IR35 and overseas: do the off-payroll rules apply with non-UK parties in the chain?

It’s been mentioned twice recently on ContractorUK, firstly by an umbrella company and then by an overseas working adviser and perhaps it does bear repeating, because the application of the IR35 rules where there is an overseas element is regularly a point of confusion.

As to why contractors, agencies, end-users and in some case even advisers might be stumped by IR35 when an overseas party is introduced into the contractual chain, it’s simple. It’s because a deep understanding of the off-payroll rules is required, as well as an understanding of tax residency, writes Matt Fryer, managing director of Brookson, a People 2.0 company.

Residency of the end-client

As a basic principle, the off-payroll working rules (post-April 6th 2017 for public sector contracts and post-April 6th 2021 for private sector contracts) only apply where the end-client (remember, just large or medium sized clients in the commercial sector) has a UK connection. Where the end-client is based wholly overseas, the off-payroll rules do not apply.

In this context ‘wholly overseas’ means that the end-client has no UK connection immediately before the start of the tax year due to the fact that it is not UK resident and does not have a UK permanent establishment.

What is meant by permanent establishment?

A ‘permanent establishment’ includes a fixed place of business i.e. a branch or an office. But a permanent establishment can also be established via an agent who has authority to do business on behalf of the client – although please note, this does not extend to a recruitment agency carrying on its normal course of business. It is also important to note that if a worker provides services to an offshore client through a UK resident PSC, that UK PSC is not ordinarily a ‘permanent establishment’ of the offshore client.

Therefore, if the end-client is wholly overseas but has a UK office, then the client is required to consider the off-payroll rules. If, however, the end-client is based wholly overseas with no UK permanent establishment, then it is not responsible for determining the IR35 status of the contract and is not required to produce a Status Determination Statement (i.e. the so-called ‘Chapter 10 rules’ do not apply). That is not the end of the matter, though, as the worker’s own  tax residency position needs to be considered to understand whether the ‘old’ IR35 rules (Chapter 8 of ITEPA 2003) apply.

Residency of the contractor

When applying Chapter 8, contractors will need to consider their own residency position (not the residency position of their PSC, nor where the duties are performed), because if they are UK resident then they are subject to UK tax on their worldwide income.

If, however, the contractor is not UK-resident and is performing work outside of the UK, then it is unlikely that any UK tax or NIC will arise and neither Chapter 8 nor Chapter 10 will apply, even if the end-client has a UK connection.

Examples

Two examples to consider:

Example 1 (provided by HMRC) – The client is resident outside the UK but has a UK office immediately before the beginning of the tax year in which the worker provided their services. The worker’s intermediary is resident in a country outside the UK. The agency and worker are both resident in the UK. The work is performed outside the UK. In this scenario, the worker is UK resident but performs the work outside the UK, so a UK tax liability will arise (unless an agreement gives taxing rights to another country exists). Although the client is based overseas, it has a UK office immediately before the beginning of the tax year during which the worker provided their services so has a UK connection through its permanent establishment. It is, therefore, within the scope of the off-payroll working rules.

The worker’s intermediary being based overseas does not affect the operation of the rules. The client should issue a status determination statement to the worker directly and to the UK agency it contracts with. By providing the status determination statement the client would have discharged its responsibilities under the legislation (subject to meeting the requirement to exercise reasonable care). The UK agency is a ‘qualifying person’ and will therefore be responsible for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC if due.

Example 2 (again, provided by HMRC) - The client is resident in a country outside of the UK operating an oil and gas platform outside of UK waters (beyond 12 nautical miles of the UK coastline) with no UK residency or permanent establishment.  The contractor is UK resident.  In this example the end client is not within scope of the off-payroll rules and is not required to produce an SDS or consider whether any tax should be deducted from the payment (they are outside the scope of Chapter 10). As the contractor is UK resident they need to consider their own IR35 position and tax payments using the old IR35 rules (Chapter 8). 

Residency of recruitment agency

It is also important to consider the tax residency position of any recruitment agencies in the supply chain, typically referred to as the ‘fee-payer,’ as this will dictate who is responsible for operating UK PAYE on any inside IR35 assignments.

The fee-payer is usually the company which sits immediately above the contractor’s PSC in the supply chain. If, however, this company is not UK resident then it is exempt from its fee- payer duties, and the next company up the supply chain (which is UK resident) assumes this responsibility. This could mean that if a UK resident end-client contracts with an overseas agency that provides a UK resident contractor, it would be the end-client and not the agency who is responsible for deduction of any tax that may be due.

Final thought

As can be seen, IR35 and its applicability when overseas entities are in the chain is a complex area, meaning advice should be taken in this respect.