IR35 reforms and international issues
21 January 2021
The new IR35 rules create some particularly complex issues where a contractor is based outside the UK. This article looks at some of the frequently asked questions.
With effect from April 2021, the new IR35 regime will apply to large and medium-sized businesses in the private sector who engage contractors (End Users). They will be required to determine whether a contractor who is suppling their labour via their own intermediary would be an employee of the End User if engaged directly by the End User. If the End User determines that IR35 applies, the Fee Payer - the entity that has the direct contractual relationship with the contractor’s own intermediary - must operate PAYE/NICs as appropriate.
One of the effects of the Covid-19 pandemic is that many contractors have been providing their services from abroad. In this article, we address your most frequently asked questions on whether and how the IR35 rules apply where the contractor is tax resident and/or providing their services outside the UK.
The answers below assume that the contractor is providing their services via their own company (Contractor) after 5 April 2021.
We are the UK-based End User of a Contractor who is tax resident in a country outside the UK and doesn’t provide any services in the UK. Do we need to determine the Contractor’s status?
IR35 does not create any new tax liabilities – it only applies if there would be a PAYE and/or NICs liability if the Contractor was engaged by the End User directly as an employee.
Where the Contractor is both tax resident outside the UK and performing all their services outside the UK, there is generally no PAYE or NICs liability in respect of that individual. This means you would not need have to carry out a status determination.
We are the UK-based End User of a Contractor who is tax resident overseas but is performing services in the UK. We contract directly with the Contractor’s own intermediary.
Do we need to determine the Contractor’s status?
Yes. You should complete the status determination and issue a status determination statement (SDS) to the Contractor. This must be done before the first payment is made to the Contractor’s own intermediary after 5 April 2021, in respect of labour supplied after that date.
Do we have any PAYE/NICs obligations?
If you determine that the Contractor falls outside IR35, you will not have any PAYE/NICs obligations. If you determine that the Contractor falls within IR35, you will need to consider whether you have any PAYE/NICs obligations in relation to the Contractor as if they were your employee.
Under UK law, a UK business generally has a PAYE liability if an employee is performing duties in the UK. This applies even if the employee is in the UK for only one day, unless the duties performed are “merely incidental” to the work done overseas. (To be “merely incidental”, the services performed in the UK must be subordinate or ancillary to the overseas work.)
An employee who is in the UK for a short period may, however, be exempt from UK income tax if the UK has a double tax treaty with the relevant country and certain conditions are satisfied. If so, it may be possible to obtain advance HMRC clearance authorising you to pay the Contractor’s own intermediary without deducting PAYE – for example, if HMRC issues a No Tax PAYE code in respect of the Contractor. Alternatively, it may be possible to obtain advance clearance from HMRC to operate PAYE only on the income earned by the Contractor for the period they physically work in the UK. Unless and until clearance is obtained, you would need to deduct PAYE - in broad terms on 100% of the fees (excluding VAT).
The social security position is more complex and will depend on the rules agreed between the UK and the Contractor’s home country (if any).
For Switzerland, countries within the EEA or countries with which the UK has a reciprocal social security agreement (such as USA, Japan, Korea), it may be possible for the Contractor to obtain an “A1 certificate” or “certificate of continuing liability” confirming that social security is due only in the Contractor’s home country (Certificate). If the Contractor provides a valid Certificate, you would not be required to deduct employee NICs or pay employer NICs. If the Contractor does not have a valid Certificate, you should deduct employee NICs and pay employer NICs.
For countries with which the UK does not have a social security treaty or agreement (such as Hong Kong, Australia, India and China), you would not be required to deduct UK employee NICs or pay employer NICs for broadly the first 52 weeks that the Contractor is in the UK.
We are the UK-based End User of a Contractor supplied via a UK-based agency, who is tax resident in the UK but physically performing services overseas.
Do we need to carry out a status determination?
Yes. You should complete the status determination and issue an SDS to the Contractor and the agency as the Fee Payer. This must be done before the first payment is made to the Contractor’s own intermediary after 5 April 2021, in respect of labour supplied after that date.
What PAYE/NICS obligations do we have?
There are none, provided you assess the Contractor’s status with reasonable care, issue a valid SDS on time, and deal with any objections to your status determination with reasonable care and on time.
