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International contractors and IR35

Jo-Anne-Allen
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The number of international remote workers has exploded since the pandemic. Jo-Anne Allen explains the tax implications when this way of working extends to contractors.
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Enabling your people to 'work from anywhere' brings many benefits. It maintains agility, attracts key talent, plugs skills gaps, and can play a role in inclusion and diversity (I&D). But there are also challenges – especially the human resources, immigration, legal, payroll, and tax ramifications. While these have been well documented, the focus is mostly on employers and employees. 

So, what about an ‘on demand’ workforce?

Here in the UK, between an employer and an employee, the relationship is straightforward: it is a contract of service. The employee has a clear status and both parties know what to expect, ie, payroll, income tax and, usually, Class 1 National Insurance contributions (NICs) withheld at source. 

For contractors, the situation is less clear. There's often uncertainty due to the different arrangements and structures that can be used, from sole traders and agencies, through to personal or managed service companies or umbrella company arrangements. 

These add complexity, even before the international remote working aspect is considered. To understand how international contractors are treated, we first need to know the basics of how contractors are treated in the UK. 

The issue: Are your contractors, employees in disguise?


In the UK, the 'Pay As You Earn' (PAYE) regulations require employers to withhold income tax and NICs at source on amounts paid to employees. PAYE does not usually apply to contractors: they are not hired under a contract of employment. They are not employees. 

Or are they?

The off-payroll working legislation (IR35) changed in 2021 placing the onus on the end user to determine the correct status of their off-payroll workers. Contractors may be treated as employees for PAYE purposes in certain situations, and companies using contractors can find themselves with unexpected PAYE and NIC obligations. The tests to determine status are grey. But if someone looks and feels like an employee, then they probably are – regardless of contractual arrangements or company structure. 

Different rules apply to self-employed people versus employees, which often means they pay less income tax and National Insurance. There’s no Employer’s National Insurance liability – currently an additional cost to the employer of 13.8% (of gross earnings), rising to 15% effective 6 April 2025. So, there are incentives on both sides for a worker to be outside the scope of PAYE. Over the years, people have found loopholes in the legislation to try to ensure they are treated as self-employed. Unsurprisingly, HMRC does not like this.

There is no legal definition of what makes someone an employee for tax purposes. It depends on the facts and circumstances of each individual case. Although there are employment status indicators. For example:

  • Can they send a substitute to perform the work?
  • Who controls how, where and when they work?
  • Are they able to work for other businesses?
  • Who provides the equipment for their work?
  • How are they paid? (Hourly, daily, per task?)       

Case law and guidance can help here. For example, the Agency legislation (Part 2 Ch 7 ITEPA 2003) needs to be considered first. However, often this is not applicable to typical contractors who use a Personal Service Company (PSC) structure. Here, we’re usually looking at IR35.  

The off-payroll working (IR35 2021) rules apply where there is an intermediary between the worker and the client. Under the rules, the client is required to assess the employment status of each contractor and issue a Status Determination Statement (SDS). 

If the worker is really an employee, based on a wide range of factors determining their employment status, the client is required to operate PAYE (tax and NIC withholding) on the deemed employment payment. 

What if your contractors work outside the UK?

So, what happens if a UK company uses contractors who perform their work remotely overseas? Does IR35 still apply? How does a company know – and how does it assess – whether it has a compliance risk? 

Firstly, it's important to look at the workers and see whether they're within the scope of UK income tax and NICs. Factors to consider include where the person is resident, do they spend any time in the UK (if so, how much), and do they perform substantive work in the UK? For National Insurance purposes, we also look at whether the worker is gainfully employed in the UK.

You need to undertake a certain amount of due diligence on this front:  

  • Know where duties are being performed
  • Take reasonable care to understand the worker’s UK tax and NIC position
  • Understand the contractual chain and which entities are overseas   

If a company engages with a contractor based overseas, who never sets foot in the UK, it is reasonable to assert that they are outside the scope of UK income tax (and NIC) and no status assessment is required. Otherwise, more consideration needs to be given to the situation. If the worker is within the scope of UK income tax and NICs, it is important to assess whether the company – the end-user – has a tax presence in the UK. UK-incorporated companies will nearly always have a UK tax presence (sometimes referred to as a PAYE presence, or a place of business), but for some businesses operating in the UK, or sending workers to the UK, it is less clear. 

