The UK have introduced new tax rules for contractors working for UK based business.
The new rules primarily affect contracting to private sector companies. If you are working for a UK public sector organisation these rules have applied for some time.
The big change is that the fee paying company is now potentially liable for any UK tax due to the HMRC taxman for any tax due on the payments made to the contractor.
As ever it’s not simple and the HMRC will not give strong guidance.
So the incentive is on the fee paying company to comply.
WHAT DO IR35 RULES MEAN
IR35 rules refer to any payments to ‘workers’ on a contract basis who are not paid under the UK tax rules for employed pay as you go PAYE.
Under PAYE the employee pays income tax at 20/40/45% and employer and employee 13.8/12% – totalling 25.8% – national Insurance taxes.
A contractor working as self employed sole trader or through a personal service company will pay a maximum national insurance tax rate of 9% for basic rate tax and has additional allowances and expenses against income before tax is paid, which could then be at a flat rate corporation tax rate of 19%.
Contractors brought under IR35 rules will now be treated as ’employees’ with the higher PAYE income and national insurance tax deducted at source.
If the fee paying company don’t pay the additional taxes involved then they become liable to the taxes due for the contractor.
Caution will be on the fee payers side.
WHAT STATUS
Given the fee payer now makes the decision the incentive is for the contractor to prove his case to retain his contractor status and any tax advantage that may give.
This applies to contractors providing remote services Living and Working Abroad to a UK company.
The main exemption are determined if the fee paying company is deemed small with turnover below £10 million and balance sheet below £5m.
If the fee paying UK company is a small company the expat contractor can still work in a sole trader or through a UK service company.
If not then there is a debate but no clear ground.
DECISION TREE
The decision making for IR 35 off payroll work is largely based upon case law so there is a case for argument.
Expats contractors could apply to HMRC for a Self Determination Statement of their status with the fee paying company.
The fee paying company could also, however the risk is with them and they could choose to start paying UK taxes from the contract without consultation with the contractor. The contractor is enforced to receive ‘netto’ income or lose the contract work.
There are 3 principle tests for the contract to determine if it falls under IR35 rules :
- Does the fee payer control when the contractor does the work
- Does the contractors role provide a deemed ‘personal service’ to the fee payers business.
- Is the contractor obliged to provide services at specific time and place
If the contractor is obligated to provide a specific service, for specific periods of time to carry out an integral service then the contract could be deemed to be off payroll work that now falls under IR35 rules for tax deduction at source.
WHAT TO DO
Expat contractors working for larger Companies in the UK would need to accept significantly different contractural arrangements.
ProACT could assist and advise if this is possible.
Smaller companies maybe unsure of their obligation and liability. In which case ProACT could help obtain a status determination statement from the UK HMRC which would confirm – or reject – the contractor status.
Tax returns are still needed for the contractor even if deemed to work and be taxed under IR 35 rules to claim full allowances.
ProACT expat experts could support this tax return work.
Contractors could also diversify their work and amend their contracts. This could keep them outside of IR35 work.
Contact us
For more guidance about IR35 for your expat family and business contact us for a Free Review.
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