Getting offshore hiring legally right: Why your Filipino team just became a £300k HMRC headache

Getting offshore hiring legally right: contracts, compliance and payroll

I learned the hard way that offshore hiring done cheaply comes back to bite you. Hard. The first time I set up a Manila team for a London fintech, I thought I was being clever by using simple freelance contracts. Our Filipino developers would invoice us monthly. Quick, cheap, easy. Right?

Six months later, an accountant pointed out we'd created what HMRC would consider a "permanent establishment" in the Philippines. The tax implications were horrendous. We were non-compliant with local employment law. And the supposed £150k savings we'd projected? Complete fiction once we factored in the compliance cleanup costs.

It's now 2026, and I wish I could say this sort of thing has disappeared. It hasn't. If anything, the post-Covid remote work revolution has made the mess worse, with more companies than ever hiring overseas with shockingly poor legal frameworks.

Let's talk about how to do this properly. Not the "corporate brochure" version. The actual nuts and bolts that nobody explains until you're already in trouble.

The three offshore hiring models that actually work

Let's cut through the consultant-speak. After nine years managing distributed teams across three continents, I've seen precisely three models that don't end in tears:

1. The entity approach (the long game)

Setting up your own legal entity in the target country is the gold standard. It's also expensive, slow, and complex. Last month, I watched a scale-up spend £85k just to establish their Manila office properly. But when you're planning to hire 20+ people in one location, it's ultimately worth it.

For this approach you need:

• A local legal entity (Ltd, Inc, whatever the equivalent is)
• Local payroll infrastructure
• In-country HR expertise (don't try to wing this)
• Local bank accounts
• Compliance with local employment law (which, trust me, is NOTHING like UK law)

The setup time? 3-6 months minimum in most countries. Budget £50-100k to do it right.

But one thing I've learned - if someone promises you they can set up your legal entity in a month for £5k, they're either delusional or lying. Run away.

2. The EOR approach (the middle ground)

Employer of Record services have exploded since 2023. They employ your chosen candidates through their existing legal infrastructure. You pay a markup (typically 15-30%), and they handle compliance, contracts, payroll, and benefits.

Some realities from someone who's used them extensively:

• They're not all created equal. The difference between the top-tier EORs and the cowboys is vast.
• They work brilliantly for hiring 1-15 people across multiple countries
• The best ones have actual feet on the ground in each country (not just paper entities)

I now use EORs almost exclusively for new market entry. The markup seems steep until you compare it with the true cost of DIY compliance failures.

And yes, I've had clients ask: "Can't we just start with contractor agreements and switch to an EOR later?"

Sure, if you enjoy tax investigations. The "contractor who's actually an employee" arrangement is the first thing authorities look for. In 2025 alone, I watched three UK companies get hit with six-figure penalties for this exact setup.

3. The legitimate contractor approach (the careful path)

Despite what I just said, there IS a legitimate way to use contractors. But it requires strict parameters:

• They must be genuine service providers with multiple clients
• They set their own hours and working methods
• They use their own equipment
• The relationship must be project-based, not ongoing employment
• They must not be economically dependent on your company

This works well for specialized talent you need intermittently. It's a nightmare for core team functions like customer support or development.

The biggest mistake? Writing a contractor agreement that specifies fixed hours, company equipment, and direct management. That's an employment contract in disguise, and tax authorities everywhere have gotten very good at spotting them.

The hidden compliance landmines nobody warns you about

Here are the three compliance issues that have cost my clients the most money and stress:

Tax residency and permanent establishment

Having people working for you in another country can create a "permanent establishment" - essentially a taxable presence. This can happen even without a formal office.

Signs you might be creating one:

• Your contractors regularly close deals or sign contracts
• You have multiple people working in the same location
• They represent your company to customers
• They have company business cards or email addresses

The consequences? Potentially owing corporate tax in that jurisdiction, plus penalties for late filing. I've seen bills exceeding £300k for companies who ignored this.

Mandatory benefits that aren't optional

Many countries have non-negotiable benefits that make UK statutory minimums look positively stingy.

In the Philippines, for example, every employee is legally entitled to a "13th month pay" - essentially an extra month's salary paid in December. Not a bonus. A legal requirement.

Most Western companies miss these country-specific requirements until it's too late. The EORs I mentioned handle this automatically, which is often worth their fee alone.

IP ownership gaps

This one's terrifying and under-discussed. Without proper contracts, the intellectual property your offshore team creates might not legally belong to your company.

I've watched a UK startup discover that their core product code - written by contractors in Eastern Europe - wasn't actually theirs under local IP law. The cleanup cost them over £200k and delayed their funding round by nine months.

Country-specific peculiarities worth knowing

Here are some key examples from countries where I've built teams:

Philippines

• Very formal employment contracts with specific language requirements
• Mandatory benefits include 13th month pay, rice allowance, and transportation allowances
• Extremely employee-friendly termination laws (you better have documentation)
• Tax-advantaged zones for certain industries (significant savings if set up correctly)

India

• Complex state-by-state employment regulations
• Provident Fund (PF) and Employee State Insurance (ESI) contributions are mandatory
• Extremely detailed employment documentation requirements
• Complex rules around termination and notice periods

Eastern Europe (Romania, Poland, Ukraine)

• Civil law contracts vs employment contracts (different tax treatments)
• Working time regulations that are strictly enforced
• Significant differences in contractor classification between countries
• VAT complications for cross-border services

Payroll: The part everyone underestimates

Paying people across borders is still shockingly difficult in 2026. Options include:

Local payroll providers

Works well if you have an entity, but requires ongoing management. Budget £300-600 per month for a small team.

Global payroll platforms

Good for multi-country operations, but they're aggregators of local providers, so quality varies widely by country.

Wise, Revolut, etc.

Cheap for transfers but not actual payroll solutions. They don't handle tax withholding, compliance reporting, or mandatory deductions. Using them as your entire payroll "system" is asking for trouble.

The biggest payroll headache remains currency fluctuations. I've had years where we budgeted for one exchange rate, then watched the pound drop 15% against the peso. Suddenly our "cost-effective" team wasn't so cost-effective.

The right approach depends on your scale

After building offshore teams for a decade, here's my advice:

• 1-5 people across multiple countries: Use a quality EOR
• 5-20 people in one country: EOR initially, then transition to your own entity
• 20+ people in one country: Set up your own entity from the start
• Occasional specialists: Genuine contractor relationships with bulletproof contracts

Whatever you do, please don't wing it. The days of "we'll figure it out later" are long gone. Tax authorities worldwide are specifically targeting cross-border employment arrangements.

And one final thought - the ROI of doing this right isn't just avoiding penalties. It's in the quality of talent you can attract. The best overseas professionals now expect proper employment setups, not dodgy "consultant" arrangements with monthly PayPal transfers.

Get the legal foundations right, and you can build something that actually lasts. Get them wrong, and you're building on sand.

Priya Nair has been building and managing distributed teams across the Philippines, India and Eastern Europe since 2017. She specialises in helping UK tech companies scale their engineering and support teams globally.