Introduction
With the ongoing advancements in communication, media, and information technologies, the world is more connected than ever before. This has led to the breakdown of geographical barriers and a shift in global business practices. As a result, governments and countries face the difficult challenge of modernizing their policies and laws to keep up with these changes.
One of the necessary updates is to taxation systems in order to offer greater clarity and adapt to new forms of employment that are developing, such as digital nomad taxes. Digital nomads, who are becoming increasingly popular, are taking advantage of the flexibility provided by remote work and the gig economy.
As they work while traveling using the internet, digital nomads lead an adventurous and liberating life that has been popularized by social media influencers and online content creators. The lifestyle gained even more acceptance worldwide when many countries went into lockdown during the pandemic.
Countries such as Barbados, Bali, Greece, Malta, Croatia, and the Cayman Islands have introduced residence visas and permits aimed at attracting remote workers who are digital nomads to help boost tourism. Provided that they earn a certain minimum income from their work outside these countries, digital nomads are allowed to reside, reside, and work in these countries for periods ranging from a few months to several years.
Although the lifestyle of digital nomads seems attractive and the number of countries inviting them is increasing, it can be difficult to calculate digital nomad taxes in numerous scenarios, and occasionally it is extremely perplexing.
As a nomad from the United Kingdom, should you pay digital nomad taxes back to the British government?
The concept of digital nomad taxes is fairly new and many tax systems, including the UK government’s, do not account for them. This results in a legal ambiguity where they are not clearly categorized as either UK or foreign income.
Some digital nomads choose to change locations frequently, while others opt for an affordable and cozy retreat and remain stationary. In such instances, the tax revenue that the government collects from digital nomads is disconnected from their homeland, exceeding typical foreign earnings.
At the same time, several wanderers rely on temporary employment. However, these jobs provided by the gig economy do not align with the Pay As You Earn tax system utilized in several countries globally.
The varied factors create a lot of uncertainty about the appropriate way and location for digital nomads to fulfill their tax responsibilities.
What are the basics you need to know about digital nomad taxes as a British nomad?
If you are a citizen of the United Kingdom, you are obliged by the UK government to pay income taxes on any income earned from sources outside the country. This includes wages received for working with foreign companies, investment income from foreign sources (i.e. dividends and savings interest), rental income from properties owned overseas, and earnings from international pensions.
Broadly speaking, foreign income is described by the British administration as any income derived from sources outside England, Scotland, Wales, and Northern Ireland. Similarly, revenue generated from the Channel Islands and the Isle of Man is also regarded as foreign income in these circumstances.
As an employee of a UK-based company, it is imperative that you pay the necessary digital nomad taxes to the British authorities.
When such situations arise, both you and your employer may face specific legal and tax consequences. The nature of these implications could differ depending on your individual circumstances. Generally, if you work in a foreign country, you will fall within the jurisdiction of that nation’s employment legislation and tax regime.
If you live in a nation that taxes your income from the UK, you can receive tax relief in the UK to prevent being taxed twice if it has a ‘double-taxation agreement’ with the UK.
It is advisable for you to take care of all your legal and tax responsibilities before departing from the United Kingdom.
Should you still pay digital nomad taxes to the UK government if these variables don’t pertain to your specific case?
The initial query to make is whether you are still categorized as a UK resident in terms of taxation.
Although it is advised to seek formal tax advice from a professional due to the complexity of tax residency, it can be stated in simple terms that the tax responsibilities of a UK resident differ significantly from those of a foreign tax resident.
It’s important to note that tax residency is distinct from citizenship. Being a foreign tax resident is possible even if you hold British citizenship, and vice versa. Digital nomads should prioritize understanding this differentiation.
Your requirement to pay taxes as a digital nomad whilst working outside the UK for companies that are not of British origin pivots on being classified as a ‘resident’ in the UK for taxation intentions.
How do you know if you are a UK resident for tax purposes?
To start, the UK government offers an online tool that can help you determine your residency status and whether or not you should be paying taxes as a digital nomad.
By using the residence status checker, you can find out if you were a UK resident during any tax year starting from 6 April 2016. However, it may require you to disclose certain details such as the number of days you lived and worked in the UK and overseas, your approximate weekly working hours, information about your family who still reside in the UK, and particulars of your home in the UK.
The UK Statutory Residence Test came into operation in April 2013, and it gives digital nomads the ability to determine their residence status for a specific tax year. The evaluation considers each tax year independently, implying that one may be a resident in the UK in one year but not in the next or vice versa.
