The pandemic has exacerbated the ongoing battle for talent, meaning many employers are now looking overseas, engaging contractors ‘off-payroll’ to provide services remotely. It’s an attractive option - you get you the flexible labour you need and it gets round the IR35 tax laws. However, there is a catch. Companies could, potentially, become exposed to non-UK tax risks.
This is an issue that has been flagged by tax lawyer Penny Simmons in her Out-Law Guide. She explains how IR35 works in the UK, something we’ve covered many times in this programme, and she goes on to say that, for IR35 purposes, no UK employment taxes should be payable by a company in respect of non-UK tax resident contractors engaged through personal service companies if all their work is undertaken overseas and provided the contractor doesn’t enter the UK for their role. Similarly, NICs are generally only payable in respect of workers who are resident or present in the UK. Therefore, provided any non-UK tax resident worker remains overseas, NICs should not be payable.
Penny says, although IR35 should not apply when it comes to engaging overseas contractors, nonetheless safeguards should be introduced to manage residual risks. She says IR35 policies should be updated to clarify that whilst overseas contractors can be engaged through intermediaries, they must not visit the UK to undertake work for the company. These policies should be documented and communicated across the business, particularly to those responsible for engaging contractors.
So, let’s pick up on that. Penny joined me by video-link to discuss the issues. Given the reference to policies, I started by asking Penny about HR’s role:
Penny Simmons: “So whether it's a role for HR, I think, depends really on how the business is organised. From my experience businesses organise their engagement functions in different ways when we're talking about contractors. So sometimes it will be HR and sometimes it may be Procurement, sometimes Legal and Tax Risk get involved as well. I think it's very important that all those key parts of the business communicate with each other because what you don't want is HR creating a policy on what should happen when you engage contractors who are based overseas and advice to the business in terms of saying, well, they shouldn't come over to the UK to provide services and ideally they should do everything outside of the UK, not have meetings, even online meetings really would elevate risks. There’s no use HR making those policies and not communicating them to the procurement function if it's the procurement function that, in some cases, will engage with those contractors overseas. So, yes, I think it is a role for
HR in many cases, but I do think it's very important that different parts of the business, particularly in large organisations where we see this more and more of an issue, where different parts of the business need to talk to each other. So, it's really key to make sure that those new policies are communicated effectively across the business.”
Joe Glavina: “I can see why a policy needs to discourage overseas contractors physically visiting the UK but in your Out-Law Guide you warn against even having online meetings, from overseas, with UK-based personnel. Why is that a risk?”
Penny Simmons: “Well this comes down to the fact that at this point in time the Revenue, if you like, hasn't updated its guidance to really look at what's happening across supply chains and across the labour market and the fact that we now have more and more businesses, because of labour shortages, seeking to engage individuals overseas, who do all the work overseas remotely, to provide services that could have been, or were traditionally pre-COVID, pre-Brexit, done in the UK. It may well be that we see an update to the Revenue’s approach and its guidance in this area. The reason I draw on online meetings is that at the moment, there is nothing in the guidance that says if you take part in an online meeting from overseas then that would be construed as happening in the UK, but that guidance may change and I think that you should minimise those meetings because you are increasing the risk that something that the overseas contractor is doing overseas could be construed as actually providing services in the UK notwithstanding that, at the moment, there is no reason to suggest taking part in an online meeting would be would be problematic. For me, as a tax risk lawyer, I'm looking at the risks here, and I would minimise the opportunity for that to happen.”
Penny has written about this for Tax Journal as part of a Q&A piece for them. She has also written a Guide for Out-Law which is called ‘Tax risks for UK companies engaging overseas contractors’. That Guide is available now for from the Out-Law website.