Using overseas contractors

Businesses using overseas contractors need to consider country-specific employment regulations and keep updated on any developments in employment law (eg the 2016 ruling that Uber drivers should be classed as 'workers' rather than 'self-employed contractors').

In the UK, there are important distinctions between employees, workers and self-employed contractors which determine the applicability of various employment laws (eg entitlement to minimum wage and holiday pay). Businesses wanting to use contractors in other countries need to be aware of how the different employment statuses are classified to avoid trampling on local employment laws.

Even if employment law issues do not arise, other disputes can crop up, and these can be more difficult to resolve due to differences in legislation between the contractor's country of residence and relevant UK regulations. There can also be a clash of business cultures (eg delays in work submission or payment being more acceptable in one country than another) which can lead to legal disputes. Further jurisdictional complications can arise if litigation ensues; namely determining which court (one in the UK or the contractor's country) should hear proceedings.

For more information on issues relating to the jurisdiction of a contract, read Jurisdiction and international contracts.

One of the most effective ways of minimising the possibility of disputes with overseas contractors is to ensure that everything is put in writing before the business relationship commences. A bespoke consultancy agreement or subcontracting agreement can be used to set out the expectations and responsibilities of both parties. As local employment laws vary and you should always Ask a lawyer for advice before using a written agreement with an overseas contractor, to ensure that it is valid in their specific country. It may sometimes be necessary for a local lawyer to convert the agreement into an appropriate form.

Using overseas contractors through a managed service company is another option. Rather than contracting directly with the individual, you will be contracting with the service company which handles any employment law issues at their end.

It's important to agree on payment terms and methods in advance. International payments will often incur extra expenses, both in terms of exchange rates and administration fees. Many overseas contractors will accept PayPal as an alternative to direct bank transfers - but cross-border charges are also levied, so ensure you check these.

If you intend to use a self-employed overseas contractor, there are generally no additional tax implications other than what there would be for using a UK-based counterpart. However, it can be tricky to establish the true employment status of an individual. To avoid doubt, it can be helpful to contract with them via an overseas services company that handles payment and administration. 

It is advisable to Ask a lawyer to assess your specific arrangements.

IR35  is a tax law introduced to tackle tax avoidance by workers ('consultants' or 'contractors') supplying their services to clients via an 'intermediary' who would otherwise be an employee. It applies when a consultant provides services to a business through a UK registered 'intermediary' (eg through a private limited company, known as a personal service company or 'PSC') but would be classed as an employee if contracted directly. A PSC is a type of intermediary that the consultant has a 'material interest' in (ie they’re the PSC director or control more than 5% of the ordinary share capital). 

Where the consultant does not provide their services through a PSC (ie they provide their services to the client directly as a sole trader), the client is still responsible for determining their employment status. This is because if a consultant is deemed an employee, the client may be held liable to HMRC for the misclassification.

Where IR35 applies, the fees paid by the client to the consultant are treated as employment income and subject to income tax and National Insurance Contributions ('NICs'). 

Where the contractor is both tax resident outside the UK and performing all their services outside the UK, there is generally no PAYE or NICs liability in respect of that individual. This means you would not typically need to carry out a status determination. If the contractor is tax resident outside the UK but performing their services in the UK, you will need to determine their employment status.

Similarly, where the consultant provides their services through a UK intermediary, you may need to determine the employment status of a consultant (depending on the size of your business). For more information, read IR35 status determination.