IR35 for the American contractor: who decides, and what it costs

The IR35 rules apply when you provide services through your own intermediary. That is usually a limited company, often called a personal service company. They then test whether the work is really employment.

The test looks through the company at the working relationship. If it looks like employment, the tax follows employment too.

Nothing about them prevents contracting through a company. They simply stop the company changing the tax on work that is really a job.

It depends on the client, and the IR35 rules split clients into groups. Public bodies and larger private clients decide for you. They must also issue a status determination statement, setting out their reasons.

Where the client is a small private company, the decision stays with your own intermediary. HMRC guidance on off-payroll working for clients explains which category applies.

So the IR35 rules can treat two of your contracts differently in the same year. Check who is responsible before you start each engagement.

Ask the question in writing at the start of an engagement. A short email saves a long dispute at the first invoice.

This is the case most transatlantic contractors are in, and it changes who decides. HMRC guidance on international issues confirms that a client based wholly overseas, with no UK connection, falls outside the off-payroll rules.

A UK connection means the client is resident here, or has a permanent establishment here. Where neither applies, HMRC's manual on international issues says your own intermediary must consider the older rules instead.

So a US client will not issue a determination, and nobody will do the analysis for you. The responsibility, and the risk, sit with your company.

Agencies can change the picture. Where a UK agency sits between you and the American client, check whether it has a UK connection of its own.

How the work happens in practice, rather than the words in the contract. Three themes matter most. Who controls the work, whether you must do it yourself, and whether each side must offer and accept more work.

Other factors matter too. They include financial risk, your own equipment, and whether you look like part of the client's team.

HMRC's check employment status for tax tool walks through the questions. Keep the output and the contract together.

Write down how the work will run before you start. Memory fades, and a short note made early is worth more than a long argument later.

Broadly, the tax follows employment rather than the company. Where the client decides, the fee payer takes tax and National Insurance off before paying your company. So the money arriving is much lower than the invoice.

Where your own company is responsible, it works out a deemed employment payment and pays the tax on it. That leaves considerably less to take as dividends.

Either way, the commercial rate needs to reflect the outcome. In our practice we see contractors discover the difference after signing, when the rate is already fixed.

Not at all on the British side. The IR35 rules look at the working relationship. Citizenship and residence play no part in whether an engagement sits inside or outside them.

What changes is everything sitting behind it. A US citizen running a British company has American reporting on that company as well as the British analysis.

So the same determination produces more work for an American contractor than for a British one. That is a reason to settle status early, not a reason to avoid contracting.

It sees a foreign corporation that you control, which brings its own annual reporting. That usually includes Form 5471, which US officers, directors and shareholders of certain foreign corporations file.

Profits left in the company can also be taxed in America before you draw them. A regime brought in during 2017, and renamed for years from 2026, can tax certain company income in your hands.

Elections can change that treatment, and they need advice on your own numbers. What you should not do is assume an undrawn profit is invisible.

They change what you keep from the same headline rate. Inside the rules, tax and National Insurance come off before the money reaches your company. Outside them, you pay tax on salary and profits in the normal way.

So a rate that works outside can be poor value inside. Many contractors quote two rates for that reason.

Ask who will decide status before you quote. It is a fair question, and most clients expect it now.

Employer costs matter inside the rules too. They come out of the fee before your company sees it, so factor them into any inside quote.

Often, yes, and that surprises contractors who expect a company to be the default. As a sole trader there is no foreign corporation, so the American side is a Schedule C rather than company reporting.

The off-payroll rules also fall away, since they only apply where you work through an intermediary. Ordinary employment status questions can still arise with the client.

Our guide to registering for Self Assessment covers that route. Many clients accept either structure once you explain the reason.

Some clients insist on a company for their own reasons. Ask early, because it affects which route is open to you.

One system should cover you, not both, and a certificate settles which. Where British National Insurance applies, a certificate of coverage keeps US Social Security and self-employment tax out of the picture.

Our guides to National Insurance for Americans and the totalization agreement cover how that works.

Inside the off-payroll rules, contributions usually come through payroll on the deemed payment. Outside them, they follow the salary and profits your company actually pays.

Keep the paperwork that shows how the engagement really worked day to day. A contract on its own is weak evidence, because the IR35 rules look at practice rather than at careful drafting.

Useful items include the status tool output, emails showing you controlled your own methods, evidence of working for other clients, and anything showing you carried financial risk.

Review each engagement separately. A contractor can sit outside on one contract and inside on the next without changing anything about their company.

Clients that must decide also have to consider a challenge. The IR35 rules give you a route to ask the client to review its decision. The client then has to reply within a set period.

Raise it early, in writing, with the facts rather than the conclusion. A calm description of how the work actually runs is far more persuasive than an assertion.

Take advice before a big engagement starts if the sums are significant. Fixing a rate afterwards is much harder than agreeing one that reflects the position.

Keep the company paperwork and the engagement paperwork apart, because they answer different questions. Company records cover accounts, payroll and dividends, while engagement records cover each contract and how it ran.

Both feed the American return as well. Your company accounts sit behind the reporting on a foreign corporation, so tidy records save real money there.

Keep everything for at least as long as each country requires. The two periods differ, so use the longer one.

Run this before signing each contract. It takes an hour and prices the engagement properly.

Repeat it for every client, since the answer is per engagement rather than per contractor.

Take an illustrative example: an American developer in Manchester contracts through her own limited company for a software firm in Boston with no British presence.

Because the client is wholly overseas, no determination arrives. Her company must consider the older rules itself, so she documents how the work runs and keeps the status tool output.

On the American side, her company is a foreign corporation, which brings its own annual reporting. She takes advice once, at setup, and the position stays stable afterwards.

Her British colleague in the same role has none of that second layer. Same contract, same day rate, and a noticeably lighter year end.

The first is assuming an overseas client means no British analysis. It means nobody else does the analysis, which is a larger responsibility rather than a smaller one.

The second is relying on contract wording. HMRC looks at how the engagement operates, so a well-drafted clause that nobody follows helps very little.

The third is ignoring the American side of a British company. The company reporting arrives whether or not you take money out.

The fourth is treating one determination as permanent. Status is judged per engagement, so each new contract deserves its own look.

We review engagements and structures through our UK Self Assessment service, alongside the American reporting your company creates. Where a sole trade would be simpler, we say so plainly.

If you contract for a US client from Britain, send us a contract and a description of the work and we will set out both sides at a fixed fee agreed first. This article is general information, not personal tax advice; take advice on your own facts from a qualified adviser.