Can I get a tax refund for taxes paid outside UK ?

3D illustration of "DOUBLE TAXATION" title on legal document

Many people who work abroad may be due a tax refund for taxes they paid while working outside of the UK. Though this may seem simple and straightforward, in reality if you worked outside of the UK and paid taxes in that country, your tax situation will be determined by a complex of factors, such as:

  • whether you are a UK-resident or UK-domiciled,
  • for how long you worked outside of the UK
  • in what country you worked, because there are different double-taxation agreements with different countries

In this blog I will discuss and explain some of the issues that will impact you if you worked abroad.

What is double taxation ?

When you work outside of the UK, you may have to pay taxes in both the UK and in the country where you work or worked if you are a resident in the UK and have income or gains from another country. This is called double taxation.

The complication comes because each country has its own tax laws. If you work in a country and pay taxes there, it does not mean you will not also pay taxes on same income in the country you are resident of.

The good news is that the UK has “double taxation agreements” with many countries for the purpose of ensuring that people do not pay tax twice on the same income. Double tax agreements are also known as “double tax treaties” or “double tax conventions”. If there is a double taxation agreement between UK and another country, then this may clarify which country has the right to collect tax on different types of income.

The UK provides three options for providing relief from double taxation: two of these options are in the form of tax credits and the other options is by way of deduction from the profits of a business.

With respect to the options that provide relief via a tax credit, one is provided under UK domestic legislation and is known as “unilateral relief”. The other tax credit option is provided through the double tax agreements with other countries that we mentioned above. The exact details for tax relief under a double tax agreement will vary from one individual agreement to the other.

How does tax relief work ?

As mentioned before, UK has “double taxation agreements” with many countries. It is highly likely that if you worked in a country outside of UK, then a “double taxation agreement” is already in place between the UK and the country in which you are working or have worked.

Tax relief under a double tax agreement is usually given in one of the following ways:

  • the country where you earned income (also known as the source state) gives up all its taxing rights in favour of the country of which the recipient is a resident, which in our case is the UK, or
  • the country where you earned income applies a reduced rate of tax compared to the normal domestic rate that would apply to its non-residents, or
  • credit relief – where the income remains taxable in both countries, but credit is given for the foreign tax by the country in which the recipient is a resident, which in our case is the UK. In other words you will receive a tax credit from HMRC

In order to obtain this tax relief or tax refund from HMRC, it is necessary to establish that you are a UK-resident. In case you are a dual resident (i.e. resident in both the UK and the country where you earned income), the treaty itself will determine your country of residence purely for the purposes of that treaty, in order to make sure you do not pay taxes twice on the same income.

How to claim a tax refund

Before you start your application for tax relief with regard to foreign income you earned, it is important to note that HMRC expects you to have taken all reasonable steps to have your foreign tax liability reduced to a minimum. This includes claiming or securing the deduction of all allowances and reliefs that you might have reasonably expected to have claimed or secured if no foreign tax relief claim was open to you, such as: personal allowances in the country where you earned income, deductions for expenses, etc.

In conclusion, your tax refund for taxes paid outside UK depends on your exact circumstances, on the nature of the income and on the specific provisions of the agreement between the UK and the country where you earned income. Please be aware that if you have more than one source of foreign income or capital gains eligible for tax relief, then maximising the relief available can require a complex calculation.

Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.

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