Micro BNC and UK tax problem

[Frederick]

Hi all

Last year I earned more than the Micro BNC working for a UK company from france. Some of the work was carried out in the UK so I was hoping to declare the extra income there as a sole trader there this year. I did register as a sole trader but forgot to start paying my class 1 contributions. I assume I can pay these retrospectively for the period of the contract.

Also, I am concerned that the UK authorities may want proof that I was there all the time this work was being done whereas in fact I was coming and going. What should I do ?

Fred

[Will]

Unless you stayed in Britain for the majority of the tax year, and from what you say this sounds unlikely, you should not need to pay compulsory NI contributions. Without knowing all the details, it may be best to come clean with the French authorities and pay normal self-employed contributions. Although these are high, as you are outside the micro limits you should be able to claim your true costs, and as this presumably includes travel to, and stays in, the UK, they could be quite substantial, which will keep your cotisations (and tax) lower than you would have paid as a micro.

At least, that's how it worked for me in a similar position.

[Frederick]

Well it may be too late now to "come clean" as I have already paid tax at the Micro BNC limit and have declared the rest as foreign income on which tax will be paid in the UK. Coming clean would involve pain as there is lots of registration and paperwork involved. And now that it is late there would be penalties and stuff.

I did speak to a French accountant about this at the start of the year and he was very unhelpful and simply said that I should have registered properly at the start of my activity. He was very negative. At the end he even implied with a shrug of the shoulders that it might be better to keep quiet about the UK income. But I would be very uncomfortable about that.

If I can declare and pay in the UK then that would be best. Why do you not suggest that? After all I was working part-time in the UK for a UK company. The only issue is that I discovered that I should have been calling the inland revenue to tell them when I was arriving in and leaving the uk so that they could make me pay the correct national insurance contbns. However my invoices show when I was working for the company - so I am happy to overpay if I have to.

[Will]

[quote user="Frederick"]If I can declare and pay in the UK then that would be best. Why do you not suggest that? ...[/quote]

To be honest, tax isn't the problem here. For one thing you don't have a choice as to where you pay tax - that's taken care of by the double taxation agreement between France and UK. You say 'working for the company' - I assumed from your original post that you were self employed. If you were employed by the company than you would pay UK tax on your earnings in UK. If self employed it's not quite so straightforward, you need to talk to a better accountant than the one you saw before, but first of all have a read of www.hmrc.gov.uk/international/france.pdf

Under the agreement you are only taxed once on any particular income, though as you are French resident you may have extra tax to pay in France if the UK income takes your worldwide income into a higher tax band.

Your problem is really with social security contributions - though I don't see it as a problem, because you need only belong to one country's scheme so you only pay contributions to one country. As a general rule, the country to which you pay is the country in which you spend the most time, presumably France in your case. Whether your UK income means you will have to pay additional cotisations over and above what you paid on your French micro business I don't know - if you don't pursue it, nobody may ask. If you are worried, then again, the answer is check with a decent accountant.

[Frederick]

Will - Thank for you help.

Essentially the problem is that the French system is so complex and I failed to sort out a different status as soon as my earnings passed the barrier for Micro BNC - I was too busy working. I am willing to pay the tax (but I would rather pay less ;-) as I do not have that many expenses). It's just going to be a mess going back to the local tax office and telling them I have another 20k of earnings that I was planning to declare in the uk but now want to declare in France under a different regime.

And when I talk to a French accountant they tell me how complex the system is. It's the thing I like least about France, i.e. how the tax framework for small companies is complex and very expensive while large companies get massive subsidies to stay.

Oh well ...

[Will]

Frederick

You can have a micro business alongside some other form of employment or self employment. Might it be possible for you to arrange things so that your UK income could be declared in such a way that it appears to be separate from your French micro? That way you could declare it in UK and pay UK tax on it (less expenses of course, which could be substantial as you have done a lot of travelling), then declare it in France as separate worldwide income already taxed elsewhere. As you are in the French social security system there should be no need to pay NI.

Just a thought...

[Frederick]

Will - That is exactly my aim. I have already declared my foreign earnings (well the part above the Micro-BNC) to the French authorities so they are aware of it and expect tax to be paid on it in the UK. I am also employed part-time in France so have substantial other income that is all above board on which I happily (well sort of) pay the required taxes into the system here.

As the UK reporting deadline is Jan 31 2012 I have a bit of time to sort it out there. I want to declare it as self-employed income in the UK. It was a UK company I worked for. The problem is that the UK may ask for proof that I was there (to be honest I was there less than 50% of the time) and also kick up a stink about the fact that I did not pay the class one NI at the time I was earning. If they ask for proof that I was there all the time I was working then I am not sure what to do. Alternatively I can decide not to do anything, which carries a risk and is not my style.

[Will]

If you can prove to HMRC that you are French resident and pay French social security cotisations, there should be nothing to worry about. You only need to contribute to one European social security system.

[Frederick]

Thanks for continuing but I am not sure what you mean by "there should be no problem".

Basically I have a dilemma, either

i) Declare income (mostly earned in France from UK company) in UK as self-employed sole trader income and pay National Insurance on it but risk having to provide proof that all of work was done in UK. If I cannot prove this and they say "no thanks it's french income so pay it there" then I will have to do either of (ii) and (iii) below.

ii) Go back to French authorities and tell them I should have declared this income in France under the small business regime and have to go through penalties and loads of paperwork and accountants fees.

iii) Do nothing and take risk that France never asks to see proof that I paid tax on this income in the UK. This is my least favourite option.

What would you do ?

[EuroTrash]

Am I missing the point here but I don't see why you are so concerned about HMRC wanting you to prove that you were in the UK when you did the work. It's to their advantage to tax you on it, so I'd have thought they'd take the money without creating problems. I'd be more concerned about the French fisc wanting you to prove that you weren't in France, since it's them that are losing out. I've never heard of anyone being prosecuted for trying to pay tax that wasn't due.

Another point that occurs to me is, if you don't come clean this time and get yourself under the correct regime, then this problem is going to crop up every year until you do. By your own admission the work WAS done in France, so I don't quite see how your scruples will not let you fail to declare it, yet don't seem to bat an eyelid over declaring it wrongly which as far as the French impots are concerned is probably almost as bad. As for worrying about the NIC agency jumping on you, I wouldn't - they are so slow to respond that you will probably have retired by the time they get round to doing anything. They have recently written to me about a query dating back 18 months.

[Frederick]

I agree and I hope you are correct. It's just the UK gold plate all these things and can be more anal than the French about ensuring that the rules are obeyed.

I am only not declaring this tax in France because I was under the micro BNC regime and then went over the limit. When it came to filling out my tax return both French accountants I spoke to were very discouraging about me retrospectively switching regimes mid-year with all the paperwork and hassle and encouraged me to declare it in the UK instead. Some of the work was done there and the client company was in the UK so for them it all seemed arguable as I was in the Uk for some of the time.

In any case this problem will go away as my earnings from my sole-trader activities this year are below the BNC threshold and that is how I plan to keep it. This was always a bit of a sideline. And my scruples are not complaining too loudly because I already pay a lot of tax on employment work I do here. I am certainly not riding the system here for free.