Subcontracting outside the UK - the tax implications

With the increasing prevalence of low-cost outsourcing websites, SMEs and freelancers alike need to wise up to the tax implications of subcontracting work to individuals and businesses abroad.

The laws within Europe can often be troublesome for those looking to engage a foreigner to complete a job. Let’s say you were trading in Switzerland. Well, unless you were established as a limited company in Switzerland itself, you would be unable to subcontract to a freelancer who was a resident there, or even conduct business, without being heavily taxed and climbing through yards of red tape.

It’s crucial when subcontracting out abroad that you research the country’s rules of business engagement, and whether their tax laws are surplus to our own.

We’d encourage seeking advice from your accountant on the specific country you’ll be outsourcing your work to.

Personal tax and employment

Generally, when subcontracting to a foreign contractor, personal tax liabilities will be their responsibility and are separate to your company.

Depending on the wording and length of the contract, the contractor may be seen to be an employee, in which case you are responsible for calculating and paying their tax at source – this becomes far more complicated, as you would need to then pay them a wage in-line with their country’s tax laws. Once you've got an earnings figure, why not generate an estimate for the tax you'll pay using our personal income tax calculator? Keeping all of your figures documented will enable you to follow our simple step-by-step guide to filing your tax return.

Simple VAT

If you are subcontracting within the EU then you need to record the subcontractor’s VAT registration number (if they are registered) on their invoice. Although the VAT is defunct and cancels itself out, it still needs to be recorded on the invoice for regulatory purposes.

However, if you are outsourcing to someone outside the EU, you do not need to record their VAT registration number regardless of whether they are registered or not.

When subcontracting out, it’s a good rule of thumb to consider whether you’ll be losing money on the VAT Flat Rate scheme, which allows you to charge 20% VAT from a client and pay a lower amount depending on your sector, pocketing the difference.

You’re unable to reclaim input tax (VAT) on any of the services or expenses which a subcontractor has personally paid for or provided, so sometimes it may not be worthwhile subcontracting in the first place!