For PSCs whose clients have no UK presence or connection, it's old IR35
It was right for the Lords’ inquiry into the off-payroll rules to be told that a carve-out from April’s IR35 framework for ‘wholly overseas’ engagers has “not been widely spoken of.”
In this article, exclusively for ContractorUK, I hope to go some way towards fixing that, writes Kevin Austin, managing director of overseas contracting advisory Access Financial.
It’s important to because, in line with what the Lords were also told by the Employment Lawyers Association, this exclusion from the new IR35 rules for entirely offshore engagers is one of the most significant aspects of the HM Treasury IR35 Reform Review. That review was published on February 27th.
Scant detail, for such a significant measure
Perhaps part of the reason why not much has been said about the exclusion is because HMT didn’t say much about it in the first place. In fact, there are only two mentions in the review – the first at chapter 4.15, which is more concisely worded later, in the review’s Annex A:
“HMRC will amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules.”
Putting aside for now the scope of the stated exclusion, this clarification from the government is significant. Until this clear articulation of policy (made just 38 days before the rules are scheduled to be introduced), there has been no explicit statement from HMRC that using a UK-registered PSC to provide services overseas, or even simply work abroad, was valid.
When the old IR35 is going to be in play
But the February statement from HMT goes further. It means that, where the UK limited company’s end-user client is totally abroad, i.e. based “wholly overseas”, the IR35 status determination of the limited company contractor will continue to be made by the contractor. So in such an instance, the ‘old’ IR35 regime (of 2000) remains in play, not the new one (from April 6th 2020).
To reiterate, the government says that for the exclusion from next month’s off-payroll rules to apply (in which case the contractor would decide their own IR35 status), the client must be wholly based overseas.
Note; there is no mention of where the contractor’s assignment is carried out, nor where the recruitment business is located. This mean that the only factor one needs to consider is where the client is based.
Does your client have ‘no UK presence’?
But look again at the HMT statement. It also specifies that the organisation – to be excluded from the imminent IR35 reforms – must have “no UK presence”.
In a new manual for its inspectors (ESM10006), published on the same day as this offshore carve-out was announced in the HMT review, HMRC states:
“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.”
What does ‘no UK connection’ likely mean?
So ‘no UK connection,’ ‘no UK presence.’ At this stage, and based on these two phrases, we believe that to be excluded from the off-payroll rules, the engager must not have in the UK any of the following:
- A company
- An office
- A branch
Let’s put our wider understanding of ‘UK presence’ and ‘UK connection’ into everyday terms and real-world scenarios, by posing (and answering) a few queries contractors might have.
Three ‘wholly overseas’ exclusion questions
Q1: If the end-user has its bank account in the UK, does that constitute having a ‘UK presence’?
A bank account in the UK is very unlikely, in our view, to constitute a 'UK presence.' Look at it this way; I might have some money in an account somewhere in India – but I am far from present there.
Q2: If the end-user is not in the UK, but its directors are UK tax residents, would that still mean no consideration of the April 6th IR35 rules are required?
Answer: Yes, no consideration necessary.
The ‘old’ IR35 rules (Chapter 8, Part 2, ITEPA 2003) would apply, not the ‘new’ rules (Chapter 10). Why? Well, the end-user is corporate; its directors are separate legal entities.
Q3: What does ‘UK presence’ mean, other than what we’ve outlined so far?
Answer: Guidance alongside today’s Budget 2020 might answer this better than we can (at the time of writing).
But ‘UK presence’ might be stretched to include the engager’s permanent employees, or the end-user company’s ‘associated’ companies. At this stage, without case law or HMRC guidance, we cannot be certain.
Other compliance considerations when contracting abroad
Generally though, and based on our initial understanding of this carve-out, we welcome it and think that UK limited company contractors (and their agencies) will too. That said, from the UK tax liability perspective, contractors, recruitment business and their clients all still need to be aware of the local compliance requirements in the work country. They must be vigilant in terms of immigration, tax and social security law. Recruitment business must also be alert to their not breaching the Criminal Finances Act 2017 by facilitating tax avoidance in the work country.
And in that work country, status is obviously only one aspect of contractor compliance. The others are:
- Employment law
- Social security
- Income tax
- Dividend tax
- Corporation tax
Yet status is undoubtedly the aspect of the moment; more worried about right now than these eight. So much so that we expect a flood of queries from UK contractors about what variants of IR35 they might encounter when contracting overseas.
To stem the tide a bit, let’s look at the status front in two popular overseas destinations for UK contractors.
Under the Dutch’s WAB law, it is possible for a client and contractor to enter into a Model Agreement. This model has been agreed between the unions and government, and it works on the understanding that neither party seeks an employment relationship. If genuine, this is strong evidence of self-employment.
Across the Channel, Portage exists and is based on the assumption that consenting adults can enter into an independent business relationship and that the safety net of Equal Treatment is not needed. So in France, you have economic employment but it’s in the client–worker nexus of a relationship of independence.
Loophole, legitimacy, limited company
Whether this exclusion from having to consider the off-payroll rules for engagers who have no UK presence because they are wholly overseas turns into an exploited loophole remains to be seen. We believe that it is potentially a loophole, and it could be exploited by setting up foreign clients to commission the work when the work is done, or will be done, in the UK.
But the fact of the matter is that the writ of UK law covers only the UK’s continental shelf, so what’s the alternative for HMRC?
For our part, we would not advise contractors to exploit this ‘wholly overseas’ exclusion. What we will advise UK-registered PSCs 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 from next month's rules.
But we are also advising contractors that where a client genuinely is wholly outside of the UK, then it’s old IR35 which is in play. In other words, it is the contractor limited company that will continue to be responsible for determining the IR35 status of the director in any given assignment. So at least for some contractors from April, it’s going to be ‘business as usual.’ If you or your contractual partners are unsure, tailored expert advice is your answer.