When a UK company pays a genuinely self employed freelancer who lives and works abroad, there is usually no PAYE to run and no UK tax to deduct from fees for services. The obligations that do arise are narrower: the company normally accounts for VAT on the services under the reverse charge, deducts tax if the payment is really a royalty, a UK performance fee or UK construction work, and checks that the arrangement does not give it a taxable presence in the contractor’s country.

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Does PAYE apply to a contractor who lives abroad?

PAYE only applies to employees, so the first question is status. The usual tests of control, substitution and mutuality apply wherever the person lives; see employment status tests. A freelancer who works for several clients, sets their own methods and invoices for deliverables is likely to be self employed, and the company simply pays the invoice.

Even if the person would be an employee, UK income tax reaches only so far. For a tax year in which an employee is not UK resident, section 27 of the Income Tax (Earnings and Pensions) Act 2003 charges general earnings for duties performed in the UK. Earnings for work done entirely abroad by a non resident fall outside that charge. The contractor’s own country may still tax the income, and it may have its own rules on employment and social security that a UK adviser cannot settle.

Do the off payroll working rules apply?

Usually not for work done abroad. HMRC’s Employment Status Manual says a worker who is not UK resident and performs the work outside the UK is unlikely to be within the charge to UK tax or National Insurance, and if they are not chargeable the off payroll working rules do not apply (ESM10025). Where the contractor’s company is registered abroad, that fact alone makes no difference; HMRC says the residence of the worker’s intermediary does not need to be considered.

The position changes if the contractor comes to the UK to work. A worker carrying out duties in the UK for an end client will normally fall within the UK charge to tax and within the off payroll rules, subject to limited exceptions for short visits. If the client is a medium or large organisation it must then issue a status determination statement and, if the engagement is inside the rules, the fee payer operates PAYE (ESM10025). A worker holding a certificate of continuing liability such as an A1 pays social security at home and is exempt from UK National Insurance. See IR35 and the off payroll rules.

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Do you need to withhold UK tax from the payment?

UK deduction duties attach to particular types of payment rather than to payments abroad generally. The ones that most often catch businesses paying overseas freelancers are:

  • Royalties and payments for intellectual property. Section 906 of the Income Tax Act 2007 requires tax to be deducted at the basic rate, 20% for 2026 to 2027, from a royalty or other payment for the use of intellectual property where the owner’s usual place of abode is outside the UK and the payment is charged to income tax or corporation tax. A treaty may reduce the rate. A fee for designing a logo that the company will own outright is a payment for services; a licence fee for a font or photograph the freelancer keeps is a payment for the use of intellectual property. See withholding tax on interest and royalties.
  • Performers and sportspeople appearing in the UK. A payment to someone who does not live in the UK for an appearance or performance here must have tax deducted if it exceeds the personal allowance threshold (foreign entertainers withholding).
  • Construction work in the UK. A subcontractor based abroad who does construction work in the UK should still register for the Construction Industry Scheme, and a contractor paying them operates CIS in the normal way (Construction Industry Scheme).

How does VAT work on services from an overseas freelancer?

For most business to business services the place of supply is where the customer belongs, so services from an overseas freelancer to a UK company are supplied in the UK. The reverse charge applies where the supplier belongs outside the UK, the customer belongs in the UK and the supply is not exempt (VAT Notice 741A, paragraph 5.1). The company accounts for output tax in box 1 and the same amount as input tax in box 4, and puts the full value in boxes 6 and 7 (paragraph 5.2). For a fully taxable business the net cost is nil; a partly exempt business bears VAT on the services as if a UK supplier had charged it (paragraph 5.4). HMRC’s own example of a reverse charge supply is legal services bought from a French business (paragraph 5.6).

A company that is not VAT registered must add the value of these overseas services to its own taxable supplies when deciding whether it has passed the registration threshold, and can be required to register even with no sales of its own (paragraph 5.7). This catches start ups that spend heavily on overseas developers before trading. See reverse charge on services from abroad and the VAT registration threshold.

Could the contractor create a permanent establishment abroad?

This is the risk most often missed. Under double tax treaties based on the OECD model, a person acting on behalf of an enterprise can create a dependent agent permanent establishment in their country. Under the older wording the test is habitually exercising authority to conclude contracts in the enterprise’s name; the 2017 OECD wording, which UK domestic law follows for chargeable periods beginning on or after 1 January 2026, also covers habitually playing the principal role leading to contracts that are routinely concluded without material modification (INTM264510). An agent of independent status acting in the ordinary course of their own business does not create one. HMRC’s guidance on the OECD commentary points to whether the agent is free of detailed instructions, bears entrepreneurial risk and acts for several principals; dependency is more likely if the agent works wholly or almost wholly for one enterprise over a long period (INTM264530).

A freelance developer delivering code is unlikely to be a problem. A freelance “country manager” who negotiates and signs customer contracts for the company, works only for it and follows its instructions is a real risk. If a permanent establishment exists, the other country can tax the profits attributable to it. A UK resident company remains chargeable on all its profits wherever arising, subject to the foreign permanent establishments exemption (section 5 Corporation Tax Act 2009), so the result is either double tax relief or an election to exempt those profits. See permanent establishment risk from overseas staff.

Is the cost deductible?

Payments to overseas contractors are deductible in the same way as any other trading expense: section 54 of the Corporation Tax Act 2009 disallows only expenses not incurred wholly and exclusively for the trade. Keep the contract, invoices showing the supplier’s address and business status, and evidence of the work delivered, because these support both the deduction and the reverse charge treatment.

What does this look like in practice?

Illustration only. A VAT registered UK design agency pays a self employed illustrator in Spain £3,000 a month. No PAYE is due. Each month the agency records £600 output tax and £600 input tax under the reverse charge, a nil net cost. In one month it also pays £1,000 for a licence to use illustrations the illustrator keeps the rights to; that is a payment for intellectual property, so it considers section 906, applying the treaty rate if the conditions are met. The next year the illustrator spends three months working in the agency’s London studio; that UK work is likely to be within the UK charge to tax, so the agency checks its size and the off payroll rules before paying.

What mistakes come up most often?

  • Treating an overseas worker as self employed without testing status.
  • Forgetting the reverse charge, or forgetting that overseas services count towards the VAT registration threshold.
  • Paying licence fees for intellectual property gross without considering section 906.
  • Giving a freelance sales agent power to conclude contracts without considering permanent establishment risk.
  • Assuming the rules stay the same when the contractor starts working from the UK.

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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.