IR35 when your client is based overseas

Q: What does this look like in practice?

Illustration only. Priya is UK resident and works through her own limited company. For 2026 to 2027 she contracts directly with a German software business that has no UK company, branch, office or agent. She works from home in Bristol on the client's product team, joins its daily meetings, takes work from its sprint plan, uses its systems and could be moved to another product at the client's request. She cannot send anyone else and is paid a day rate. Chapter 10 does not apply, because the client had no UK connection immediately before 6 April 2026. Chapter 8 applies to the engagement, so Priya's company must decide status. On these facts the hypothetical direct contract looks like employment: personal service, a strong framework of control and no business risk. If the company receives £100,000 from the contract in the year, step 1 of the deemed payment calculation reduces this by 5% to £95,000. Salary already paid through payroll, allowable employment expenses and pension contributions are then deducted, and the employer National Insurance included in the balance is stripped out at the final step. Because Priya works in Great Britain, Class 1 National Insurance is due on the deemed payment as well as income tax. If she instead delivered a fixed price project to several overseas clients, chose her own methods, used her own equipment and could send a qualified associate whom her company paid, the picture would point away from employment.

IR35 still applies. The off payroll rules in Chapter 10 of Part 2 ITEPA 2003 only make a client decide status if it has a UK connection, so a client with no UK residence and no UK permanent establishment falls outside them. The engagement drops back into the original IR35 rules in Chapter 8, which put the status decision, and any tax and National Insurance, on the contractor’s own company.

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Why does an overseas client not issue a status determination?

Section 61K ITEPA 2003 says Chapter 10 applies where the services are provided to a public authority, or to a person who qualifies as medium or large and has a UK connection for the tax year. Size and connection are separate tests. A very large client with no UK connection is outside Chapter 10. Our guide to small clients and the off payroll rules covers the size test.

HMRC’s Employment Status Manual at ESM10006 says wholly overseas clients do not need to consider the off payroll working rules, the engagement is not within Chapter 10, and the worker’s intermediary must consider whether Chapter 8 applies. So the absence of a status determination statement from an overseas client is not a sign that the contract is outside IR35.

Why does Chapter 8 pick the engagement up?

Section 48(1) ITEPA 2003 says Chapter 8 has effect where services are provided through an intermediary to a person who is not a public authority and who either qualifies as small for a tax year or does not have a UK connection for a tax year. The two chapters fit together, so a private sector engagement sits under one or the other.

Under Chapter 8 the tests are the same as they always were. Section 49 asks whether, if the services had been provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client. Where the intermediary is a company, section 51 sets the conditions of liability, the usual one being that the worker has a material interest in it, which broadly means more than 5% of the ordinary share capital, distributions or assets on a winding up. A typical one person company meets that condition easily. The comparison with Chapter 10 is set out in our guide to Chapter 8 vs Chapter 10 IR35.

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What counts as a UK connection?

Section 60I ITEPA 2003 says a person has a UK connection for a tax year if, and only if, immediately before the start of that tax year it is resident in the UK or has a permanent establishment in the UK. Permanent establishment takes its meaning from the Corporation Tax Act 2010, applied as if references to a company were references to any person. HMRC’s guidance at ESM10006 explains that this includes a fixed place of business such as a branch, an office or a factory, and an agent who has and habitually exercises authority to do business on the client’s behalf.

Three practical points follow:

Your own company does not create the connection. ESM10006 states that where a worker provides services to an offshore client through a UK resident intermediary, that UK intermediary is not a permanent establishment of the offshore client for Chapter 10 purposes.
The test is fixed at the start of the year. Because section 60I looks at the position immediately before the tax year begins, a client that opens a UK office part way through 2026 to 2027 is still treated as having no UK connection for the rest of that year. If it is medium or large, Chapter 10 would apply from 2027 to 2028.
A UK branch changes everything. ESM10025 says that where an overseas client has a UK connection through a permanent establishment such as a branch, the overseas client must meet its Chapter 10 responsibilities, including issuing a status determination statement, and HMRC will pursue any unpaid tax through the UK permanent establishment.

