A question that arose from a recent contractor survey is, ‘what are the pros and cons of working with overseas fee-payers?’
With the current state of the UK economy being unpredictable, for want of a better word, it is a relevant question. The drop in contractor opportunities in the UK since the rollout of IR35 to the private sector in April 2021, combined with the effect of the Covid pandemic, has forced many contractors to go back into full time employment or seek work opportunities farther afield.
It could be that the overseas fee-payer has a project running within the UK and logistically it makes more sense to hire UK contractors to work on that project. Or you could be a contractor with certain skills set that are in high demand for the fee-payer, but in low supply. IT contractors often fall into this category, as do some technical engineering and mechanical engineering professions, especially those that are in demand for energy contractor engagements.
If you’re looking to engage in a contract for an overseas fee-payer, you will be classed as an international contractor for that fee-paying client. It’s important to look at the basis of contractor engagements before we look at the potential pros and cons of working for overseas fee-payers.
Private sector IR35
IR35 off-payroll working reform came into force on 6 April 2021. A commonly asked question from contractors at the time the reform was announced was, ‘what if my end-client is based overseas?’
International markets have been very lucrative for some UK contractors (depending on the business sector) working with overseas end-clients and is a market that is continually growing. Since the announcement of the new IR35 payroll reforms (Part 2, Section 10 of the ITEPA), there has been much confusion as to whether the legislation would apply to overseas end-clients and fee-payers.
Prior to the announcement of the Finance Bill 2020 it looked likely it would apply. However, the government took note of contractors’ concerns and provided further clarification and an exemption that it will not apply to end-clients and fee-payers with no presence in the UK.
Contractors are governed by the intermediaries legislation, commonly known as IR35 (Part 2, Section 8 of the ITEPA), which was created to tackle disguised employment through intermediaries.
Responsibility for status determination and tax deductions
The responsibility for status determination and tax deduction used to lie with a contractor operating through a Limited Company. The rules were quite simple – if a contractor was a UK tax-resident, then the jurisdiction of the end-client has little effect in regard to IR35.
One of the main changes the IR35 reform of 2021 brought is that the responsibility for determining status is no longer with the contractor, but with the end-client.
Government consultation document causes confusion and concern
The government issued a consultation document in March 2019 which led to much confusion and concerns from contractors regarding overseas end-clients. It suggested end-clients and fee-payers would remain liable when determining the IR35 status of a Contractor, stating:
“Where the agency or third party that would be the fee-payer is offshore, the liability moves to the next person above them in the contractual chain which is in the UK. If only the client is in the UK, then they will be the liable party. Where a party in the contractual chain, including the client is outside the UK but the off-payroll worker performs services in the UK, fee-payers must still deduct tax and NICs.”
Unsurprisingly, many end-clients based abroad weren’t aware of IR35 legislation in 2021, and contractors became worried how they would obtain a Status Determination Statement (SDS) from an overseas end-client and what impact this would have on their businesses.
The consultation document’s statement also raised the question, ‘how would HMRC enforce compliance from overseas end-clients and fee-payers?’
The government took note of the concerns raised and, in response, clarified the issue in the Finance Bill 2020 to exclude overseas organisations with no UK presence from having to adhere to the off-payroll working rules.
This means that where the end-client is “wholly overseas”, the old rules still apply, and it is the responsibility of the individual’s limited company to determine IR35 status.
The legislation states that to be “wholly overseas” a client must show:
They have either no UK connection immediately before the beginning of the tax year or if the client is a resident in the UK or has a permanent establishment in the UK then they will have a UK connection.
What does this mean for the contractor and the overseas end-client?
Put simply, this means that where a contractor has an end-client based overseas but the end-client has no UK connection such as a UK branch or office, as such, the IR35 reforms do not apply, and the contractor will apply the old rules and self-determine their status.
However, if the overseas end-client has a UK connection such as a branch or office, it will still be the responsibility of the end-client to determine the contractor’s status and issue a status determination statement.
The overseas client will also be liable for the Tax and National Insurance Contributions (NICs) if it fails to meet its responsibilities under the IR35 rules and HMRC will collect this debt through the UK connection.
What are the pros and cons of working for an overseas end-client?
As with all work situations, there are many potential pros and cons. The following are just a few that we think contractors should be aware of:
Potential Pros:
- You have the control over your status determination and your tax deduction for HMRC.
- You will be working to pre-IR35 rules.
- You could potentially earn more income.
- You could be offered the chance to work abroad for a period.
Potential Cons:
- Confusion for your accounts when it comes to year-end if you work for overseas end-clients and UK end-clients.
- Difficulty chasing payment of late paying end-clients due to the logistics of being abroad.
- Different tax rules for different countries. The fact that you would not be subject to UK tax rules means you will be liable for the tax laws of the country your end-client is based in. You’ll need to make yourself fully aware of those tax laws. ContractorCalculator.co.uk have a good article on this topic
- Potentially having to set up a bank account abroad to receive payment. This could impact on your ability to withdraw money and/or transfer large amounts of money from an abroad account to an English bank account.
- Financial instability in the eurozone.
- Your overseas end-client decides to expand and sets up an office in the UK. You would then lose your control over your status determination and would be subject to IR35 legislation, which could complicate matters for your overseas end-client as well as for yourself.
- If you’re offered the chance to work abroad for a period of time, you’ll need to make yourself aware of the culture of the country you’re going to work in.
Help to clarify your position as a contractor if you’re unsure
Even if you’re an experienced contractor, it’s important to ensure you understand the set-up of any end-clients or fee-payers based abroad and seek professional advice if you are unsure.
A contract review is a good place to start. Contact us for details on 0333 321 1403
You can read more about our legal expenses and tax investigation insurance here.
Sources:
Original article written by Markel Tax. Updated and extended by Caunce O’Hara July 2022.
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10025
https://velocityglobal.com/blog/pros-and-cons-of-international-contractors/
https://www.gov.uk/tax-foreign-income
https://www.contractorcalculator.co.uk/contracting_overseas.aspx
https://www.contractorcalculator.co.uk/taxation_uk_contractors_europe.aspx
