Engaging with international contractors - Are your risk processes up to scratch?

28 June 2024

As businesses expand globally and embrace remote work trends, engagement with international contractors is now commonplace. This brings a number of advantages, including:

  • access to skills and expertise which might not be available locally; 
  • flexibility to adjust the workforce due to the project-based nature of contractors;
  • skills potentially offered at more competitive rates which can be beneficial in managing budgets while ensuring quality of work; and
  • simplified collaboration across networks and time zones due to technological advancements. 

It is crucial to acknowledge challenges when engaging international contractors and a long-term strategy is vital. Most importantly, we recommend seeking advice to ensure compliance and maximise the benefits of a global workforce.

Should your ‘contractor’ be taxed as an employee?  

Employment status and ‘IR35’ are UK concepts, but similar regulations exist in other countries. 

These rules are designed to prevent tax and social security/National Insurance Contributions (NICs) avoidance by treating contractors as employees for these purposes. Hiring talent in another country does not mitigate this risk. 

Each country has its own rules, and while these will not be identical to the UK, many systems are comparable. Although generalised, many consider criteria such as:

  • control over the work;
  • structure of compensation and duration of relationship;
  • integration into the company;
  • provision of resources or tools; and
  • the nature of the work.

If a contractor falls under these types of regulations, businesses may need to register in certain locations, withhold taxes and/or social security, or even more.

Permanent establishment

While businesses may consider the people-related aspects when engaging with international contractors, they often overlook the potential implications related to corporate tax. Irrespective of the contracting structure (employee vs contractor), these risks very much remain. 

The notion of a ‘permanent establishment’ (PE) presents a risk in terms of local tax consequences when employing an international contractor. According to the laws of numerous countries, a PE can be defined as either:

  • a fixed physical location where business activities are carried out (such as offices, factories, or even a remote worker’s home office); and
  • an agent who consistently acts on behalf of another company, with the power to conduct business (negotiating contracts, for example). This type of agent is known as a ‘dependent agent’.

If a contractor serves multiple clients, the risk might be mitigated as they are more likely to be viewed as a contractor rather than an employee for tax or employment law purposes. However, for longer term contractors, the position could be very different. 

The creation of a PE could lead to compliance obligations such as profit attribution and local corporate tax filings. Therefore, it’s vital to actively prevent the unintentional creation of a PE.

What about employment law?

Contractor arrangements also require businesses to adhere to global employment laws. Businesses may see a contractor as ‘temporary labour’ and not an employee, but regulatory authorities might have a different interpretation.

If a contractor is classified as an employee under employment law, they may be entitled to additional benefits and rights, including social security, pension contributions, regulated working hours/overtime, amongst more.

Failing to comply with global employment laws can have serious repercussions for businesses, including penalties from local labour authorities, reputational damage, and increased compliance costs and complexity that could negate the benefits of this structure.

What if your contractor travels?

When managing international contractors, it’s essential to consider immigration regulations, such as confirming that contractors have suitable work visas and employers conducting right-to-work checks.

Immigration considerations

Business visitors may not require a work permit if they are considered a ‘business traveller’, which typically means they are performing permitted activities such as attending meetings/conferences or receiving training. Businesses may categorise contractors in this group, but the authorities may not consider immigration exemptions as being applicable to contractors. Extra care should be taken to ensure that contractors travelling internationally have the appropriate visa to cover the activities they’ll be expected to perform.

International tax and NIC

Many countries have double tax treaties or social security agreements which prevent double taxation and coordinates social security. At first glance, this seems there won’t be tax or social security implications if the contractor travels for their role. 

For the UK, a contractor who is not a UK resident and works outside the UK is unlikely to be subject to UK tax or NIC. However, if the contractor travels to the UK, the UK business may need to conduct a status assessment to determine the reporting requirements (UK payroll, for example) or if the contractor needs to complete self-assessment tax returns. 

Additional considerations may also be needed to confirm (via a Certificate of Coverage or Portable Document A1) that no social security is due in the location they’re travelling to.

What next?

Hiring international contractors provides flexibility but requires careful compliance efforts. By understanding employment laws, PE risks, managing payroll, addressing immigration requirements, and ensuring social security compliance, businesses can navigate the complexities of a global workforce while remaining legally compliant.

We’ve highlighted some of the key risks here, but this list is not exhaustive. You may need to also consider areas such as VAT treatment, GDPR, data and IT security, and IP ownership, among others.

If you would like more information or have any questions about international contractors, please contact James Smith or your usual RSM contact.

Rory Davis
Rory Davis
Associate Director
AUTHOR
Rory Davis
Rory Davis
Associate Director
AUTHOR