IR35 and international issues

The Inland Revenue has issued guidance on the international implications of IR35.

UKTECH's IR35 expert, Kevin Miller, said: "Guidance to what is a very complex aspect of the IR35 legislation is long overdue. While the article goes some way to highlighting the issues I suspect that, for many freelancers, it will only serve to emphasise the complexity of all aspects of IR35 and the fact that they need expert advice to ensure that they have properly understood the implications.

"An illustration of this is example 4 - involving a worker resident in the UK working via a UK service company in Ireland. In the discussion concerning liability to NIC's under the IR35 legislation the first paragraph concludes "Therefore the service company legislation would not apply for NICs purposes." The second paragraph expands on the options and also concludes "In these circumstances the worker would not have been an employed earner of the client."

"So far so good but then, in the third paragraph, there is a new piece of information which says "However, there is a further exception to this rule where a person is employed in two or more Member States. If so, they are subject to the legislation of the Member State in which they reside. So there would be a NICs liability under the service company legislation in these circumstances."

"Unfortunately this issue is not clarified further so a freelancer is left wondering, if under IR35 he/she would be a deemed employee of his Irish client does that mean he/she could be employed in two or more Member States?

"This complexity and uncertainty is a continuing feature of IR35. It shows that, far from reducing burdens on small businesses, the Government seems intent on driving small businesses into the (expensive) arms of accountants and tax advisers."

The guidance is published in the Inland Revenue's Tax Bulletin, April 2003, Issue 64

In relation to references to tax in this article, the terminology of ICTA 1988 has been used rather than that of the Income Tax (Earnings and Pensions) Act 2003.

1. Will someone coming to this country from overseas be subject to the service company legislation?

If someone comes to the United Kingdom (UK) and provides their services through an intermediary in such a way that the service company legislation applies, then:

• for tax purposes any income earned in respect of duties performed in the UK is liable to tax in this country (and the relevant Double Tax Agreement (DTA) will, in most cases, confirm this right); and
  
• for NICs purposes liability normally arises in the country in which the duties are performed, and thus a worker coming to the UK who worked here through a service company would be within the service company legislation. However, the interaction of the UK domestic legislation with international social security treaties means that there are a number of exceptions to this rule and there will be examples where there is no liability for NICs. Only if the notional contract between the worker and the client would result in the worker being an employed earner under the definition in section 2(1)(a) of SSCBA 1992 will the service company legislation bite.

The exceptions to the general rule that liability normally arises in the country in which the duties are performed depend on whether the worker has come from:

• an EEA country;
  
• a country with which the UK has a reciprocal agreement; or
  
• a country in the rest of the world.

EEA Countries

Where a worker comes to the UK from an EEA country to provide services through an intermediary to a client in the UK, then:

• the worker is liable to UK NICs (article 13(2)(a) of EC Regulation 1408/71); and

* the intermediary is the secondary contributor whether or not it satisfies the conditions as to residence or presence in Great Britain. (Reg 6(3)(b) of the Social Security Contributions (Intermediaries) Regulations 2000). Similar Regulations apply in Northern Ireland.

However, there is an exception to this rule if the individual could be regarded as a short-term posted worker. This applies where a worker is engaged to carry out a relevant engagement by a client in another EEA country and is sent by that client to work in the UK. There will be no liability for NICs provided that:

• the posting is not expected to last for a period in excess of 12 months; and
  
• the worker is not being sent to replace another person who has completed a similar posting.

(Article 14(1)(a))

Case Studies 1 and 2 illustrate the operation of these rules.

In the event of the engagement unexpectedly lasting longer than 12 months the worker may remain outside the UK scheme for a further 12 months subject to the worker obtaining satisfactory certification from the relevant authorities.

Countries that have a Reciprocal Agreement with the UK

Where the worker was paying social security contributions under the scheme of a country with which the UK has a Reciprocal Agreement for NICs and is sent by the client to work temporarily in the UK, under the terms of the Agreement that worker would not have been liable for UK NICs had he been an employee of the client and thus will not therefore be subject to the service company legislation.

Rest of the World Countries

If an individual was normally resident in a country which is neither an EEA country nor one with which the UK has a reciprocal agreement and services are provided to a client in the UK, then NICs may not be payable for the first 52 weeks from the date of entry into the UK. If he is still engaged in the UK after 52 weeks then liability for UK NICs under the service company legislation will arise from the 53rd week. Case Study 3 illustrates this situation.

2. Will someone who provides services to a client overseas be subject to the service company legislation?

If someone provides their services through an intermediary to a client overseas in such a way that the service company legislation applies, then they may have to pay tax and NICs under that legislation.

For tax purposes, chargeability will depend on the residence status of the worker and the country in which the services are performed. The legislation provides for the worker to be taxed on the basis of the Schedule E treatment that would have arisen if he/she had been engaged directly by the client.

