Overseas companies · Contractor to employee
Turning a UK contractor into an employee when your company is overseas
An overseas company with a UK contractor has two separate questions to answer. Is the contractor really working as an employee? And do the UK's off-payroll working rules, often called IR35, put any duty on the company? If you then decide to employ them, the payroll route depends mainly on where your company is based.
Onshore Partners runs UK payroll for overseas employers. We are not an Employer of Record, and we don't decide anyone's employment status. This page sets out what HMRC's and GOV.UK's own guidance says, and nothing beyond it.
Short answer: HMRC's manual says a client that is not UK resident and has no permanent establishment in the UK, immediately before the tax year starts, is wholly outside the UK, and wholly overseas clients do not need to consider the off-payroll working rules. The contractor's own company then has to consider the older IR35 rules itself. Employing the contractor directly is a separate step, and it doesn't need a UK company.
Question one
Is the contractor really an employee?
In employment law, a person's employment status helps decide their rights and their employer's responsibilities, and GOV.UK says a person may have a different employment status in tax law. Employers must work out each worker's status in both. On GOV.UK's own description, a person is self-employed if they run their business for themselves and take responsibility for its success or failure.
Getting it wrong has a cost. GOV.UK says individuals and their employers may have to pay unpaid tax and penalties, or lose entitlement to benefits, if their employment status is wrong.
For tax, HMRC's Check employment status for tax tool gives HMRC's view of a worker's employment status, based on the information you provide. HMRC say they will stand by its results as long as that information stays accurate and in line with their guidance. Anyone can use it, the hirer included, and the result can be used as a valid status determination statement.
For employment law, courts and tribunals can make final decisions on employment status. Acas can advise on employment status, and their helpline is 0300 123 1100.
Question two
Do the off-payroll rules (IR35) reach an overseas company?
The off-payroll working rules apply where a worker provides services to a client through their own intermediary, usually a limited company, and would have been an employee if they were providing their services directly to that client. They apply contract by contract.
A client wholly outside the UK
HMRC's manual says a client is wholly outside the UK only if, immediately before the tax year starts, it is not UK resident and has no permanent establishment in the UK. Wholly overseas clients do not need to consider the off-payroll working rules. The contractor's own company then has to consider whether the older IR35 rules apply to it.
A permanent establishment includes a fixed place of business, such as a branch or an office, and can also be an agent who has, and habitually exercises, authority to do business on the client's behalf. HMRC's manual also says a contractor's own UK company is not a permanent establishment of an offshore client.
A client with a UK connection
If your company is UK resident or has a permanent establishment here, size comes next. Small organisations outside the public sector do not need to consider the rules, and the contractor's own company decides their status and whether the rules apply. Where the rules do apply, the client is responsible for deciding the worker's employment status for tax, and should produce a status determination statement with its reasons.
If you employ them
The payroll route, with no UK company
Once the contractor is your employee, which route fits depends mainly on where your company is based. The employee sets up a DPNI and pays both their income tax and their employee National Insurance to HMRC under one PAYE reference. When someone works in the UK for an employer based in the EU and UK National Insurance is due, it is due on both sides, the employee's and the employer's, so the scheme is an NI-only scheme in the employer's name and not a DPNI or DCNI. A company with no UK presence doesn't have to run UK PAYE, but it can choose to run it in its own name. We will ask HMRC for the scheme that fits your facts, and they may suggest a different one once they have the full facts.
One exception to watch: if your employee is made available to work in a UK business, such as a UK client, HMRC's employer guide says that UK business must pay the employer's and the employee's National Insurance instead, where no agreement with employer obligations covers the employee.
You must have employers' liability insurance from the day you become an employer, unless the only person you employ is based outside England, Scotland and Wales, and you can be fined £2,500 for every day you're not properly insured. The workplace pension (auto-enrolment) duties also start on the employee's start date, not when HMRC open the scheme.
We'd allow four to eight weeks for HMRC to set the scheme up, and that's our own estimate, not a figure from HMRC. If pay starts before the scheme is in place, payroll still runs every payday and is reported to HMRC late once the scheme exists.
A DPNI costs £157 a month. An NI-only scheme costs £157 a month for one employee, and £150 a month plus £7 per payslip for two or more. A UK PAYE scheme in the company's own name starts at £225 a month plus £8 per payslip, and setting it up costs £350. When the scheme is in the employee's own name, the employee is our client and pays our fees. We are not VAT registered, so no VAT is added. The steps in order are in our guide to converting a UK contractor to an employee.
Common questions
A UK contractor and an overseas company: common questions
Do the IR35 rules apply to a company based outside the UK?
HMRC's manual says a client is wholly outside the UK only if, immediately before the tax year starts, it is not UK resident and has no permanent establishment in the UK. Wholly overseas clients do not need to consider the off-payroll working rules. The contractor's own company then has to consider whether the older IR35 rules apply to it.
What counts as a permanent establishment?
HMRC's manual says it includes a fixed place of business, such as a branch or an office, and can also be an agent who has, and habitually exercises, authority to do business on the client's behalf. A contractor's own UK company is not a permanent establishment of an offshore client.
How do I check whether my contractor is really an employee?
HMRC's Check employment status for tax tool gives HMRC's view of a worker's employment status for tax, based on the information you provide, and HMRC say they will stand by its results as long as that information stays accurate and in line with their guidance. Employment law can reach a different answer, and courts and tribunals can make final decisions on employment status.
Do I need a UK company to employ them?
No. The employee sets up a DPNI and pays both their income tax and their employee National Insurance to HMRC under one PAYE reference. When someone works in the UK for an employer based in the EU and UK National Insurance is due, it is due on both sides, the employee's and the employer's, so the scheme is an NI-only scheme in the employer's name and not a DPNI or DCNI. A company with no UK presence doesn't have to run UK PAYE, but it can choose to run it in its own name. We will ask HMRC for the scheme that fits your facts, and they may suggest a different one once they have the full facts.