Will my UK-based client whose registered overseas decide my IR35 status?

Q. I am an IT contractor working through my own PSC. I am engaged directly by my client, that has a special status whereby it is based in London but operates outside of UK legislation, including tax and employment law. Permanent employees, for example, do not pay UK tax. The client’s position is that it’s not subject to the rules established by IR35, nor is it registered as a UK employer. On this basis, the client refuses to have any part in the determination of IR35 status. My understanding is such that if I were working through an agency or umbrella company the responsibility for IR35 determinations would fall to them. However, in this case, there is no third-party between my company and the client. 

Under the new legislation, from April 6th, I presumably cannot continue to assess my own IR35 status, while my client refuses to be involved. Where does the responsibility therefore lie for IR35 determinations?

A. Whether IR35 reform will apply to contractors working with companies registered overseas has been the subject of confusion for some time. 

This was cleared up to an extent last week in the Government’s response to the IR35 review, which explained that contractors working with “wholly overseas” companies would retain the right to determine their own IR35 status after 6th April, as stated here:

“The Government has listened to those concerns and will amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules.”

While the term “wholly overseas” has not yet been defined by the Government, given your client is based in London there is a possibility that the reform will apply to them, even though, as you mention, this business operates outside of UK legislation. However, if they do qualify as a “wholly overseas” firm then you will retain the right to assess your own IR35 status.

The full details of the “wholly overseas” element should be published in the final IR35 legislation, which is to be released on 11th March – at which point it will become clear if you or your client will be expected to determine IR35 status when reform is enforced.

However, whether your client accepts this responsibility or stops working with contractors due to the changes is another question entirely. 

Given there seems to be some uncertainty regarding the party that will administer IR35 status in your situation, our advice is to:

1. Work off the basis that IR35 reform will apply and that your client will be expected by HMRC to decide your tax status.
2. Contact your client immediately after the final legislation has been revealed when the “wholly overseas” aspect has been explained.
3. Explore ways to safeguard your status, including an IR35 contract review and working practices review, which you can then put to your client or use to set your own IR35 position (if you retain the right to do so).

With regards to the second part of your question, if you were to operate via an umbrella company, for example, the IR35 legislation will not apply. This is because you will be classed as an employee of the umbrella company. While this may be a viable option for you to continue working with this client, it is something they will need to accept given the costs involved.

This answer was provided by IR35 specialist, Qdos Contractor.