Quick Summary: IR35 for Foreign Employers
If your company is based outside the UK and you engage contractors there through their own limited companies, IR35 is the legislation that decides whether those contractors should be taxed as employees.
Getting the classification wrong puts the tax liability on you, not the contractor, and HMRC can pursue that liability even if your company has no UK headquarters.
What IR35 Actually Is
IR35 is the informal name for the UK’s off-payroll working rules, codified in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
The legislation targets what HMRC calls “disguised employment”: a situation where an individual works like an employee but channels payments through their own limited company, known as a personal service company (PSC), to pay lower tax than a direct hire would.
The rules require that where a contractor would have been an employee if engaged directly, they must pay broadly the same income tax and National Insurance Contributions (NICs) as an employee.
Since April 2021, the responsibility for making that determination shifted from the contractor to the client organisation in most cases, and that change is what makes IR35 directly relevant to foreign employers.
Does IR35 Apply to Your Company?
The starting point is whether your organisation has a UK connection. Under Chapter 10 of ITEPA 2003, the off-payroll working rules only apply where the client is UK-resident or has a permanent establishment in the UK, such as a registered branch, an office, or a fixed place of business.
If your company is wholly overseas with no UK presence whatsoever, Chapter 10 does not apply to you. The determination responsibility falls back on the contractor’s PSC under the older Chapter 8 rules.
However, if your company has any UK office or branch, even one that doesn’t directly manage the contractor, HMRC considers you to have a UK connection, and Chapter 10 applies to all contractor engagements you run from that entity.
The HMRC off-payroll working flowchart for clients sets out this test explicitly. The first question it asks is whether you have a UK connection; if the answer is no, the rules do not apply. If yes, company size then determines your specific obligations.
UK Connection Test: Who Holds IR35 Liability?
The Remote Contractor Scenario
A common situation for foreign employers is engaging a UK-based contractor who works entirely remotely from the UK, servicing a client headquartered abroad. The key variable here is the contractor’s tax residency, not yours.
If the contractor is UK tax resident, they are subject to UK income tax on their worldwide income. If your company has a UK connection, the Chapter 10 rules apply and you must assess their IR35 status.
If your company is wholly overseas with no UK presence, the contractor’s PSC still needs to assess its own status under Chapter 8, HMRC confirmed this in its historical FAQ guidance on offshore PSCs.
Where a contractor is not UK tax resident and performs their work entirely outside the UK, IR35 generally does not apply. As Grant Thornton’s international contractor guidance states, if a contractor based overseas never sets foot in the UK, it is reasonable to conclude they are outside the scope of UK income tax and NICs, and no status assessment is required.
The contractor’s location, residency, and where the work is physically performed all matter.
Company Size: Why the Thresholds Changed in April 2025
IR35 client obligations split along company size. Small clients in the private sector are exempt from the off-payroll working rules entirely; the contractor’s PSC retains responsibility for its own IR35 determination.
From 6 April 2025, the size thresholds increased. A company is now classed as small if it meets at least two of these three conditions in its most recent financial year:
- Annual turnover of £15 million or less (raised from £10.2 million)
- Balance sheet total of £7.5 million or less (raised from £5.1 million)
- No more than 50 employees (unchanged)
Because IR35 assessments use the previous financial year’s accounts, many organisations only started benefiting from the new thresholds for engagements beginning in the 2026/27 tax year. If your company now qualifies as small under these updated figures, contractors you engage determine their own IR35 status.
Medium and large clients, and all public sector bodies regardless of size, must follow the full off-payroll regime.
IR35 Legislative Timeline
The Three Tests HMRC Uses to Determine Status
When assessing whether a contractor falls inside or outside IR35, HMRC looks at three core factors. These apply regardless of what the contract says: what matters is how the working relationship operates in practice.
Control. Who decides what work is done, how it is done, when, and where? A contractor who operates under close day-to-day supervision from your managers, attending standups, following internal processes, working set hours, looks more like an employee.
A contractor who delivers an agreed output with autonomy over method and schedule looks more like a genuine business.
Right of substitution. Can the contractor send a qualified replacement to carry out the work if they are unavailable? If your engagement is with the specific individual rather than the service they deliver, that points toward employment.
A genuine right of substitution, one that is contractual and practically exercisable, supports outside IR35.
Mutuality of obligation. Is there an expectation on both sides that work will continue after the current project? Employment relationships tend to carry an ongoing obligation: you offer work, they accept it.
A genuine contractor engagement ends when the project does, with no assumption of continuity on either side.
HMRC’s Check Employment Status for Tax (CEST) tool can be used to run a preliminary assessment. It is not infallible, HMRC’s own investigations have found cases where CEST output conflicted with the actual working relationship, but it provides a documented starting point.
The Status Determination Statement: What You Must Produce
If your organisation falls under Chapter 10 (UK connection, medium or large), you must issue a Status Determination Statement (SDS) for every contractor engagement before work begins. The SDS is the formal record of your IR35 decision.
A valid SDS must do three things: state clearly whether the engagement is inside or outside IR35, give the reasons for that conclusion, and demonstrate that you reached the decision with reasonable care.
