Contractors' Questions: Can my German contract be executed IR35-free?

Contractor’s Question: My new contract with a German firm is written in German, under German law and pays in Euros but I'll work in the UK as they only have a Berlin office.

I’ll be paid a monthly salary plus 21% to cover my state taxes, insurances and pension liabilities, which is quite typical I’m told. The contract is akin to a full-time contract (it has no expiry date), but it’s up to me to cover all taxes and NI under UK law since this is where I reside.

I may de-register my PSC to do the work full-time as a sole trader, but given that the German firm isn’t UK-based or registered, does IR35 rest with them, who are outside of HMRC's jurisdiction? So they’d carry the risk that HMRC would be able to come to me to claim for the lost 13.8% employer’s NICs, wouldn’t they?

Alternatively, the firm could set up a UK PAYE office with HMRC, but with extra cost and complexity they won’t want. It seems simplest for me to cover my own liabilities through self-assessment of my income, but I don't want the risk of the firm ending up in legal bother. Please advise.

Expert’s Answer: While managing your own liabilities may sound like the simplest option, it doesn’t accurately reflect the nature of your engagement with the client and is therefore risky.

You are right to question whether employer NICs should be covered; if these are not paid and you are deemed to be in an employment situation, your client is exposed to the liability, which would likely lead to them having to unwillingly start a payroll as well as face any penalties that might be imposed. It is for that reason that we would instead suggest that you explore the option of becoming employed in the UK, either by your client directly or by a third-party employment company. Getting paid under an employed structure is by far the safest way to approach this situation for both parties.

Quite honestly, setting up a UK payroll is not a difficult or expensive process for your German client. Of course, this is only worth doing if they plan on engaging more people in the UK in the future. If you are a one-off and they never plan on using a UK payroll for anyone other than yourself, then third-party or umbrella employment is definitely the way forward. Engaging a third-party removes any risk of false self-employment and all liabilities are automatically fulfilled for everyone involved.

While it is admirable that you are concerned about protecting your client, you must also consider your own protection in this situation. If you are a UK employee and employer contributions are not being paid on your behalf, then your social security will be compromised. The extra 21% offered by your client suggests that they are willing to cover the costs of an appropriate solution, and that money would be better spent on setting up a UK payroll or engaging a third-party employer rather than asking you to manage matters yourself.

The overarching point to remember is that employment is your friend if you are looking for the most compliant solution for both you and your client, so we would suggest exploring this option with them. 

The expert was Nick Broughton, payroll and contractor tax expert at Capital GES.

Editor's Note: Related --

IT contracting in Germany -- Money and Tax

Contractors' Questions: Any tax tips for my German IT contract?

How UK contractors will fare under Germany's labour reforms