IR35 - What happens when there are overseas aspects?

21 December 2019

There seems to be much confusion on the application of the IR35/Off-payroll working administrative rules scheduled to apply from April 2020 where there are overseas aspects (for example, where the worker provided by a personal service company or similar entity (PSC) is based overseas, or where the worker and PSC are in the UK but the end client is based elsewhere), and it’s easy to see why – the rules are complicated.    

Where an end client engages a PSC worker and undertakes a status determination which concludes that IR35 applies and the worker is a deemed employee, the worker is NOT chargeable to UK tax in respect of the deemed direct payment to them if, or to the extent that:

  • the worker is resident or domiciled outside the UK, or  has relatively recently arrived in the UK having not been UK resident for at least three tax years;
  • the end client is resident outside, or not resident in, the UK, and
  • the services are provided outside the UK.

Where the following conditions are met, the end client is treated as resident in the UK:

  • the end client is the person treated as making the deemed direct payment;
  • the worker is resident in the UK;
  • the services are provided in the UK;
  • the end client is not resident in the UK; and
  • the end client does not have a place of business in the UK, 

This means in other cases they are liable to UK income tax and National Insurance contributions (NICs) deductions where appropriate under PAYE.

In order to see how this might work in practice it is helpful to look at some examples.

Example 1
An overseas end client engages a UK resident worker providing their services through their UK resident PSC directly with the PSC, with some work physically performed in the UK and some done overseas. The end client must check the conditions of liability (ie does the worker own at least 5 per cent of the PSC) and, if so, undertake a status determination. If the determination concludes that IR35 applies, the end client would need to set up a payroll to deduct income tax and NICs under PAYE. 

Example 2
A UK end client engages a UK resident worker providing their services through their UK resident PSC via an overseas agency, with some work physically performed in the UK and some done overseas. The end client must check the conditions of liability (ie does the worker own at least 5 per cent of the PSC) and, if so, undertake a status determination. If the determination concludes that IR35 applies, the end client would need to advise the agency it contracts with that a payroll needs to be set up by the UK resident entity nearest to the PSC in the supply chain, if any, to deduct income tax and NICs under PAYE  from its payments (the agency  is required to pass the determination to the next entity in the supply chain and so on).  If there are no such UK resident entities in the supply chain or no such entity operates such a payroll, the end client would itself need to set up a payroll to deduct income tax and NICs under PAYE. 

Example 3
An overseas end client engages a worker providing their services through their UK resident PSC directly with the PSC, with all the work physically performed outside the UK. The end client must check the conditions of liability (ie does the worker own at least 5 per cent of the PSC) and, if so, undertake a status determination. If the determination concludes that IR35 applies, the worker’s tax residence and domicile needs to be checked to see if the rule outlined above applies to prevent the worker being subject to income tax and NICs on the deemed direct payment to them. If not, the end client would need to set up a payroll to deduct income tax and NICs under PAYE. 

Example 4
A UK end client engages a worker providing their services through their non-UK resident PSC via an overseas agency, with the work physically performed in the UK. The end client must undertake a status determination. If the determination concludes that IR35 applies, the end client would need to advise the agency it contracts with that a payroll needs to be set up by the UK resident entity nearest to the PSC in the supply chain, if any, to deduct income tax and NICs under PAYE from its payments (the agency is required to pass the determination to the next entity in the supply chain and so on). If there are no such UK resident entities in the supply chain or no such entity operates such a payroll, the end client would itself need to set up a payroll to deduct income tax and NICs under PAYE. 

Take advice

The above examples illustrate the processes and issues involved in applying the rules but are not intended to identify the approach to be adopted in all circumstances. Given the complexities involved in applying the rules and the potential costs of getting it wrong, it makes good sense to take professional advice on all cross-border arrangements involving off-payroll workers.

For more information, please get in touch with Susan Ball.