For NICs purposes, the intermediaries legislation only applies where the worker would be regarded for the purposes of Parts 1 to V of the Social Security Contributions and Benefits Act 1992 as employed in employed earners employment by the client, had the arrangements taken the form of a contract between the worker and the client.

However, there are exceptions to the general rule, which depend on whether the individual is providing services to a client:

• in an EEA country;
  
• in a country with which the UK has a reciprocal agreement
  
• in a country in the rest of the world

EEA Countries

Any worker employed in the territory of one EEA country is subject to the legislation of that country even if he resides in the territory of another country or the registered office or place of business is situated in the territory of another EEA country. Therefore, a worker providing services to a client in an EEA country other than the UK would be liable to pay social security contributions according to the EEA country in which he is employed and would not be an employed earner in the UK under sec 2(1) of SSCBA 1992. Consequently, the service company legislation would not apply for NICs purposes. However, there is an exception to this rule if the individual could be regarded as a short-term posted worker.

Case Studies 4 and 5 illustrate the operation of these NIC rules.

Countries that have a Reciprocal Agreement with the UK

Under Reciprocal Agreements with certain countries outside the EEA, a worker will pay social security contributions in the country where he is working. The UK has entered into 19 such agreements. Therefore, a worker providing services to a client in a country with which the UK has a reciprocal agreement will be liable to pay social security contributions according to the country in which he is employed and he would not be an employed earner in the UK. Therefore, the service company legislation would not apply for NICs purposes.

However, within each RA a provision allows for a posted worker to remain insured in the UK for National Insurance purposes for a limited period. Each RA sets out the time limit. In this situation the individual would remain within UK NICs because he would be a posted worker, but this is because he is, as a matter of fact, an employee of his service company. It does not bring him into the scope of the service company legislation because that is based on the position which would apply if he were working directly for the overseas client without the interposition of an intermediary.

Case Study 7 illustrates the operation of these NIC rules.

Rest of the World Countries

Any worker providing services to a client in a country in the rest of the world would be liable for contributions according to the country in which he is employed and he would not be an employed earner in the UK. Therefore, the service company legislation would not apply for NICs purposes.

Case Study 6 illustrates the operation of these rules.

3. What are the residence rules?

The tax liability is determined by the residence status of the worker and also the location in which the duties of the relevant engagements are performed. The rules are quite complex (see IR20), but the various permutations can be summarised as follows:

UK residence status of employee Duties of employment performed either wholly or partly in the UK Duties of employment performed wholly outside the UK Performed in the UK Performed outside the UK Resident and Ordinarily Resident Case I (taxable on all earnings, whether duties performed in the UK or overseas) Case I Case I. If the emoluments are foreign emoluments, Case III Resident but Not Ordinarily Resident Case II (taxable only on duties performed in the UK) Case III (taxable only on earnings remitted to the UK) Case III Not Resident but Ordinarily Resident Case II No liability No liability Not resident and Not Ordinarily Resident Case II No liability No liability

4. What about Double Taxation Agreements (DTAs)?

The UK has entered into DTAs with most countries but the terms of these generally mean that, where a worker provides services in the UK, the UK retains its taxing rights over the deemed payment in respect of duties performed in the UK for the client.

There will be a few exceptions, such as where the work done in the UK is merely incidental to the work done abroad, or where the worker is a `short term business visitor' (i.e. in the UK for less than 60 days in a tax year where that period does not form part of a more substantial period where the worker is present in the UK).

5. International Case Studies

Case Study 1 - Worker resident in Ireland/working in UK

Ms A is resident in Ireland without also being resident in the UK. She provides her services through a service company also resident in Ireland. The services are provided to a UK resident client in the UK.

Tax

According to the Irish DTA, any emoluments paid in respect of duties performed in the UK will be chargeable to tax under Case II of Schedule E. The UK will retain taxing rights unless the merely incidental test or 60 day rule are satisfied.

NICs

As Ms A is an EC national and works in the UK for a UK client she is liable for UK NICs and there would be NICs liability under the service company legislation.

However, there is an EEC Council Regulation which allows a person to remain insured in Ireland for 12 months (with the possibility of a further 12-month extension) if he/she is a `posted worker'. The intermediary in Ireland can obtain a certificate form E101 from NICO International Services, and the person will not be liable for UK NICs. In this situation, the service company legislation would not apply for NICs purposes because the worker would not be an employed earner if engaged directly by the client.

Case Study 2 - Worker resident in France/working in UK

Mr B is resident in France and provides his services through a service company also resident in that country. The services are provided to a UK resident client in the UK.

Tax

The wording of the French DTA has the same effect as for Ireland.

NICs

The same EEC Council Regulations apply to all EEA countries including France so the situation will be the same as for Ireland.

Case Study 3 - Worker resident in Australia/working in UK

Mr C is resident in Australia and provides his services through a service company also resident in that country. The services are provided to a UK resident client in the UK.

Tax

The wording of the Australian DTA has the same effect as for Ireland.

