With the increasing prevalence of low-cost outsourcing websites, SMEs and freelancers alike need to wise up to the tax implications of subcontracting work to individuals and businesses abroad.

If you run a UK business and hire a freelancer or subcontractor based overseas, the tax treatment will depend on factors including where the contractor is based, the type of work they provide, and whether they’re genuinely self-employed. It’s also important to consider VAT, as different rules can apply when you buy services from a supplier outside the UK.

It’s crucial when subcontracting out abroad that you research the country’s rules of business engagement, and whether their tax laws are surplus to our own. We’d encourage seeking advice from your accountant on the specific country you’ll be outsourcing your work to.

Personal tax and employment

Generally, when subcontracting to a foreign contractor, personal tax liabilities will be their responsibility and are separate to your company’s tax obligations.

However, it’s important to make sure the person you’re hiring is genuinely self-employed. Employment status depends on the actual working relationship, rather than simply what the contract calls them. For example, factors such as whether they work under your supervision, invoice you for their services and are responsible for their own tax can help determine their status. If the contractor should actually be treated as an employee, different tax and payroll responsibilities may apply.

Once you've got an earnings figure, why not generate an estimate for the tax you'll pay using our personal income tax calculator? Keeping all of your figures documented will enable you to follow our simple step-by-step guide to filing your tax return.

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Simple VAT

If you’re a UK business buying services from a supplier outside the UK, you may need to account for VAT using the reverse charge. This means you calculate the VAT yourself and include it on your VAT Return as if you had supplied the service yourself.

If you’re entitled to reclaim the VAT in full, the output VAT and input VAT will generally cancel each other out. However, the transaction still needs to be recorded correctly. For example, if your UK business buys £1,000 of eligible services from an overseas contractor, you may need to account for UK VAT on that £1,000 under the reverse charge. If you can reclaim the VAT in full, there will generally be no net VAT cost.

The reverse charge applies to most B2B services supplied by overseas businesses, but there are exceptions, so the exact VAT treatment depends on the service being provided.

If you’re using the VAT Flat Rate Scheme, the reverse charge can affect how much VAT you pay, so it’s worth checking the treatment of overseas services rather than assuming the VAT will cancel out.

Can I claim payments to an overseas subcontractor as a business expense?

VAT isn't the only tax consideration. You’ll also need to consider whether payments to an overseas subcontractor are an allowable business expense.

Generally, payments to a subcontractor can be claimed as a business expense when they are incurred wholly and exclusively for the purposes of the business and meet the normal rules for allowable expenses. Keep invoices and other records showing what the work was, who provided it, and how much was paid.

Speak to an accounting expert

If you’re not sure about subcontracting outside the UK, it’s always worth speaking to an expert. They can help you understand the tax, VAT, and employment considerations that apply to your circumstances. That way you always know what you need to do before you start working with an overseas subcontractor.