With a large and diverse market and a skilled and innovative workforce, the UK offers many opportunities for businesses looking to launch or expand their footprint. However, setting up in the UK also comes with its own challenges and complexities, especially when it comes to hiring staff.

How you choose to hire individuals in the UK has a significant impact on your legal and tax obligations.

We explore the advantages and challenges of the different hiring options.

Contractors

As of April 2021, the UK government reformed the off-payroll working rules (commonly known as IR35), changing the rules for hiring contractors who operate via intermediary companies. These changes aim to ensure that individuals, who work like employees but operate through their own intermediary companies, like Personal Service Companies (PSCs) pay similar tax and social security contributions as other employees. However, navigating IR35 compliance can be a double-edged sword.

The rules do not apply to self-employed individuals who should be subject to separate status checks.

The rules also require organisations to determine the tax status of workers engaged through Personal Service Companies or certain other intermediaries. A Personal Service Company (PSC) is a limited company that is set up by an individual contractor to provide their services to clients.

Where it is determined that a worker would be an employee for tax purposes, if they were engaged directly by their end client, payments need to be subject to tax and social security through the payroll.

Pros

• If exempt from IR35, there will be a reduction in employment costs, fewer administrative responsibilities, and fewer employer obligations.
• Employers have greater flexibility when hiring and dismissing contractors.

Cons

• Admin time and cost spent on determining if you fall within the IR35 regime.
• Increase in expected cost if it is determined that you should be paying employers tax and NIC.
• Less control. By nature, contractors have more freedom than employed staff.

Employer of Record (EoR)

EoR arrangements allow an individual to be employed by a third party in a different country. They are often seen as a low-compliance alternative to hiring employees directly, particularly if you’re expanding into multiple countries.

Although this solution may appear to reduce local compliance requirements, it does not eliminate the permanent establishment (PE) risk. A business could still have a taxable presence and be liable for corporate income tax in other jurisdictions. This could surface as a non-compliance issue in due diligence for your future funding rounds or acquisitions.

EoR arrangements are typically used to provide short-term solutions for companies looking to test a new market. If you’re willing to pay the mark-up to your global employment partner, the flexibility that the arrangement offers could be beneficial if you decide to exit the market after a few months.

Pros

• Can be quicker to set up than a formal UK payroll arrangement.
• May benefit from some economies of scale around provision of benefits.
• A UK entity/bank account is not needed.

Cons

• Paying a potentially significant margin to the EoR, and high costs of switching to direct hire approach.
• Harder for employees to identify as being part of the company. As they aren’t employees of the company, some tax efficiencies, particularly around stock-based compensation, will be lost.
• Reluctance from European employees to sign an employment contract with an EoR as it’s less common, and time-limited by statute in some countries.

Direct employees

When entering a new jurisdiction, many businesses hire staff as contractors or under an EoR arrangement, assuming that it takes months to add a new direct employee to the payroll. But in the UK, these registrations typically take just one week to complete.

Pros

• Maintain HR responsibility and oversight of employees while building employee engagement and company culture.
• Demonstrates local presence and makes it easier to facilitate growth by simplifying the hiring process for employees who require visas.
• Potential to structure the issue of stock-based compensation in a more tax-efficient manner for group employees.

Cons

• While employee salaries are typically lower than the hourly pay of an independent contractor, there will be added compliance costs such as setting up a workplace pension.
• Easier to end a relationship with a contractor than to terminate an employee, whether directly hired or via an EoR.

How we can help

With our international network of tax specialists, we collaborate with you to review your operations. We proactively identify potential risks based on the OECD guidelines and suggest strategies to mitigate the risk of permanent establishment.

Our Foreign Direct Investment team understands the critical importance of getting expansion plans right the first time. We offer expert advice and solutions tailored to your specific needs, ensuring a smooth and successful transition into the dynamic UK market.