Does IR35 Apply When Working Abroad?

There are a number of contractors who either routinely or infrequently travel outside of this country to carry out their services for end clients. Once outside these shores then do the IR35 rules apply to an overseas contract? Well the answer is yes and no!

For NIC purposes, where a worker provides their services to the client abroad, IR35 may not apply. IR35 will only apply for the purposes of NIC, where a contractor would be regarded for the purposes of Parts I – V of the Social Security Contributions and Benefits Act 1992 as employed in employed earner's employment by the client, had the arrangements taken the form of a contract between the worker and the client.

The definition of “employed earner” is in section 2(1)(a) of the Social Security Contributions and Benefits Act 1992 as “a person who is gainfully employed in Great Britain either under a contract of service, or in a office (including elective office) with general earnings”.

Only if the contract between the freelancer and client would result in the worker being an employed earner under this definition will the IR35 legislation bite for NIC purposes. However, where the duties are to be performed with an overseas client there are exceptions to this general rule depending on where the client is based.
 

Working in the European Economic Area (EEA)

Any person employed in the territory of one Member State of the EEA is subject to the legislation of that state even if they reside in the territory of another state or the registered office or place of business is situated in the territory of another state.

Example:
A contract involving a freelancer working in the UK and a French client, under which the freelancer works in France would mean they would be liable to pay French social security contributions. They would not be an employed earner for the purposes of UK national insurance legislation and therefore IR35 would not apply.

There are two exceptions to this rule. One does not affect the above example but the other is where a person is employed in two Member States. In this situation, they are subject to the legislation of the Member State in which they reside.

Example:
A contract between a worker living in the UK and a French client to work in both the UK and France will mean they are still liable to pay UK NIC's. They would therefore be an employed earner for the purposes of UK NIC legislation and IR35 may apply.

Working in a country with a Reciprocal Agreement (RA) with the UK

Under a RA with a country outside the EEA, a contractor will pay social security contributions in the country where they are working. The UK has entered into 19 such agreements.

Example:
A contract involving a freelancer in the UK and a USA client under which they work in US means that they would be liable to pay US social security contributions. They would not be an employed earner under UK national insurance legislation and IR35 will not apply for NIC purposes.

Rest of the world

A worker will pay social security contributions under the legislation of the country they are working.

Example:
A contract involving a worker living in the UK and a client in Angola under which services are provided in Angola would mean that the contractor would be liable to pay Angolan social security contributions. They would not be an employed earner under UK national insurance legislation and IR35 would not apply for NIC purposes.

There are exceptions to the above which are beyond the scope of this article.

It must be noted that whilst the NIC element of the IR35 legislation may or may not apply, the tax position is not affected by the location in which the services are performed,