Running your own limited company is a fantastic way in which to operate when you’re a contractor working in the UK. The limited company structure gives you greater control over your net retention, greater scope for off-setting business expenses, and the ability to benefit from VAT registration. The Limited company option really does represent a natural progression for many “career contractors” that have out-grown the more straight-forward umbrella company option that is usually the first choice of the novice contract candidate.
The problem with your UK limited company, though, is that it can be quite limited. In today’s globalised economy, there’s a very realistic chance of your average contractor having a skill-set that’s in demand outside of the UK. And therein lies the problem; in nearly every instance, the UK limited company structure is not going to be a viable option for a UK contractor working outside of the UK.
Of course, that’s something that most contractors are not aware of, and many of them move forward with international opportunities under the mistaken belief that they’ll be able to use their UK limited company on the assignment or, at the very least, use it for the first 6 months of the assignment.
This 6 month window – more commonly referred to as the 183 day ruling – is one of the most widely misunderstood issues to effect contract workers. The commonplace assumption is that a contractor can operate in country X, for a period of up to 6 months, without registering into that countries system and without paying local tax and social security. The contractor assumes that they can either “nip in and nip out again” if the assignment is due to last less than 6 months, or they believe that they only have to register locally when they hit the 6 month mark if the contract is likely to go beyond that initial 6 month period.
Unfortunately, in the majority of cases this is simply not true. And even in those cases where that argument has some grounding in legislation, it is now increasingly being seen as a more complicated and “less compliant” option…and therefore one that most clients and agencies are refusing to entertain.
The most appropriate interpretation of the 183 day ruling is simply that it refers to the point at which you convert from being tax “non-resident” to tax “resident” within a particular country. The difference between “non-resident” and “resident”, however, has nothing to do with whether or not local tax and social security are due on locally sourced earnings. Instead, it’s to do with whether or not the local authorities take an interest in knowing about your worldwide earnings within a particular tax year. Under both the “non-resident” and “resident” scenarios, there will be an expectation that you pay local tax and social security on money you’ve earned locally in that country.
Because of all this, the simple fact of the matter is that, in nearly every scenario, a UK contractors’ UK limited company is not a viable trading structure for the overseas assignment in question…and it’s in this sort of situation that even the most experienced of contractors can find themselves in a position where an umbrella-type structure from a payroll service provider becomes the most appropriate way for them to operate.