Off-payroll rule exclusion for UK contractors' wholly overseas clients 'could be a loophole'

An exemption from the new IR35 legislation from April 6th 2021 -- to exclude end-users with no UK presence -- could be an exploitable “loophole,” peers have been warned.

Announced by HM Treasury in its very quick review, the exemption has been overshadowed by the other announced changes, such as the ‘soft-landing’ and the ‘small company’ notification duty.

But Stephen Ratcliffe of the Employment Lawyers Association (ELA) told peers that despite it “not being widely spoken of,” the carve-out for wholly overseas engagers is “quite significant”.

“No longer, it seems, will [the off-payroll rules] extend to end-user clients who are entirely offshore and don’t have a presence in the UK. That’s a big change”, he told the Lords.

“And it’s something on which many of our clients have been taking advice on for some quite time now, and so it’s quite unfortunate it came [from HMT] at this late stage.”


Chris James, chairman of the FCSA, sounds sympathetic to clients who took HMRC guidance at face value because, he says, what it stated previously, is not what it states now.

“[The guidance previously stated] that where there was a UK contractor, a UK agency and an overseas end-user, there was still a requirement to get an SDS from that end-user.

“This would be difficult for them to do and it's hard to see how HMRC would enforce action against them for non-compliance,” explains Mr James, a director at JSA Services.

“But now…[thanks to the] implementation review, an amendment to this [means] if the end-client is outside the UK and has no UK presence, such as a UK office or similar, then the new [IR35] rules do not apply and the contractor must apply the old IR35 rules. This is sensible.”

'Worker domicile, status'

Chartergates, an employment law firm, broadly agrees on that interpretation -- and the translation of HMRC’s terms.

“A wholly overseas client exists where, ‘A client is based wholly outside the UK if it does not have a UK connection in the form of being UK resident or having a permanent establishment,’” the firm said, quoting from HMRC’s updated guidance.

“If, however, the client does not fall within the definition of being a wholly overseas client, then the new IR35 rules may need to be considered for tax and NICs. However, this will depend on the worker’s domicile and residency status.”

'A very clear HMRC'

In his evidence to the Lords (submitted to the peers at its fifth oral evidence session for its off-payroll rule inquiry), Mr Ratcliffe also kept the worker in mind. Exactly as HMRC is doing.

“Now, HMRC has been very clear -- the idea that you might offshore your PSC in the hope of avoiding this legislation simply doesn’t work. And that’s been clear for a long time,” he said.

“But end-user clients, who do engage [UK-registered] PSCs, who are offshore and have no presence here [-- the UK], will be excluded from the legislation it seems.”

'Only factor'

Overseas contracting advisory Access Financial, which is preparing an analysis of the off-payroll rule exemption exclusively for ContractorUK, yesterday confirmed:

“The very latest statement from HMT says that the client must be wholly based overseas,” says the advisory’s managing director Kevin Austin.

“There is no mention of where the contractor’s assignment is, nor where the recruitment agency is located. This mean that the only factor to consider is where the client is based.”

In his oral testimony, the ELA’s Mr Ratcliffe said there was “no suggestion” from his clients that the exemption is “going to be operated as a loophole.” Nontheless, “in principle, it could be” a “loophole,” he acknowledged.

'HMRC has no route to claim from'

Access Financial’s Mr Austin agrees: “Yes, potentially it is a loophole.

"But it is a fact that the writ of UK law covers only the UK’s continental shelf.”

Similarly, Mr Ratcliffe argued (in his testimony): “I would question what the solution to that is -- where you have an entity that is offshore which has no presence here and therefore which, it seems to me, HMRC has no route to claim from.”

Responding to questions from ContractorUK last night, Mr Austin said: “It could be exploited by setting up foreign clients to commission the work when the work was really done in the UK.

“We would not advise them [contractors] to exploit this. What we are advising is to take advantage of the fact that their client in the UK may be a small company. Even at this late stage, not everyone is aware of this other legitimate exception to the imminent off-payroll rules.”

'Government has listened'

In its 23-page review, the Treasury said: “During the review concerns were raised about how the rules will apply where the client is overseas.

“The government has listened to those concerns and will amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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