An SDS that simply states “outside IR35” with no reasoning is not valid in HMRC’s eyes, and the tax liability reverts to you as client even if an agency sits between you and the contractor. The SDS must be passed to the contractor and to every party in the supply chain down to the fee-payer.
Contractors have a legal right to dispute an SDS. You must have a disagreement process in place and must respond to any challenge within 45 calendar days.
Failing to respond within that window means HMRC may treat you as the deemed employer for PAYE purposes, regardless of whether your original determination was reasonable. Read HMRC’s client responsibilities guidance for the full requirements.
What an Inside IR35 Determination Costs
When a contractor engagement is inside IR35, the deemed employer, usually the agency paying the contractor’s PSC, or you directly if there is no agency, must deduct income tax and employee NICs from the payment before it reaches the contractor. On top of that, employer NICs are due at 15% from April 2025 (raised from 13.8%).
These employer NICs cannot legally be deducted from the contractor’s agreed rate; they are an additional cost on the fee-payer.
In practice, many clients factor employer NICs into their rate negotiations for inside IR35 roles. This is why contractors consistently report lower effective earnings on inside IR35 engagements compared to outside IR35, and why the tax cost of an inside determination can be 20% to 30% higher than engaging an outside IR35 contractor at the same day rate.
The April 2024 offset rule reduces the double-taxation risk: if HMRC successfully challenges an outside determination and assesses the fee-payer for PAYE, it must credit any tax the contractor’s PSC already paid against that liability.
HMRC Penalty Schedule for IR35 Non-Compliance
| Behaviour | Penalty | Lookback period |
|---|---|---|
| Careless misclassification (did not know, no reasonable care taken) | 30% of unpaid tax | 6 years |
| Knew status was wrong, chose not to act | 70% of unpaid tax | 6 years |
| Deliberate concealment of employment status | 100% of unpaid tax | Up to 20 years |
How EOR Providers Handle IR35 for Foreign Employers
For a foreign company hiring in the UK, using an Employer of Record is often the most straightforward way to avoid IR35 exposure entirely. An EOR becomes the legal employer of the UK worker, running payroll through HMRC’s Real Time Information (RTI) system, handling PAYE and NICs, and taking on the compliance obligations that would otherwise fall on you.
This matters most when your company does have a UK connection and the workers you need are better suited to employment contracts than contractor arrangements. If you are hiring full-time or long-term roles, an EOR eliminates the need to assess IR35 status at all: the worker is directly employed by the EOR, so the off-payroll rules simply do not apply.
You retain day-to-day management of the worker’s output; the EOR handles the legal and tax relationship.
For foreign companies still wishing to engage genuine independent contractors in the UK without an EOR, proper IR35 compliance is unavoidable if your company has a UK connection and meets the medium or large threshold.
See the UK EOR rankings on EmployerRecords for independently assessed providers covering IR35 compliance depth.
Frequently Asked Questions
Does IR35 apply to a foreign company with no UK office?
If your company is wholly overseas with no UK permanent establishment, Chapter 10 of ITEPA 2003 does not apply to you. The contractor’s PSC determines its own IR35 status under the older Chapter 8 rules. That changes the moment your company opens any UK office or branch: at that point, you acquire a UK connection and the off-payroll working rules apply to all contractor engagements you run.
Who is responsible for the IR35 status determination?
For medium and large clients with a UK connection, the end client makes the determination and issues the SDS. For small clients, the contractor’s PSC determines its own status. From April 2025, the small company thresholds are turnover under £15m, balance sheet under £7.5m, and fewer than 50 employees — meeting two of the three qualifies.
What happens if we get an IR35 determination wrong?
The fee-payer owes the unpaid income tax and NICs, plus interest from the date they should have been paid. Penalties run from 30% of the unpaid tax for careless misclassification up to 100% for deliberate concealment. HMRC can investigate up to six years back in standard cases and up to 20 years where fraud is suspected. The April 2024 offset rule reduces the net liability by crediting tax the contractor’s PSC already paid, but it does not eliminate the penalty exposure.
Does IR35 apply to a UK contractor working remotely for an overseas client?
It depends on whether your company has a UK connection. If you have a UK office or branch, Chapter 10 applies and you must assess the contractor’s status. If you are wholly overseas, the contractor’s PSC handles its own assessment under Chapter 8. The contractor’s UK tax residency is the key factor: UK-resident contractors are subject to UK income tax on their worldwide income regardless of where their client is headquartered.
What must a Status Determination Statement include?
A valid SDS must state clearly whether the engagement is inside or outside IR35, give specific reasons for that conclusion, and show that the determination was reached with reasonable care. It must be issued to the contractor and the fee-payer before the engagement begins. An SDS that states a conclusion with no reasoning is not valid; HMRC treats it as if no SDS was issued, leaving the client as the deemed employer for PAYE.
Can we avoid IR35 by using an Employer of Record?
Yes. An EOR directly employs the worker under a UK employment contract, processes payroll through HMRC’s Real Time Information system, and holds the legal employer obligations. Because the worker is employed rather than a contractor operating through a PSC, the off-payroll working rules do not apply. This is the simplest compliance path for foreign companies hiring permanent or long-term roles in the UK.
