Right of Substitution in European contacts

[SueEllen]

I was reading the Swiss and German tax regulations and cross border tax is not simple anywhere. Both my German and Swiss tax advisers struggled trying to clarify where tax was payable. Though I agree with you you should also do your own research. Clarity will only come when you are communicating with a tax inspector. With regards to where you pay your tax on your contract earnings, it is strongly advisable to pay in the country you do the contract, as the other country will never question it. The other way round is quite different as we know from quite a number of posters who got it wrong in Germany. In other words running your Ltd and taxing it in the UK in a foreign country is akin to running around in a mine field.

I was presuming he was going to one of the Nordic countries or Ireland rather than Germany, France etc. Those countries tax pages are easy to understand. The difficulty arises, like with all countries, is if you fall inside the UK tax regime as well and the country doesn't use the employer of record model.

Oh and the OP needs to be very careful in counting the 183 days as in some EU countries it is a continuous period and buggering of for a weekend or a couple of weeks doesn't stop the clock.

[BlasterBates]

To be fair when I've worked abroad I did my own digging and unlike in the UK lots of countries make their tax regulations very easy to understand e.g. there are no loopholes.

That way if you screw up you cannot blame anyone else.

I was reading the Swiss and German tax regulations and cross border tax is not simple anywhere. Both my German and Swiss tax advisers struggled trying to clarify where tax was payable. Though I agree with you you should also do your own research. Clarity will only come when you are communicating with a tax inspector. With regards to where you pay your tax on your contract earnings, it is strongly advisable to pay in the country you do the contract, as the other country will never question it. The other way round is quite different as we know from quite a number of posters who got it wrong in Germany. In other words running your Ltd and taxing it in the UK in a foreign country is akin to running around in a mine field.

[SueEllen]

I wouldn't rely on interpreting a website. I would take advice from an accountant in the country you are working in. It is indeed true that in all countries you can work for up to 183 days provided the client is a UK based client. This is a rule adopted by all European countries, and probably the US as well. However if you are working on your own account at a client in the country (i.e. not contracted out to a UK company) then this rule generally does not apply. Therefore you have to be careful how you are interpreting the internet page, you can easily be misled into thinking it's not a problem. I have also read an internet page and quoted it at a tax inspector, and then he said "ah but" and quoted me a few more enlightening paragraphs that totally destroyed my argument, so do be careful

To be fair when I've worked abroad I did my own digging and unlike in the UK lots of countries make their tax regulations very easy to understand e.g. there are no loopholes.

That way if you screw up you cannot blame anyone else.

[BlasterBates]

BB yes I know the above and I am aware of working for consultancy, but I checked the tax website for that country and it confirmed the 183 days / 6 month rule. So I can pay tax in the Uk if my work was 6 months or under.

I wouldn't rely on interpreting a website. I would take advice from an accountant in the country you are working in. It is indeed true that in all countries you can work for up to 183 days provided the client is a UK based client. This is a rule adopted by all European countries, and probably the US as well. However if you are working on your own account at a client in the country (i.e. not contracted out to a UK company) then this rule generally does not apply. Therefore you have to be careful how you are interpreting the internet page, you can easily be misled into thinking it's not a problem. I have also read an internet page and quoted it at a tax inspector, and then he said "ah but" and quoted me a few more enlightening paragraphs that totally destroyed my argument, so do be careful

[SandyD]

When I worked in such a country I ensured I had another UK resident company director before I set foot in the country to make it clear my company's place of origin throughout my contract was in the UK. And I actually believed the tax office did check up on me as unlike the UK they have a more integrated approach to records and the state is trusted.

Anyway if you are solely under UK tax regulations and laws then you do need a right of substitution in the contract. If you can work at your own office then you can get anyone to do bits of work for you and not having that clause in means you can't.

Edited to say: I was told a story about a UK based contractor who did substitute work but didn't inform the client he was doing so. As there was a non-disclosure agreement when the client caught him at it - and it was easy to - he was made to walk. The client was actually impressed he did substitute work and would not have had an issue with him doing so, but the issue was he breached the contract and their trust by not informing them. So this is why you want the clause in.

Thanks again Sue

[SueEllen]

BB yes I know the above and I am aware of working for consultancy, but I checked the tax website for that country and it confirmed the 183 days / 6 month rule. So I can pay tax in the Uk if my work was 6 months or under.

When I worked in such a country I ensured I had another UK resident company director before I set foot in the country to make it clear my company's place of origin throughout my contract was in the UK. And I actually believed the tax office did check up on me as unlike the UK they have a more integrated approach to records and the state is trusted.

