PLEASE Tell Me This Isn't True....(non-res income tax)

[Blewyn]

I have spent a year in Saudi Arabia/Bahrain, and my contract has been terminated. I came out in September 2003 and my contract finished November 2004. I am advised that unless I find a new job quick, the Inland Revenue will tax me on my earnings in Saudi Arabia since Sep 2003, because my employment has not lasted a full tax year (regardless of whether I return to the UK before April 5th 2005 or not). If this is true then I am broke, busted and heavily in debt - please help !

Cheers

Blewyn

[raymondr@emwlaw.com]

It depends where you are tax resident. Did you give notice on your exit from the UK? Will you be returning to earn income in the UK. consider when and for how long. If you are staying out of the UK give the Revenue notice of your exit.

[Lambs]

Don't want to burst your bubble, but in theory yes, the UK Revenue could apply tax and NI. You need to look at the Revenue's booklet IR20.

http://www.inlandrevenue.gov.uk/pdfs/ir20.htm

and consider the parts about working abroad, and "split year treatment." You have stayed out of the UK on presumably full time work overseas, but NOT for a complete tax year, so if you return to the UK before 5th April 2005, then you will be deemed resident in the UK for both 2003/04 and 2004/05, and duly taxable in both years on any earnings, wherever they arise in the world. This will encapsulate all the income earned in Saudi, etc.

If you have stayed out of the UK for a complete tax year, i.e. past 5th April 2005, then your overseas earnings between 6/4/04 and 5/4/05 should fall out of the UK tax net because you were not physically present in the UK for a complete tax year, so cannot be deemed resident in the UK for that tax year. (Reed v Clark). However, return visits would be a problem.

Because you left partway through a tax year, then you would normally be taxable in the UK for any worldwide earnings in that tax year. Here, the Revenue will only "waive" taxing you on your Saudi earnings from September 2003 to 5th April 2004, if the "split-year" treatment applies, (see aforementioned IR20), and it will only apply if you work full time overseas for at least one complete UK tax year - in this case you would have to work full time 'til 5 April 2005 at least. (But then if the split year treatment applies on the way out, it will also apply on the way back in, and you wouldn't have to worry about return visits as much as if you were relying on total absence a la Reed v Clark case).

Bear in mind the following:

The Inland Revenue like to catch people out on this point.
However, there's nothing to stop you getting a new full-time job, anywhere else in the world outside the UK, to take you past 5th April 2005, and it doesn't necessarily have to be "full time" by UK standards, but more by the standards of the relevant country, and you could still qualify if you took up full-time SELF-Employed work to tide you over 'til 5th April 2005. The UK Revenue will not like a significant gap between one employment and the next (self) employment, but it doesn't HAVE to be the same employment for a complete tax year.

A more drastic course of action is to stay out of the UK for at least 3 whole tax years, and then you wouldn't have to worry about having to be in full-time work. (See IR20 Leaving UK to live abroad permanently, etc.)

If there's a substantial amount of money at stake, (and if you've been working in "Dry" Saudi then I hope for your sake there is), then it'll be worth hiring an accountant to cover this in more detail: no doubt there will be accountancy firms in Saudi who come across this scenario all the time, and you can go through all the fine detail, which could save you a lot of money in the long run.

(It's possible here that the Double Taxation Agreement between the UK and Saudi could also save you, and you should check the DTA out. But be warned, they are heavy going, and normally only help people like civil servants).

[Blewyn]

I did give the IR notice, and even received a tax refund for 2003-2004 because I had been taxed at 40%, but my total earnings for the tax year (because I left halfway through) only qualified for the lower rate.

What if I don't get a new job, but I do stay out of the UK until after April 5th 2005 ? Will the IR still request income tax ? I don't think Saudi will have a DTA with the UK because there is no income tax in Saudi (it's against the teachings of Islam).

Thanks a lot for the answers guys, really appreciated.

Cheers

Blewyn

[Lambs]

If you have stayed out of the UK for a complete tax year, i.e. past 5th April 2005, then your overseas earnings between 6/4/04 and 5/4/05 should fall out of the UK tax net because you were not physically present in the UK for a complete tax year, so cannot be deemed resident in the UK for that tax year. (Reed v Clark). However, return visits would be a problem.

i.e. if you've been back to the UK AT ALL within the tax year ended 5/4/05, then you cannot rely on the findings in Reed v Clark. Can you not become a full-time self-employed painter & decorator for the next few months? (!) As I said, for the finer points you should speak to an accountant, or even better, a tax adviser: I am sure there are several with relevant experience.