VFD inside or outside the control box?

[Muzzer]

On a safety note: The output of your VFD is at potentially lethal voltages and is isolated from the mains input so you get no protection from an RCD or other 'safety switch' on your mains supply. Make sure the spindle body is well earthed and use insulating sleeving over each connection inside the plug (this will help prevent you detonating your VFD as well). Recent spindles from Huan Yang have the body earthed via a fourth pin on the socket, but earlier versions had only 3 pins or the fourth pin was not connected.

Kit

I'm afraid that's incorrect. VFDs do NOT isolate the motor (output) side from the mains. So the RCD would provide some degree of protection. So, you should consider the motor phase connections to be at mains potential (which they are) and use appropriate insulation / creepage and clearance distances. A good quality VFD should tolerate a phase to ground short circuit without "detonating". I speak as an engineer who has developed VFDs throughout my career.

There are some high end industrial installations where the entire VFD high voltage circuit (AC and output) is isolated from ground by means of a dedicated power transformer ("normal" mains is grounded on the neutral side). This is to allow a single fault (phase to ground) to exist without the whole system crashing immediately. These are used in factories such as paper and steel mills where loss of one VFD in a series of interconnected VFDs could be catastrophic. I doubt any of us will ever see such a system.