UK-Based Australian Contractors: A Guide

Last week, we had an enquiry from an Australian who had recently moved to the UK and had the opportunity to continue working for an Australian-based company. They contacted us to help figure out the tax and accounting implications and to see if there were any hidden pitfalls they weren’t previously aware of.

Although this blog covers UK-based contracting for an Australian client, it’s applicable to any UK-based freelancer working for overseas clients. One thing we have noticed in the last six months is that this scenario is becoming much more common.

The Scenario

Let’s get this scenario underway. The dates, locations, and names have all been changed to protect the privacy of the individual who contacted us, but the situation and the implications are identical.

Mia has lived in Sydney most of her life. She was born in Melbourne and moved to Sydney when she was eight. She attended local schools and university, where she received a Bachelor of Commerce degree. She has been working in Sydney for eight years and managed to purchase her own apartment while she was there.

Recently, she decided she wanted a change of pace and has relocated to London. She arrived in London on 31 July 2024 and has signed a lease agreement for a three-bedroom flat, which she is sharing with two of her friends. This is her permanent address and is where she will be living for the foreseeable future. When she left Australia, she rented out her apartment through a real estate lettings agency, which is taking care of all the administrative work that comes with it.

Some project work has come up at a company in Sydney that Mia had previously worked for, and they wanted to see if she was interested in taking it. Mia has not worked as a contractor before, and being in a new country, she wasn’t too sure if it was possible and how it would work.

At No Worries Accounting, we have significant depth of experience in helping newly arrived Australians understand the UK tax system, how it works, and how it interacts with taxes and residency issues related to Australia.

Tax Residency

Firstly, let’s take a quick look at tax residency. We know that Mia has set up a permanent establishment in London where she will be living for the foreseeable future and that she has rented out her apartment in Sydney on a commercial basis. For these reasons, it’s highly likely Mia’s Australian tax residency ceased on the day she flew out. From an Australian tax perspective, Mia just needs to be concerned with the reporting of income from within the borders of Australia once she has left, to the Australian Tax Office. This means each year she will need to continue filing an Australian tax return, reporting her residential property income.

On the UK side, Mia arrived on 31 July 2024. She has set up a permanent establishment, and she intends to stay for the foreseeable future. On this basis, she would have become a UK tax resident the day she landed at London Heathrow.

Contracting Through a Limited Company

Mia had not worked as a contractor before and was unsure about how the whole process worked. In addition to this, she had the complication of having her main client as an Australian registered business with no presence in the UK at all, and she wasn’t sure how this was going to work.

We have already produced several blog articles such as How to Run a Limited Company in the UK, Limited company vs Sole trader, Streamline Your Limited Company Set Up that talk about how contracting works when using your own limited company. Here, I want to focus on the specific issues that Mia faced.

Getting Paid

The process of invoicing her client is exactly the same as if she were working for a UK-based business. She simply needs to create an invoice for work done and send it to her client for them to pay. Often, it’s easier for the Australian client to receive an invoice in Australian dollars and pay into an Australian dollar bank account, which is straightforward for Mia to set up. Firstly, the Joy Pilot accounting software that she may be using can handle multiple currencies, so it’s easy to create an invoice in Australian dollars.

We then suggested that she set up a business bank account using wise.com, where she can have a default GBP bank account set up for business, and she can easily establish an AUD bank account with an Australian bank account number using wise.com.

Now, Mia can create her invoices in AUD, her Australian client can pay directly into her AUD bank account, and then, within the wise.com app, she can transfer those funds into her business GBP bank account and pay herself (in salary and/or dividends) from her GBP business account.

Even just five years ago, this process would have been much more complicated, but now with the flexibility of business bank accounts in multiple countries, it’s an extremely simple strategy to execute.

Day-to-Day Business Operation

Other than having overseas clients and moving money between her AUD and GBP business bank accounts, the day-to-day operation of her limited company is identical to any other UK-based limited company contractor. She can claim the usual business expenses, such as any travel costs, office running costs, insurance, and business-related purchases.

Her company will still need to register for corporation tax in the UK, and PAYE, and complete annual accounts and a corporation tax return each year, all of which are included in our accounting service.

VAT Registration

Regarding overseas clients, there is no requirement for Mia to register her company for VAT. VAT registration is required once taxable turnover exceeds £85,000, and the word “taxable” here is key. Taxable turnover excludes any exempt income and income from activities outside the scope of UK VAT. Where a UK-registered business supplies services to an Australian company, this activity is outside the scope for UK VAT and does not count towards taxable turnover.

