When it comes to how working overseas affects your IR35 status determination, the caveats appear too numerous to count. In this article, we pull together a back-to-basics view on how IR35 is applied when working outside of the UK which, incidentally, is one of the major aspects of IR35 that will change as a part of the now-2021 reform to the off-payroll legislation. The focus here will be on showing you the differences in how it all works now - i.e. before the reform - and exactly what will change after.
If you need a refresher, we’ve already written an article that dives a little deeper into the basics of IR35 here.
How does IR35 apply when working outside the UK?
To keep it simple, even if you are working outside of the UK, IR35 can still apply. The first step to understanding this question is to clearly outline the differences in the process both before and after the IR35 reform.
Before the IR35 reform: (Part 2, Section 8 of the ITEPA)
Until the reform is in place, the contractor is responsible for the lot! This means that you are responsible for determining your IR35 status and are liable for the payment of any tax or national insurance contributions (NICs). In addition to this, you will also be liable for the payment of any fines, penalties or remaining tax if your IR35 status determination is incorrect. Let's start with some questions.
It is important first to distinguish: Is the contractor a UK taxpayer?
If the answer is no, then IR35 does not apply.
If you’re not a UK taxpayer, it’s important to seek the equivalent legislation that may be in place in your country of residence.
Secondly, are you working via an umbrella company?
If the answer is yes, then IR35 isn’t something you need to worry too much about. As part of an umbrella company, you will already be taxed as an employee.
After the reform: (Part 2, Section 10 of the ITEPA. Due to arrive in 2021)
Once the reform is enacted, the responsibility for determining IR35 status switches from you, the contractor, to your end client. Liability for payment of tax and national insurance contributions is also no longer your burden - this will fall at the feet of the fee-payer in the engagement.
Now, who exactly are all these people in your contractual chain? To put it simply, the fee-payer is usually the agency between you and your end client that makes payment to your Limited Company for your services. If you’re involved in a direct agreement with your end client, i.e. there is no agency, then your end client is the fee-payer as well. Your end client will, therefore, be responsible for not only determining status but also liable for payment of tax and national insurance (now, that’s a busy client).
Agreement examples between the end client and contractor (in IR35 terms)
Let’s keep things easy and focus on a standard arrangement with both an agency and an end client. As we know, the responsibility for determining status lies with the end client. Only if they determine status fairly will the liability for payment of tax and NI pass down the contractual chain to the fee-payer (in this case the agency). If the client shows no reasonable care in assessing IR35 status, then the liability for payment of tax and NI will stay with the client.
If the end client is a small company (as per the Companies Act 2006) then you, the contractor, would be held to the same set of rules as before the reform. These can be found in part 2, section 8 of the ITEPA. I’ll reword that in plain English rather than making you read that riveting chapter of the ITEPA. Put simply; the contractor would be responsible for determining status and liable for payment of tax and NI.
If your end client is entirely offshore and has no connection or branches in the UK then, as above, the old rules will apply. You will, again, be wholly responsible for determining status and liable for tax or NI payments. This is because HMRC can’t pursue offshore companies.
Finally, if your end client is based offshore but has a branch, no matter how small, within the UK then the offshore branch of your end client determines status. In this scenario, the feepayer is liable for payment of tax and NI. If it’s a direct engagement between your limited company and your end client with no agency involved, then the UK branch of your end client is liable for payment of the associated tax and NI.
What happens if you’re paid in foreign currency?
We usually see that, as the contractor, you are responsible for any conversion charges associated with your payment. However, your contract should stipulate exactly how this operates in your engagement. Being paid in a foreign currency won’t affect who is liable for payment of any tax or NI.
We have covered a lot of ground very quickly in this short article so thank you for sticking with me. If you are in any way uncertain of what residency you fall under this can be a complex issue, we suggest you seek professional tax advice.
Although it is currently all quiet on the western front in the contracting world, it’s still important to ensure that you are protected from IR35. Remember, it is still your responsibility to keep updated on your IR35 status until the reform in 2021. The world will need dedicated specialist contractors, so be prepared for when they do.