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IR35 private sector: what happens if the end-client is overseas

With the new IR35 off-payroll reforms coming into play in April 2021, a question frequently being asked by contractors is what happens if my end-client is based oversees?

Author: Markel Tax

International markets have proved to be very lucrative opportunities for some UK contractors working with overseas end clients and is a market that is steadily growing. Since the announcement of the new IR35 payroll reforms (Part 2, Section 10 of the ITEPA) which comes into force in April 2021, there has been much confusion as to whether the legislation would apply to those end clients and fee payers based overseas. Prior to the announcement of the Finance Bill 2020, it looked very likely it would apply, but the government took note of the concerns raised by contractors and provided further clarification and an exemption that it will not apply to end-clients and fee payers with no presence in the UK.

As we know contractors are governed by the intermediaries legislation, commonly known as IR35 (Part 2, Section 8 of the ITEPA) which tackles disguised employment through intermediaries. Currently the responsibility for determining status and deducting tax in respect of an engagement rests with a contractor operating through a limited company and the rules are straightforward – if a contractor is a UK tax resident, then the jurisdiction of the end client has little effect on the overall picture for IR35.

One of the main changes the new IR35 reform brings in 2021 is that the responsibility for determining status will no longer rest with the contractor, but with the end client. The government issued a consultation document in March 2019 which led to much confusion and concern from contractors regarding overseas end clients. Initially it suggested end clients and fee payers would remain liable when determining the IR35 status of a contractor. It said:

“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 are not even aware of IR35 legislation and contractors have become increasingly worried about how they will obtain an SDS from an overseas end client and the impact this could have on their businesses. It also raised the question: how would HMRC enforce compliance from overseas end clients and fee payers?

The government took note of these concerns and in response clarified the issue in the Finance Bill 2020 to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules. This means that where the end client is wholly overseas, the old rules will apply and it will be the responsibility of the individuals limited company to determine IR35 status. This will come as a huge relief for many contractors.

We must then look to see what the legislation says that to be wholly overseas a client must show:

  • they have 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, they will have a UK connection

This means where a contractor has an end client based overseas, which has no UK connection, such as a UK branch or office, the new IR35 reforms will not apply and the contractor must apply the old rules.

If, however, the end-client based overseas has a UK connection, such as a branch or office, it will still be the responsibility of the end client to determine status and issue a status determination statement. The overseas client will therefore be liable for the tax and NICs if it fails to meet its responsibilities under new rules and HMRC will collect this debt through the UK connection.

Remember, it is still your responsibility to keep updated on your IR35 status until the new reforms come into play in April 2021 and the easiest way to do this is to carry out an IR35 review. However, with the new reforms taking effect in just a few months, make sure you understand the set-up of any end clients or fee payers based abroad and seek professional advice if you are unsure.

We have been advising and defending clients against IR35 challenges since the introduction of the legislation 20 years ago. We offer a complete package of due diligence services to ensure you are well prepared and protected.

Markel Tax FeePayer Protect insurance is specifically designed to defend against an HMRC enquiry and even the potential tax losses where you are also the fee payer. What's more, we are able to provide you with contract reviews including the whole supply chain from end-client through agency to the contractor, support in drafting an SDS, as well as training and on-going support from our tax experts.

Speak to our team today to find out how we can help you protect yourself against IR35 risks. Call 0333 920 1589 or request a call-back.