Anyway if you are solely under UK tax regulations and laws then you do need a right of substitution in the contract. If you can work at your own office then you can get anyone to do bits of work for you and not having that clause in means you can't.

Edited to say: I was told a story about a UK based contractor who did substitute work but didn't inform the client he was doing so. As there was a non-disclosure agreement when the client caught him at it - and it was easy to - he was made to walk. The client was actually impressed he did substitute work and would not have had an issue with him doing so, but the issue was he breached the contract and their trust by not informing them. So this is why you want the clause in.

[SandyD]

BB yes I know the above and I am aware of working for consultancy, but I checked the tax website for that country and it confirmed the 183 days / 6 month rule. So I can pay tax in the Uk if my work was 6 months or under.

[BlasterBates]

But I know for example in Switzerland I was told for any contract I need to pay tax from day 1 and the agency (acting like an umbrella) would hold such taxes... I rejected that contract because it didn't make any sense financially to me.

You need to pay tax from day one in all countries.

The exception is if you work for a UK client (not agency), then you pay UK tax.

So for example if IBM(UK) is doing a project in Germany, you're billing IBM(UK) via the agency, then there is no problem-

If the client is German, Swiss or whatever then you should be registered and paying tax in the country you're working.

For example a colleague of mine was hired by the London office of a Swiss bank and was "seconded" to Switzerland. he was taxed in the UK. I was hired directly by the Swiss bank via an agency, so I paid Swiss tax.

If the contract is very short i.e. a few weeks you can pass it off as a "business trip", in any case for a short contract you will barely be above the tax threshold.

[SandyD]

But I know for example in Switzerland I was told for any contract I need to pay tax from day 1 and the agency (acting like an umbrella) would hold such taxes... I rejected that contract because it didn't make any sense financially to me.

[SandyD]

Thanks NLUK, good points, apologies for the quick posting without proof reading !


I checked re the '183-day rule' , and I know in that specific country its applicable, plus after the initial month or so I will divide my working time between the UK and onsite in that European country.

Not sure if that makes any difference.

[northernladuk]

And IMO if you are going to write to anyone please make sure you proof read it a bit better than that post.

[northernladuk]

Hmm...

This question often arises when contractors discuss possible options for working overseas. The simple answer is that if you're working overseas through your UK limited, IR35 is the least of your worries.

IR35 is a UK tax regulation put in place by HM Revenue & Customs to protect against deemed employment in the UK. It was designed to ensure that people claiming company-related non-taxable benefits are entitled to these benefits and not simply misusing a tax structure to avoid income tax.

The key here, however, is that these are UK tax benefits and, under the OECD model, only apply to individuals working in the UK. The real question, therefore, is no longer whether you should be worried about IR35 when working outside of the UK through your UK limited company, but whether you should be working outside of the UK through your UK limited company at all.

One popular interpretation of the '183-day rule' and its application is that it allows contractors to work overseas for 6 months while retaining their UK taxation structure. This is incorrect in a vast majority of European countries. Indeed, as a contractor working in almost any country, tax is due locally from day one. The relevant part of the OECD Model Tax Treaty states that "employment income is taxable in the country where the activities are physically carried out, unless (amongst other things) the remuneration is paid by, or on behalf of, an employer who is not a resident of the country of work."

The varying interpretations of the 183-day rule arise from the interpretation of the 'employer' in the above sentence. Most countries interpret the 'employer' as the 'economic employer' (the entity that is paying for the work) as opposed to the 'employer of record' (the entity that is paying the worker). This means that, in the scenario of a contractor working overseas, the local client will be deemed the employer for purposes of interpretation of the 183-day rule, not the contractor's UK limited company nor the UK recruitment agency.

The correct way of working while contracting overseas is always to make use of a structure that allows you to pay tax locally in the country of work. This may be by means of registering your company locally, working through a local employment umbrella or management company or registering as a freelancer or equivalent: each country has different requirements. Whatever your situation may be, before you embark on any foreign assignment, take professional advice tailored to your circumstances.

[SandyD]

Hi, If a contract is issued from Europe and they don't normally include Right of Substitution clause, would I need to insist that this clause added? my co's insurance asked if I include this clause in all my contracts, and I normally do, but not sure if this is also required of contracts out in Europe.

Also if I write an email to agency explaining that this clause needed to be added purely to comply with insurance and tax purposes in the UK, would that email invalidate the contract clause as it showed I had no intention of using the clause or subtitute?