Contractors' Questions: Is IR35 in play if we hire an overseas contractor?

Contractor’s Question: If we hire a contractor based in Madrid to work for our UK-based company, does IR35 apply, in that it will be a consideration? And do we -- the UK-based firm -- have responsibilities other than just paying the contractor his invoice?

Expert’s Answer: If the worker is non-resident in the UK for tax purposes, then IR35 is not applicable. But if both the worker and their PSC are UK resident, then clearly IR35 has to be considered. 

If IR35 applies, the tax and National Insurance position will depend on the tax residence status of the worker, the client and the location in which the duties of the contract are carried out.

If the worker is a non-resident working for a UK company and carries out their duties full-time overseas and doesn’t set foot in the UK, then they are not liable to tax in the UK. What then would be the point in the company operating PAYE only for HMRC to repay the full amount of tax? In these situations, UK companies with such workers obtain NT codings from HMRC.

The Intermediaries legislation only applies, for NIC purposes, where the worker would be regarded for the purposes of Parts I to V of the Social Security Contributions and Benefits Act 1992, as employed in 'employed earner’s' employment by the client, had the arrangements taken the form of a contract between the worker and the client.

The definition of 'employed earner' is in section 2(1)(a) of the Social Security Contributions and Benefits Act 1992 as 'a person who is gainfully employed in Great Britain either under a contract of service, or in an office (including elective office) with general earnings'.

Aside from IR35, bear in mind that when you buy services from suppliers in other countries, you may have to account for the VAT yourself -- depending on the circumstances. This is called the ‘reverse charge’, and is also known as ‘tax shift’. Where it applies, you act as if you’re both the supplier and the customer. You charge yourself the VAT and then (assuming that the service relates to VAT-able supplies that you make) you also claim it back. So the two taxes cancel each other out. You should refer to the government guidelines to check whether this applies.

The expert was Andy Vessey, senior employment consultant at IR35 advisory Qdos.