Prior to this, we extensively covered the UK Statutory Residence Test. Nevertheless, your individual circumstances as a digital nomad will be examined through the tests to determine if you are liable to pay digital nomad taxes.
If you spent at least 183 days in the UK during the tax year, or half the tax year, you may be automatically classified as a UK resident. Your status as a UK tax resident for digital nomad taxes may also be determined by other connections to the UK, including work and family ties.
If your sole place of residence, i.e., your home or domicile, is located in the UK continuously for 91 days or more and you have spent at least 30 days in it during the tax year, your eligibility for the automatic UK test is determined.
Determining your domicile may also be necessary. Usually, the UK government identifies your domicile as the nation your father viewed as his permanent residence at the time of your birth. However, this may alter if you relocate overseas and can be substantiated that you have no plans to come back.
Determining your domicile when you have a residence established overseas can be challenging and intricate. We advise you to seek formal, expert assistance and review the advice issued by the UK HM Revenue and Customs.
If you were employed in the UK for a full year and worked at least one day during the tax year being examined, you will also be classified as a UK tax resident.
Generally, you may be considered a non-resident if you satisfy either of two conditions. First, you spent fewer than half a month, or 16 days in the UK. This rule extends to 46 days if you have not been a UK resident for the three previous tax years.
Alternatively, you spent an average of at least 35 hours a week working overseas and stayed in the UK for less than 91 days, out of which only up to 30 days were dedicated to work.
The UK government states that if you relocate to or from the UK, your tax year will be separated into two segments – a non-resident section and a resident section. As a digital nomad, this is significant since you only owe UK government digital nomad taxes on foreign income for the duration of your residency.
If you return to the UK before completing a full tax year while living overseas, you will not be eligible for the ‘split-year treatment’ offered by the government. Meeting additional criteria is also required.
If you are a digital nomad and experience any changes in your circumstances, such as spending more or less time in the UK, buying or selling a home in the UK, switching careers, having your family move in or out of the UK, or getting married, separated, or having children, it may be necessary to review your residency status.
For your specific situation, you may want to refer to the supplementary instructions provided by the HMRC.
Digital Nomads General Tax Practice
Generally, spending more than 183 days in a calendar year in a country makes you a tax resident, but mere residency for the same duration does not necessarily establish tax residency.
To cease being considered a tax resident by your country of citizenship, you must inform the authorities and keep a record of the notification along with the acceptance date and information of the corresponding government official.
After informing your country of current residence about your other tax residence, you must ensure the validity of your new tax residency by registering at the tax office of your permanent residence and obtaining an individual tax number. This number will be crucial for various tasks and processes, such as opening a bank account in your new place of residence.
Moreover, you must demonstrate financial activity that aligns with your pursuits in your new tax residency. This could encompass receiving limited wages into a recently established account, investing in stocks or starting a new corporation, procuring or renting property, or engaging in any other financial endeavor that may be subject to taxation or reported to the domestic tax authorities. Failing to take proactive measures to augment your tax residency standing could result in your new country being unaware of your presence and your prior country of residency continuing to treat you as a tax resident.
What might happen as a result? The consequences outlined earlier, such as difficulties in establishing businesses, creating accounts, and obtaining ownership of real estate or property in your name. This is because such actions may necessitate the submission of your most recent tax return. If you plan on residing in Tibet and traveling between China, India, and Nepal, you probably won’t need to be concerned about these matters.
To conduct business proactively across multiple countries, it’s necessary to become a tax resident somewhere. Choosing the ideal location is important, depending on your profession. For those who enjoy traveling, it’s suggested to seek residence in a country that provides citizenship with the ability to easily enter other countries without a visa. For individuals who don’t wish to pay taxes on their international earnings, residing in a country that doesn’t impose taxes on income earned outside of its boundaries is the ideal choice.
Panama is an example of a country that implements territorial taxation and allows visa-free entry to over 140 countries, while Portugal provides a special tax regime for non-permanent residents who are foreign nationals.
It is important to keep in mind that if you renounce your tax residency in your original country of citizenship, but still own property there, the tax authorities may deem it as the center of your vital interests and claim your income accordingly. For this reason, if you plan to become a digital nomad, it is advisable to sell your property in your country of origin, and transfer all your funds to a trustworthy bank where you can access them from anywhere through your debit or credit cards.
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