What PAYE/NICs obligations does the agency have?
If you determine that the Contractor falls outside IR35, the agency will not have any PAYE/NICs obligations. If you determine that the Contractor falls within IR35, the agency – as the Fee Payer - will need to consider whether it has any UK PAYE and NICs obligations in relation to the Contractor as if they were its employee.
The agency will generally have an obligation to operate PAYE, notwithstanding that the Contractor is working abroad, in accordance with the Contractor’s PAYE code. If the Contractor is working abroad for at least a complete UK tax year, they may be able to obtain advance clearance from HMRC authorising the agency not to make PAYE deductions. Unless and until that authorisation is obtained, the agency would need to operate PAYE.
The social security position is complex and depends on the country in which the Contractor is working. If the Contractor is working for a temporary period in Ireland or a non-EU country, the Fee Payer should generally continue to deduct UK employee NICs and pay employer NICs. If the Contractor is working in a country with which the UK has a social security treaty or reciprocal agreement, the Contractor should apply to HMRC for a Certificate confirming that social security contributions are only due in the UK (in order to prevent social security contributions arising in the overseas country).
If the Contractor is temporarily working in an EU country (other than Ireland), the position may be different. This depends on whether the EU country has indicated that it will apply the “detached worker” rules, under which UK workers temporarily working in the EU country can continue to pay NICs in the home country. As of 20 January 2021, Austria, Hungary, Portugal and Sweden have indicated that they will apply the detached worker rules, meaning that UK employee and employer NICs will continue to be payable. Specialist advice should be sought on this issue.
We are a UK-based End User with a Contractor who is tax resident and physically performing their services in the UK, but the Contractor’s own intermediary is a company based in Germany. We contract directly with the German company - what do we need to do?
You should complete the status determination and issue an SDS to the Contractor. This must be done before the first payment is made to the Contractor’s own intermediary after 5 April 2021, in respect of labour supplied after that date.
If you determine that the Contractor falls within IR35, you will need to operate PAYE and NICs as if the Contractor was your employee. If you determine that the Contractor does not fall within IR35, that is not the end of the matter. As the Contractor is using a non-UK company, you will also need to consider whether the “host employer” rules apply.
Under the host employer rules, you may be required to operate PAYE/NICs even if IR35 does not apply. The rules apply where an employee or director of a non-UK employer (i.e. the Contractor’s own company) “works for” a UK business and physically performs all or some of their duties in the UK. For the Contractor to be “working for” a UK business, that business must have an element of control or management over the Contractor. This means that the circumstances in which the host employer rules rather than the IR35 rules will apply are probably quite limited, but you should seek specialist advice.
We supply Contractors who are providing their labour to an End User based in Australia. All the Contractors are UK resident and are working from the UK. Does IR35 apply?
This depends on the facts, but potentially no. If the End User has no connection with the UK, the new IR35 rules will not apply. Instead, the Contractor must decide whether IR35 applies and, if so, the Contractor’s own intermediary must operate PAYE and NICs. You will need to confirm with the End User whether they have any connection with the UK. The End User will have a connection in the UK if it is tax resident in the UK or has a permanent establishment (including a branch) in the UK.
If the Contractor is either tax resident in the UK or carrying out some of their services in the UK, the End User should carry out a status determination and issue an SDS to the Contractor and the Fee Payer (if any).
If the End User determines that the arrangements fall within IR35, the Fee Payer must deduct PAYE. It should also deduct employee NICs and pay employer NICs, unless the Contractor is able to provide valid documentation showing that no PAYE and/or NICs is due (or in the case of NICs only, that the 52-week exemption mentioned above applies). The NICs position where a UK Contractor is working in the EU is complex and you should seek specialist advice.
The international tax and social security rules are also complex and depend not just on the countries involved but also the Contractor’s individual circumstances. You should therefore seek specialist advice if you are in any doubt as to whether you have PAYE and/or NICs obligations. You may also need specialist local advice, depending on the situation.
For further information on IR35 generally and a summary of the steps you may want to consider in order to prepare for the new rules, please see our Inbrief guide and our recent article Don’t leave IR35 until the last minute.