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Chapter 1 –
The Practicalities
So you’ve decided you want to look outside the UK for new customers or new suppliers. That might be as a subcontractor working on a project, or you might be selling over the internet. Or you might decide to set up a physical presence outside of the UK.
Here are a few practical issues to think about before you get too far into the depths of tax and VAT. There will be extra costs involved, but there is also funding available.
Costs
The costs you incur will depend on how you’re trading overseas. Let’s look first at expenses that you’d pay for yourself if you’ve left the UK temporarily to work on a project.
Out-of-pocket expenses incurred overseas
If you’re out of the UK completing a project, you can still track your expenses and claim tax relief on them. We’ll look at where your profits will be taxed in more detail in chapter 5.
Some of these expenses will be in the local currency, for example hotel bills. One option is to translate these into pounds sterling yourself as you enter them into your accounts, using the rate that was in force at the date you incurred the expense. Exchange rates can be found on sites such as xe.com and oanda.com; these sites provide historic exchange rate information too. There are no hard-and-fast rules for which rate you must use.
Or, you can save time by using a service such as ReceiptBank (www.receipt-bank.com), which not only lets you capture expenses easily using your iPhone or by posting receipts, but automatically translates any expenses in a foreign currency back into pounds sterling for you.
ReceiptBank integrates with several providers of small business online accounting software, including FreeAgent (www.freeagent.com), KashFlow (www.kashflow.co.uk) and Xero (www.xero.com).
If you withdraw cash from a UK bank account to spend it abroad, do beware of extra charges that may be imposed by your bank. These charges can at least be claimed as costs in your business accounts.
Reclaiming costs from your customer/contractor
In the UK, you can often ask your customers to reimburse you for costs that you incur while you’re working on a project for them, such as a train fare to their office. Make sure that your overseas customer is also happy to do this, otherwise you could find yourself out of pocket. It’s easy to ignore costs such as travel, accommodation, food and drink in the excitement of working abroad, but they can mount up very fast.
Are you an employee?
In the UK, any individuals who believe they are in business but who are actually their customers’ employees in all but name can be taxed as employees by HMRC. Depending on whether the individual trades as a sole trader or a limited company, the tax may be due from the individual’s limited company or from their ultimate ‘employer’.
HMRC are concerned about such arrangements because they get more cash from an employer–employee relationship than from a client-supplier relationship, given that employers often have to pay National Insurance on the cost of their employees’ wages. The legal framework that enables HMRC to treat a supplier as an employee is called ‘IR35’.
The UK system is complex, but so are those of many foreign countries, so make sure that if you’re working on a project for a foreign company and are based overseas for a while, you don’t fall foul of the local equivalent of this regulation. Check this out with the local tax authorities in the country where you’ll be working.
The Daily Telegraph’s top three places in the world to live, as voted for by British expats in 2011, are Hong Kong, New York City and the North Island of New Zealand (tinyurl.com/top10places). Let’s look at whether there are local equivalents of IR35 there.
1. Hong Kong
The Hong Kong Inland Revenue Department lays down that “persons who render personal services under employment-like conditions, but have entered into service contracts in the name of service companies owned by them”, will be taxed as employees of their client (tinyurl.com/6o5s88j).
2. United States of America
The US’s Internal Revenue Service (IRS) distinguishes between employees and self-employed independent contractors (tinyurl.com/chj74n).
The employer–employee relationship can exist even if it goes by a different name. The test is the degree of control exerted by the ‘employer’.
If a supposed independent contractor is found to actually be an employee, then she will be taxed as an employee.
3. New Zealand
The New Zealand Inland Revenue provides guidance which almost exactly matches the UK’s, in that it’s not laid ...