Once it has been established that the worker is within scope of UK income tax and NICs, and that the company has a UK tax presence for PAYE purposes, the next step is to assess whether the company (the end-user) should be operating PAYE on payments made to the worker. This is where IR35 comes in. If the IR35 assessment confirms the worker is really an employee, the client must operate PAYE withholding on the deemed employment payment. 

It is also important to be aware of the Host Employer rules (Section 689 ITEPA 2003). If the IR35 assessment (the SDS) regards the worker as being self-employed, the IR35 rules do not apply but S689, which can be quite broadly drawn, may still result in PAYE being due in the UK. Some key questions need to be asked here. Does the intermediary pay the worker a salary? Is the worker an employee or a director of their Personal Service Company? Does the UK client exercise any "management or control” over the worker? If so, the client in the UK probably has a PAYE obligation. Where the worker’s intermediary is based is irrelevant. It is where the worker carries out their services that determines whether they can be caught by the rules. 

Other factors to consider around international contractors:  

  • Permanent establishment (PE) – has the worker, as a result of the nature of their activities, created a PE in the UK? This corporate tax concept can result in a UK PAYE obligation.
  • Double taxation agreements – even after all the above has been worked through, can a double tax treaty provide any relief or exemption from income tax?
  • Country of residence – what are the rules in the country where the worker is resident? 

The use of Employer of Record (EoR) has become increasingly prevalent in enabling businesses to “outsource” their employment and related administration (such as payroll) to a third party in a cost effective way. Andy Elson of Global Expansion says “EoRs can be a useful solution to enabling a business to engage with employees in overseas territories where there is no corporate presence. However, no one-size-fits-all and consideration still needs to be given to corporate tax risks and employee integration in an outsourced model.”

Territories around the globe are catching up with the exponential growth in contingent working.

Over the past 10 years, the number of self-employed workers in The Netherlands has increased by 85 percent. To ensure these workers are protected, and to create a more level playing field between different kinds of contracts, the Dutch government introduced the DBA Act (‘Wet Deregulering Beoordeling Arbeidsrelaties’ in Dutch) in 2016. To date, the Dutch Tax Authorities have not actively enforced the DBA. However, the enforcement moratorium terminated as of 1 January 2025 and the Dutch tax authorities will actively enforce their powers in respect of ‘false’ self-employment situations. Non-compliant companies might be exposed to corrections and additional levies, which can have retroactive effect from the start of the enforcement date. If not already done so, now is the time to assess whether you are dealing with a "genuine" self-employed person or whether an employer-employee relationship triggering payroll obligations, wage taxes and social security premiums arises.

In Spain, the authorities look through these structures and assess whether the relationship is one of a regular employee-employer. Spain is increasingly seeing employees being set up as contractors who take care of their own social security contributions and invoice their services to their employer. This leads to employee insecurity, in comparison to regular employees, with the associated lack of paid vacation leave, seniority, maternity leave etc. The Authorities are imposing fines on employers who allow or encourage this type of set-up.

Spain has a similar focus on EoR, where contingent workers are hired via the use of EoR companies. EoRs are highly regulated and are to be used solely for the provision of a temporary workforce to cater for new market needs, specific projects, or to replace workers on leave. The duration employees can render their services under this arrangement is temporary and limited in time.

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How can we help?

Getting the compliance right for international contractors can be confusing. We work with many organisations, helping them to make sense of the whole picture and understand their obligations in relation to international remote working.

As a network of global member firms across 150 countries, we have true global scale, deep technical capabilities and extensive expertise working with clients across all sectors.  

Get in touch with Jo-Anne Allen to discuss these issues and understand your organisation’s position in more detail.