When it comes to relocating and setting up a business overseas, there are a multitude of issues that have to be considered. Identifying a suitable business opportunity, a place to live and the appropriate work permits are obviously vital. Yet it is also essential to get your tax position in order pre-departure too.
The key to achieving this is to keep the UK authorities informed of your intentions at all times; otherwise you may find yourself liable to pay tax both in the UK and your new country of residence. To do this you should fill out a P85 form (available from HMRC) prior to your departure. This form covers a series of issues, including the length of time you will be away from the UK. It also enables HMRC to calculate if you are eligible for any tax to be returned to you and if you will be exempt from having to pay UK tax whilst away.
The general rule is that you have to be outside the UK for an entire tax year in order to break residence and thus avoid having to pay tax in the UK. This sounds simple enough, but as Baker Tilly tax expert Carolyn Leslie points out, ‘if you leave on 1 April 2007 and arrive back on 8 April 2008, you’ve only been away for a year. If you leave the country in September, however, you still need to serve a full tax year abroad, which will equate to closer to 18 months.’
As for returning to the UK temporarily, there are a number of issues to bear in mind here too. In order to continue avoiding tax in this country, for instance, you can only spend an average of 91 days in the UK each year.
Meanwhile, ‘if you have any UK business interest whatsoever it will still be taxable over here,’ adds Leslie. ‘So if you come back and work for a couple of weeks you may be liable to complete a UK tax return covering these earnings.’ For this reason it is vital to seek professional advice on your individual circumstances.
If you decide to return to the UK on a permanent basis you must fill in a P86 form on arrival. And once again the tax year is all that matters, so if you return in September you are going to have to declare all earnings for that tax year at the end of the period, regardless of their origin.
‘You have to report the full amount of income you’ve earned in the tax year of your return,’ says Leslie. That said, ‘if you’ve been non-resident, you’ll get spilt-year treatment in your year of return and not be taxed on your whole year’s income.’
Earnings-related tax aside, there are also various other issues to be aware of. If you break UK residence, for instance, you can avoid paying tax on bank or building society interest by filling in an R105 form (again available from HMRC). You will, however, be eligible to pay UK tax on other investment income, such as capital gains tax on shares.