IR35 Q&A - Overseas Contractors
In this briefing we deal with some common questions about whether or not the new Off-Payroll Regulations, commonly known as IR35, apply to the engagement of overseas contractors.
From 6 April 2021, the IR35 regulations applies to businesses which are not deemed to be a small company within the meaning of section 382 of the Companies Act 2006 and have a UK presence requiring them to undertake a status determination statement (SDS) of their working relationship with their contractor who are providing services inside England and Wales.
Subsequently, if arrangements are deemed to be inside IR35, hirer companies need to make deduction of income tax, employer and employee national insurance contributions and apprenticeship levies if appropriate which we shall refer to as employment taxes.
However, the IR35 regulations appear to be silent as to the employment tax treatment of contractors providing their services from outside of England and Wales. We explore below when the IR35 regulations may apply to contractors providing their services through a personal service company which is not registered in England or Wales and the applicability of the IR35 regulations where services originate from outside England and Wales but the hirer company (not being a small exempt company) is based in the UK.
Q - What does it mean by being overseas for the purposes of the IR35 rules?
Government guidance has stated that "if your organisation is based wholly overseas, the off-payroll working rules do not apply". The contractor or the organisation engaged is classed as being overseas if it does not have a UK connection, ie the individual behind the personal service company concerned is not a resident of the UK nor a permanent establishment in the UK.
Q - If the contractor engaged is based overseas (non UK tax resident) and is providing their services in the UK to a hirer company based in the UK, do the IR35 regulations apply?
In this scenario, the hirer company (not being a small company) would be caught by the IR35 regulations as the contractor's services are being provided in the UK. The hirer company would need to make an SDS to determine whether the contractor is deemed to be an employee for employment taxes and subsequently would need to make appropriate deductions for taxes if the regulations applied.
Q - If the contractor engaged is based overseas (non UK tax resident), and is providing their services overseas however the hirer is based in the UK, do the IR35 rules apply?
If the contractor is based outside of the UK and is physically performing their services outside of the UK, the UK hirer company (not being a small company) may not be subject to the IR35 regulations. It is important to receive specialist advice as each outcome may be fact dependant and the nature of the service being provided may attract the obligation to make an SDS and deduct appropriate employment taxes.
As the IR35 regulations are still relatively new to the private sector and there is limited information or precedent in relation to overseas matters, we are yet to ascertain the approach HMRC may take relating to these matters. For payroll purposes, non-resident employees who are working wholly outside of the UK, have not been a resident in the UK before and do not intend and will not perform any duties in the UK, code 'NT (no tax)' may be used if the paying system demands a tax code number.
However, if the overseas contractor moves to the UK and/or provides their services in the UK, the end hirer company (not being a small company) would need to carry out a SDS. The UK hirer companies should also note that even if contractors perform their services in the UK for a short period of time, they could be subject to the IR35 regulations and deduction of employment taxes regardless of whether they are permanently based in the UK or not.
Q - If the individual contractor engaged is based in the UK and performs their services in the UK and the hirer company is based in the UK, however the hirer company contracts with the contractor via a personal services company which is based outside of the UK, would the hirer company be subject to the IR35 rules?
Yes - in this scenario, the hirer company (not being a small company) would need to make an SDS to determine whether the contractor would be deemed to be an employee for employment tax purposes and be subject to deduction of taxes and employer and employee NICs.
Please note that these scenarios are dependent on international tax legislation and you should get specialist legal and tax advice when your company is engaging an overseas contractor operating through their personal service companies as the UK hirer (not being a small company) could be subject to the IR35 regulations and be obliged to make employment tax deductions.
UK hirer companies should also be mindful that HMRC can challenge any status determination decisions made if reasonable care is not taken and if arrangements are caught by IR35, the UK hirer company may still be liable for any unpaid employment taxes.
Our lawyers have specialist experience in advising companies in dealing with the SDS in the above circumstances.