NICs

There is no reciprocal agreement between the UK and Australia for NICs. If a worker is resident in Australia and provides his services to a client in the UK then contributions may not be payable for the first 52 weeks from the date of entry into the UK if the conditions of regulation 145(2) Social Security Contributions Regulations 2001 are satisfied.

If the worker is still engaged by the client in the UK after 52 weeks then there will be a NICs charge under the service company legislation on both the individual and the intermediary, from the end of this period.

Case Study 4 - Worker resident in UK/working in Ireland

Mr D is resident in the UK without also being resident in Ireland. He provides his services through a service company also resident in the UK. The services are provided to an Irish resident client in Ireland.

Tax

The DTA between the UK and Ireland will apply to a UK resident worker providing services to a client in Ireland in the same way as to an Irish resident worker providing services to a client in the UK.

The UK continues to have a right to tax the deemed payment because it is the country where the worker remains resident. However, Ireland may also tax a UK resident worker's remuneration derived from employment exercised in Ireland unless the relevant conditions in the DTA are satisfied. The extent to which the income falling within the service company legislation is also taxed in Ireland will depend on Irish domestic law.

Where the income of a UK resident worker in respect of duties performed for a client in Ireland is correctly taxed in both Ireland and the UK, then the UK, as the country where the worker is resident, will give credit for the Irish tax against the UK tax chargeable on the same income. Further information on this can be found on the Revenue website, IR35 section at FAQ (Foreign) Q.6.

NICs

A contract involving a worker living in the UK and an Irish client, under which he works in Ireland means he is liable to pay Irish social security contributions. He would not be an employed earner for the purposes of UK National Insurance legislation. Therefore the service company legislation would not apply for NICs purposes.

Under the short term posting exception a worker may continue to pay UK NICs where they are working through a service company in the UK which posts them overseas to work for a client in any country in the EEA for not more than 12 months. The intermediary obtains form E101 from NICO International Services. Under certain circumstances the 12-month period may be extended for a further 12 months and an E102 obtained. The intermediary can obtain form E101 from NICO International Services and the worker is classed as a posted worker. He would be regarded as an employed earner for the purposes of the UK National Insurance legislation by reason of the contractual arrangement between the intermediary, the worker and the client. However, the service company legislation does not apply because in deciding whether it applies you consider what the situation would have been if the intermediary had not been involved. In these circumstances the worker would not have been an employed earner of the client.

However, there is a further exception to this rule where a person is employed in two or more Member States. If so, they are subject to the legislation of the Member State in which they reside. So there would be a NICs liability under the service company legislation in these circumstances.

Case Study 5 - Worker resident in UK/working in France

Mrs E is resident in the UK without also being resident in France. She provides her services through a service company also resident in the UK. The services are provided to a French resident client in France.

Tax

The wording of the French DTA is the same as for Ireland so the same position will apply.

NICs

The same EEC Council Regulations apply to all EEA countries including France so the situation will be the same as for Ireland.

Case Study 6 - Worker resident in UK/working in Australia

Mr F is resident in the UK without also being resident in Australia. He provides his services through a service company also resident in the UK. The services are provided to an Australian resident client in Australia.

Tax

The wording of the Australian DTA has the same effect as that for Ireland.

NICs

There is no reciprocal agreement between the UK and Australia for NICs. A contract involving a worker living in the UK and a client in Australia under which services are provided in Australia would mean he would be liable to pay Australian social security contributions. He would not be an employed earner under UK National Insurance legislation. The service company legislation will not apply for NICs purposes. However, if the worker was resident and ordinarily resident in the UK immediately prior to the posting to Australia by the intermediary and the client had a place of business in the UK he would be treated as an employed earner for the first 52 weeks from the date of posting or the duration of the contract if earlier. There would be no NIC liability if the 52-week period ended before the 5th April in the year of assessment.

Case Study 7 - Worker resident in UK/working in USA

Mr G is resident in the UK without also being resident in the USA. He provides his services through a service company also resident in the UK. The services are provided to an American resident client in the USA.

Tax

The wording of the USA DTA has the same effect as that for Ireland.

NICs

A contract involving a worker living in the UK and a client in the USA under which he works in that country means he would be liable to pay US social security contributions. He would not be an employed earner under UK National Insurance legislation. The service company legislation will not apply for NICs purposes.

There is a reciprocal agreement (RA) between the UK and the USA for NICs. Within each RA a provision allows for a posted worker to remain insured in the UK for National Insurance purposes. Each RA sets out the time limit. For example, the time limit for the USA is 5 years.

The intermediary can obtain a certificate of continuing liability from NICO International Services. The worker on posting by the intermediary to the USA would be regarded as an employed earner under UK legislation by reason of the contractual arrangement between the intermediary, the worker and the client. However, the service company legislation will not apply because in deciding whether the legislation applies you consider what the situation would have been if the intermediary had not been involved.