In Mia’s case, she could choose to voluntarily register her UK business for VAT. The main benefit in doing this is that she can reclaim VAT on any expenses or purchases that her company makes where VAT is included. For example, if she wanted to buy a new laptop for her business for £1,200 including VAT, if she were VAT registered, her business could reclaim £200 from HMRC, making the effective cost of the laptop £1,000.

There is more detail on this in the HMRC guidance here.

IR35

UK-based contractors who work for overseas clients still need to be aware of IR35. The good news is the IR35 Off-Payroll rules introduced for the private sector in 2021 do not apply to UK contractors working for overseas clients. Therefore, the “old style” of IR35 applies to Mia. The rules state that it falls on Mia to assess her IR35 status and ensure she remains compliant.

In our experience, we have never seen an IR35 case where the contractor worked exclusively for overseas clients who had no UK presence. When the rules were introduced in 2000, I don’t think this scenario was even contemplated. At the moment, it’s difficult to imagine a scenario where HMRC would attempt to consider a contractor’s IR35 status when they work for an overseas client, but it’s still something Mia should be aware of.

Filing a UK Personal Tax Return

By working through a UK limited company and taking a mixture of salary and dividend income, Mia will be required to register for self-assessment, meaning she will need to file a personal tax return in the UK every year.

Although she is a UK non-dom, let’s currently disregard the rules regarding foreign income for non-domiciled individuals and the potential of using the remittance basis. We still don’t know what the Labour government plans for non-domicile tax changes, but if they continue with what they’ve said so far, the non-dom tax regime will be dis-established soon.

On this basis, a UK tax return for Mia will still be relatively simple. She will need to declare all of her UK-based income and her worldwide income, which will include the rental income from her Sydney apartment. With the assistance of the double taxation agreement between Australia and the UK, we know that Mia will not be taxed twice on this income, and she will receive a tax credit in the UK for any tax already paid in Australia.

Fortunately for Mia, we are very familiar with filing UK personal tax returns where there is an element of foreign income, so we can easily help her with this.

Selling her Sydney Apartment

After speaking with us, Mia also now has an awareness of how capital gains tax works in the UK and how this could impact her if she sells her Sydney apartment. If she were to sell her Sydney apartment say two years from now, she might face a UK gains tax bill. In her particular case, because she lived in the apartment up until she left Australia, that period of time falls outside of the capital gains tax calculation because the property would be considered her principal private residence. So, it would just be for the period from when she moved to London to when she sold the apartment that would need to be considered in relation to capital gains.

Summary

Mia is new to contracting in the UK and had some questions and concerns about working as a limited company contractor while her main client was based in Australia. At No Worries Accounting, we were able to provide her with advice on how to set up a straightforward business structure that keeps her UK tax affairs separate from her Australian tax obligations. Additionally, the set-up made it easy for her Australian client to transact in AUD.

There was an additional element regarding her Australian rental property income, but she now understands how that is handled in the UK as well.

One of the advantages of our accounting service is our substantial experience in assisting UK contractors with foreign income from multiple sources. This enables us to help them understand their obligations and simplify their tax matters.

Frequently Asked Questions

1. What is the first step for an Australian moving to the UK and starting as a contractor?

I would always say the first step is to understand your tax residency status in both Australia and the UK. Establish where you are tax resident, as this will determine your tax obligations. You will also need to decide on a business structure, such as setting up a limited company in the UK or operating as a sole trader which we can help with.

2. How does tax residency change when an Australian moves to the UK?

The two main factors at play here how long you’re intending to be away from Australia and if you have a permanent residence set up overseas. We have produced an excellent guide that talks about tax residency for Australians, and for our case study covered in this blog, Mia intended to be away from Australia indefinitely and had a permanent establishment set in London, making her non- resident for Australian tax purposes from the day she left Australia..

3. Do I need to register for UK VAT when working for an Australian client?

Good question, and the answer is most likely no. VAT registration is typically required if your taxable turnover exceeds £85,000. Income from services supplied to an Australian client is outside the scope of UK VAT and doesn’t count towards taxable turnover.

4. What is IR35, and does it apply to me if my client is based in Australia?

IR35 is a UK tax rule concerning personal service companies and disguised employment. The 2021 off-payroll rules do not apply to UK contractors working for overseas clients, so you must assess your IR35 status under the old rules.

5. Can I claim business expenses as a UK contractor working for an Australian client?

Of course! You can claim the usual business expenses like travel, office costs, and equipment related to your business operations, and the criteria for allowable expenses being wholly, exclusively, and necessarily for your business still holds true.