IR35, Foreign Companies and Overseas Contractors
International markets can provide lucrative opportunities for UK contractors willing to work with overseas clients. Historically, the jurisdiction of the end client had minimal impact on a contractor’s IR35 status, as a contractor’s UK tax obligations were their responsibility only.
However, the changes to the IR35 rules in April 2021 mean that contractors are no longer responsible for determining their IR35 status. Most of the time, the responsibility now lies with the end client or agency that pays the contractor.
Many overseas clients are unaware of the UK’s IR35 legislation or are uninterested in the time-consuming process of providing a status determination assessment. HMRC have no jurisdiction over non-UK-based companies and cannot force compliance with the IR35 rules.
IR35 and Overseas Clients
If you are a UK resident contractor working for an overseas client, then IR35 still applies. Just because you work for a foreign company outside the UK or are paid in a foreign currency does not mean you can ignore IR35.
This confuses a lot of contractors who think IR35 no longer applies if their client is not based in the UK.
IR35 and whether a contract is inside or outside relates to the contractor’s working practices; it has nothing to do with where the end client is located. The only potential difference is who performs the IR35 status determination assessment.
See our guide to IR35 Assessments for further a helpful decision tree.
IR35 and Foreign Companies
The UK government sought to clarify the confusion around IR35 and foreign companies in the Finance Bill 2020. Organisations without a UK presence, considered ‘wholly overseas’, are removed from the IR35 responsibility chain.
Instead, where a client is wholly overseas, the pre-April 2021 rules will apply, and it will be up to the contractor themselves to determine IR35 status. The responsibility and, most importantly, the liability is returned to the contractor.
It is up to the contractor to evaluate their own IR35 status and, if they assess themselves as Inside IR35, make the relevant income tax and national insurance payments. Should HMRC conduct an IR35 investigation, any additional tax and penalties arising from an incorrect assessment will be payable by the contractor.
Where a contractor has an end client based wholly overseas, the 2021 IR35 reforms will not apply, and the contractor must assess their IR35 status themselves.
What Does 'Wholly Overseas' Mean?
According to the gov.uk website, “an organisation is classed as overseas if it does not have a UK connection”. HMRC consider the definition of having ‘no UK connection’ to be where:
- The client does not have residency in the UK; and
- The client has no permanent establishment in the UK.
A permanent establishment in the UK is usually a branch or a local office. If the client is based overseas but has a branch or local office in the UK, no matter how small, the second test is not passed. The business is not wholly overseas, and they retain responsibility for determining IR35 status.
They are liable for any additional taxes or penalties arising from an incorrect assessment, and HMRC will pursue any outstanding obligations through the UK establishment.
What if the Fee-Payer is a UK-Based Agency?
Where the client is based wholly overseas, the responsibility for determining IR35 status (and any subsequent liability) falls to the contractor regardless of the contractual chain and who the fee-payer is. Any agencies involved in the process do not need to consider IR35.
IR35 and Overseas Contractors
IR35 does not apply when you have no liability to tax or National Insurance contributions in the UK. Therefore, if you are a contractor based overseas and you qualify as a non-UK resident via the Statutory Residence Test, the IR35 legislation does not apply.
To reiterate, IR35 is irrelevant if you are a foreign contractor, but it will always apply (regardless of the end client’s location) if you are a UK resident for tax purposes.