IR35 Risks with Overseas Parent Companies or Overseas Contracts

If the contract is deemed to be within IR35, the fee payer must then operate a UK payroll and deduct income tax and national insurance (NIC) under PAYE.

As this may form a larger administrative burden for smaller companies who are the end client, there is an exemption from the IR35 responsibilities for small end clients where they meet at least two of the following conditions:

• It has an annual turnover not exceeding GBP 10.2 million;
• It has a balance sheet total not more than GBP 5.1 million;
• It had an average of no more than 50 employees for the company’s financial year.

When assessing the contract between the PSC and the client, factors such as control, mutuality of obligations, ability to substitute, and insurance are taken into account.

Overseas Parent Company and IR35 Applicability

Where there is a UK Limited company subcontracting work to a UK PSC and the contract falls within IR35, if the UK Limited company meets the small-company exemption, the responsibility passes to the next party in the chain. This may lead to the PSC being responsible for IR35 duties, as opposed to the UK Limited Company.

However, if the UK Limited company is part of a group and is a subsidiary of an overseas parent company, the rules may differ. Although the subsidiary may meet the conditions for the small company exemption, where there is a group, this group is considered as one for the small company conditions. Hence, if the overseas parent company does not meet the small company conditions, the UK subsidiary will be responsible for IR35 and will need to operate a payroll and deduct income tax and NIC under PAYE.

Overseas End Client with UK PSC

Where there is an overseas end client who is also the fee payer and a UK PSC, the IR35 responsibilities may fall to the overseas end client without them even being aware of this responsibility.

HMRC have released further guidance whereby if the overseas end client is wholly overseas and does not have any connections to the UK, such as being UK resident, or having a UK branch or permanent establishment, the responsibility will be passed down the chain. If the end client is the fee payer, the responsibilities will be passed to the PSC. Therefore, the PSC will need to follow the IR35 rules similar to before 06 April 2021.

Where the overseas client does have a UK connection, they will be responsible for determining the status of the engagement, as well as operating a UK payroll and deducting income tax and NIC under PAYE. Whether NIC is applicable will depend on in which specific country the duties are performed by the worker, whether there are any reciprocal agreements in place with the UK, and the length of the contract.

UK End Client with Overseas PSC

Where there is an UK end client and an overseas PSC, with the worker also being non-UK resident, and the engagement falls within IR35, the tax situation depends on where the duties are performed. If the duties are wholly performed in the UK, the fee-payer should operate a UK payroll and the payments to the worker should be run through a UK payroll deducting PAYE and NIC, as applicable.

However, if only part of the duties are performed in the UK and the contract falls within IR35, although the fee payer may still be required to operate a payroll, payments could fall within S690 ITEPA 2003, whereby PAYE is only taxable on a percentage of the earnings. Again, whether NIC is applicable will depend on in which specific country the duties are performed by the worker, whether there are any reciprocal agreements in place with the UK, and the length of the contract.

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Photo: Alex Yeung - stock.adobe.com