IR35 legislation for the private sector comes into force on 6th April 2020. However, overseas clients who do not have a presence in the UK are exempted from this legislation, and peers have warned that this exemption can be exploited. 

What is the loophole?

This exemption has come at the last moment as until recently, HMRC has stated that when a UK contractor or agency works for an overseas client with no presence in the UK, the IR35 legislation will still be in force and the client would have to determine whether the contractor falls inside or outside IR35. 

Many experts had contended that it would be difficult for HMRC to ensure compliance as it does not have a procedure in place to check this. 

However, it now appears that the new IR35 rules will not apply to contractors who work with wholly overseas clients. Under such circumstances, the contractor will have to apply the old IR35 rules. This fact has been welcomed by many. 

At the same time, some experts believe that at times, the client may not be completely overseas as they could have a permanent office or resident permit to stay in the UK.

In such cases, the new IR35 rules would be applicable and the client would have to decide whether the contractor falls inside or outside IR35 to make deductions for NIC and tax purposes. That again, will depend on the contractor’s residency status and domicile. 

The bottom line

Many contractors have thought about relocating their PSCs to another country. However, this will not prevent them from coming under the purview of the new IR35 legislation. 

On the other hand, if their client is completely based outside the UK and has no presence in the country, then it is a different ballgame altogether. 

Procurement experts are still trying to figure out how this loophole will affect procurement professionals and supply chains. 

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