Freelance Management Companies

This is a popular option with many contractors. It offers a slightly higher net income than working as an employee of a management service company but there are some drawbacks.

The way it works is broadly as follows.

You are registered as a freelancer in the country in which you will work. The management company has a contract with your agency for the rate and duration that you agreed. They have another contract with you that reflects the agency contract with the exception that the rate offered to you is typically half of the rate in the agency contract. You pay local income tax and local social taxes on the amount mentioned in your freelance contract. The rest of the money that the agency pays to the management company is used in part to pay the latter's fee and the bulk goes into some sort of trust account to be paid to you at the end of the contract. You are paid this sum free of tax after you leave the country in which you have been working. There are usually arrangements for some of this money to be paid to you earlier in the way of expenses or loans during the contract.

The attractions of this are that you only pay tax on part of your income and that, even on that amount, you pay self-employed social taxes which are generally a lot lower than those levied on employees and their employers. (In Germany, for example, self employed social taxes can be as low as zero but you need to have medical and pension cover at least.)

Some freelance management companies will encourage you to pay UK voluntary National Insurance contributions and they say that this will get you an E128 which covers medical expenses while you are working outside the UK. (Of course, they are talking rubbish if they say that although it must be admitted that the UK NHS fails to make proper chacks and it does pay for many people who have no legal right to use an E128.)

It sounds good, you do get to keep a lot of the money that you earn so what are the drawbacks?

The main drawback is that if you work like this for less than four years, you are liable to pay UK taxes and National Insurance on the whole sum that you have earned in the course of the oversees contract.

Why is this so? Well, unless you pass the 91 day rule for four consecutive tax years, you are going to be considered to be "Ordinarily Resident" in the UK for tax purposes. In that case, you are liable to pay UK taxes on your entire earnings. Of course, you have heard the rule that you are considered not "Resident" and not "Ordinarily Resident" if you work outside the UK for at least a whole tax year so surely jpoc must be wrong on this one?

The actual UK Inland Revenue concession is that you will gain this privilege only if the work is full time and on a contract of employment. If you have a document with the words "Freelance Contract" typed on the top, you do not have a contract of employment.

If you look at the detailed regulations for IR35 you will see that, in the case of work carried out overseas, if you remain Resident or Ordinarily Resident in the UK for tax purposes, you worldwide income is subject to IR35!

If the people who offer you this contract tell you that it is OK and you really are safe from UK taxes then remember this. They might be trying to convince you today but two years from now, you might be trying to convince a judge when the alternate case is being put by a very clever QC working for the Inland Revenue. The way that the revenue go after people, I'd not be surprised to find that they first go for you on the fact that you do not have a contract of employment and that once they have won that argument, they say that you fail their test for self employment and you must pay employee's and employer's NI as well!

So how come people work like this? The obvious reason is that normally everything works out OK and the UK Inland Revenue takes no interest. After all, when you make your UK tax declaration write to say that you are now working outside the UK, you are not asked to show your contract of employment. The fact that you are not asked to prove employment does not mean that you have done no wrong. Another good question is this: If it works today, why will it not work tomorrow? It might indeed work fine for some while to come but one thing that you should know is that the taxation organisations in all EU countries are co-operating together more and more to combat tax evasion. The UK in particular is strongly opposed to the imposition of withholding taxes and wants the exchange of information instead. Imagine what might happen if, in two years time, the Finanzamt in Frankfurt writes to the Inland Revenue to tell them that Joe Bloggs from Guildford has just arrived in Germany and is working as a freelancer and is earning some number of Euro. The alert tax inspector notes that freelance means "liable to UK tax", goes to get Joe Bloggs' file to update the record and notes that Joe appears to have gone to work in Frankfurt for only just over half the money that he was getting working in London and that he has ticked the box to say that the will be in full time employment. A couple of phone calls and search warrants later and the German and UK tax authorities have a list of all of the Brits who worked through the freelance management company as well as copies of their agency contracts and tax returns. Oh dear.

You should now read my pages on the advantages and disadvantages of being a freelancer in the country in which you might work and also my pages on the payment of voluntary UKNI contributions and your entitlement to NHS health treatment and reciprocal treatment.

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