Since IR35 reform has been finalised, we have received some long-awaited clarification concerning overseas clients. In this article Qdos Head of Tax, Nigel Nordone, helps us unpack this.
In March of this year, it was announced by the government that the proposed IR35 reform, due to commence on 6 April 2020, would be delayed by a further 12 months as part of their Covid-19 response package.
The changes, which shift the responsibility of determining the IR35 status of a Personal Service Company (PSC) from the PSC to the end client, have been enforced within the public sector since April 2017. However, after MPs voted against an amendment to the Finance Bill proposing that the changes should be rolled out in the 2023/24 tax year, the reform will be introduced into the private sector from April 2021.
The reform posed many questions from contractors, one of which was whether the April 2021 reform will affect those with overseas end clients. In the consultation document issued back in March 2019, it was stated as follows:
“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.”
This suggested that if both the fee-payer (typically the employment agency) and the end client are outside of the UK, the end client would remain liable with regards to the IR35 determination of the contractor; however, this is no longer the case.
Since the reform has been finalised and announced within the 2020 Finance Bill, there has been further clarification regarding overseas clients. Within the guidance last updated in March 2020, it is stated where a client is based wholly overseas the off-payroll working rules do not apply. The PSC will be responsible for determining if the rules apply. For a client to be considered ‘wholly overseas’, they must not have a UK connection immediately before the beginning of the tax year. The client will have a UK connection if you either:
- Are resident in the UK
- Have a permanent establishment in the UK
As defined at section 1141 Corporation Tax Act 2010, a ‘permanent establishment’ includes a fixed place of business such as a branch, office, or a factory. A permanent establishment can also be described as any agent who has authority to do business on behalf of the client. For the purposes of the reform, the reference to ‘company’ in the Corporation Tax Act should also be read as a reference to individuals that are not companies.
If the client is based overseas but has a UK connection through a permanent establishment such as a branch or office, it is the overseas client who is responsible for determining the IR35 status of the PSC and for executing its responsibilities, such as issuing a Status Determination Statement. As a consequence of not meeting its responsibilities, the overseas client will be liable for tax and NICs where the rules apply. HMRC will pursue this debt through the UK permanent establishment.
For more information regarding overseas clients, Join Qdos Head of Tax, Nigel Nordone, for our IR35 Technical Series starting with a free 30-minute webinar on 18th November beginning at 2pm. Click here for more details and how to sign up.