Contractors' Questions: Is IR35 a factor overseas?

Contractor's Question: Do I need to consider IR35 if I am going to be contracting in Europe through my UK-registered limited company?

Expert's Answer: This question often arises when contractors discuss possible options for working overseas. The simple answer is that if you're working overseas through your UK limited, IR35 is the least of your worries.

IR35 is a UK tax regulation put in place by HM Revenue & Customs to protect against deemed employment in the UK. It was designed to ensure that people claiming company-related non-taxable benefits are entitled to these benefits and not simply misusing a tax structure to avoid income tax.

The key here, however, is that these are UK tax benefits and, under the OECD model, only apply to individuals working in the UK. The real question, therefore, is no longer whether you should be worried about IR35 when working outside of the UK through your UK limited company, but whether you should be working outside of the UK through your UK limited company at all.

One popular interpretation of the '183-day rule' and its application is that it allows contractors to work overseas for 6 months while retaining their UK taxation structure. This is incorrect in a vast majority of European countries. Indeed, as a contractor working in almost any country, tax is due locally from day one. The relevant part of the OECD Model Tax Treaty states that "employment income is taxable in the country where the activities are physically carried out, unless (amongst other things) the remuneration is paid by, or on behalf of, an employer who is not a resident of the country of work."

The varying interpretations of the 183-day rule arise from the interpretation of the 'employer' in the above sentence. Most countries interpret the 'employer' as the 'economic employer' (the entity that is paying for the work) as opposed to the 'employer of record' (the entity that is paying the worker). This means that, in the scenario of a contractor working overseas, the local client will be deemed the employer for purposes of interpretation of the 183-day rule, not the contractor's UK limited company nor the UK recruitment agency.

The correct way of working while contracting overseas is always to make use of a structure that allows you to pay tax locally in the country of work. This may be by means of registering your company locally, working through a local employment umbrella or management company or registering as a freelancer or equivalent: each country has different requirements. Whatever your situation may be, before you embark on any foreign assignment, take professional advice tailored to your circumstances.

The expert was Matt Walters of Capital Consulting, a tax specialist for UK contractors working overseas.