How does the contractor’s company test status?

It applies the ordinary common law employment status tests to a hypothetical direct contract between the worker and the overseas client. Section 49(4) says the circumstances include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements. In practice that means looking at every contract in the chain, including any agency contract, and at how the work is actually done.

Two points from the case law are especially relevant:

The client is the end user. In Future Online Ltd v Foulds, summarised at ESM8035, the High Court rejected the argument that the client was the recruitment agency. The client is the person for whose business the worker’s services are actually provided. An overseas agency or a UK agency in the chain does not change who the client is.
Clauses that appear in only one contract may not survive. In Usetech Ltd v Young (ESM7270), a substitution clause in the contract between the service company and the agency was not reflected in the agency’s contract with the end client, and the High Court held that the hypothetical contract would not have contained one.

The key factors are the same as for a UK client: the client’s right of control over what, where, when and how the work is done, whether the worker must do it personally, mutuality of obligation and whether the worker is in business on their own account.

What tax and National Insurance is due if Chapter 8 applies?

The company is treated as paying the worker a deemed employment payment. Section 54 sets out the calculation, starting with the income from the relevant engagements reduced by 5%, and section 50(3) treats the payment as made at the end of the tax year unless an earlier event under section 57, such as the company ceasing to trade, brings it forward. GOV.UK guidance says the deemed employment payment should be reported on a Full Payment Submission on or before 5 April, with final figures allowed until the following 31 January if a provisional figure was reported and paid on time.

For income tax, the location of the client makes no difference. ESM8305 explains that the treatment depends on the residence status of the worker and where the duties are carried out, not on the residence of the client or the intermediary, and ESM10025 confirms that a UK resident is liable to tax on earnings wherever in the world they arise.

National Insurance can differ. ESM8110 explains that, for National Insurance, Chapter 8’s counterpart in the Social Security Contributions (Intermediaries) Regulations 2000 only bites if the worker would be an employed earner under the hypothetical contract, which the Social Security Contributions and Benefits Act 1992 defines by reference to being gainfully employed in Great Britain. Where the duties are performed abroad, HMRC’s guidance at ESM8115 to ESM8125 turns on where the client is and on any social security agreement. For example, ESM8120 says a UK based worker who goes to work for a client in the USA would be liable to US social security and the intermediaries legislation would not apply for National Insurance. A contractor who works from home in the UK for an overseas client is working in Great Britain, so that exception does not help them.

What does this look like in practice?

Illustration only. Priya is UK resident and works through her own limited company. For 2026 to 2027 she contracts directly with a German software business that has no UK company, branch, office or agent. She works from home in Bristol on the client’s product team, joins its daily meetings, takes work from its sprint plan, uses its systems and could be moved to another product at the client’s request. She cannot send anyone else and is paid a day rate.

Chapter 10 does not apply, because the client had no UK connection immediately before 6 April 2026.
Chapter 8 applies to the engagement, so Priya’s company must decide status.
On these facts the hypothetical direct contract looks like employment: personal service, a strong framework of control and no business risk.
If the company receives £100,000 from the contract in the year, step 1 of the deemed payment calculation reduces this by 5% to £95,000. Salary already paid through payroll, allowable employment expenses and pension contributions are then deducted, and the employer National Insurance included in the balance is stripped out at the final step.
Because Priya works in Great Britain, Class 1 National Insurance is due on the deemed payment as well as income tax.

If she instead delivered a fixed price project to several overseas clients, chose her own methods, used her own equipment and could send a qualified associate whom her company paid, the picture would point away from employment.

What mistakes do contractors make with overseas clients?

Treating the lack of a status determination statement as a finding that the contract is outside IR35.
Assuming a large overseas client must apply Chapter 10, when the UK connection test comes first.
Testing the contract with the agency rather than the end client.
Ignoring a client’s UK branch or office, which brings the engagement into Chapter 10 from the next tax year if the client is medium or large.
Keeping no record of the status review. If HMRC opens an IR35 enquiry, the company will need to show how it reached its view for each contract.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.