host location. However, the intricacies of this are easily misunderstood. We often hear claims that any contractor working less than six months will be covered by this directive, but that is simply not the case.
The 183-day rule is only applicable to dependent workers – those able to prove that they are in a full employment contract with the company in question. It does not apply to self-employed or independent workers. Those operating through a personal service company (PSC) abroad are also unable to use this rule and will instead be required to become a tax resident in the host country once the contract begins. This applies for the company, its director and any employees. Contractors themselves also risk paying the host country income tax and social security on their entire global earnings as well as corporate tax on all profits by operating through a PSC outside their home country. And, of course, should these workers choose to use a PSC which is not registered in the host destination, they risk fines, penalties, back-dated liabilities and potential jail time.
While this is a more general concern, it’s important for contractors to be aware of just how much both HMRC, foreign authorities and international bodies have stepped up their game in the fight against tax evasion. In the last couple of years alone, the exchequer has been using a variety of new tactics to tackle tax crime, introducing landmark legislation such as the Criminal Finances Act 2017, psychological profiling, big data analysis, and social media search. In fact, recent reports have revealed the extent of HMRC’s pursuit of offshore tax evasion, with efforts leading to an unprecedented 5.67 million financial records detailing citizens with offshore accounts being delivered to the tax authority.
From an international standpoint, the OECD-led Common Reporting Standard has ensured that countries now automatically share tax information with each other, making it far easier to crack down on evasion. With 109 countries currently signed up to the agreement, anywhere contractors choose to work is likely to be getting stricter over tax and compliance.
Future-proofing: protecting yourself from the risks
Ultimately, the world of international compliance can undoubtedly be complex, and is always changing. As such, contractors will face a logistical headache when it comes to staying ahead of new developments. There are a few measures that contractors can implement to minimise risks, such as ensuring any company they are going to work for is declaring all of its income in the country of work and the correct taxes are being applied, and asking for a signed commitment from any firm that provides a payment solution that it is 100% compliant in the country of work and does not involve any form of tax evasion. Aside from that, partnering with an expert in international contractor compliance is the most effective way to remain risk-free.
- Tax-efficient protection for contractors - life insurance and income protection - your company pays the premiums.
- Need a new accountant? - compare 30+ specialist firms
- Switch between umbrella and limited - flexible solution from Nixon Williams for contractors who may be affected by the Off-Payroll changes.