Offshore Employment Intermediaries Legislation.
What is it and how will it affect contractors?
During the 2013 budget the UK government announced that they would be consulting on making changes to the regulations on Offshore Employment Intermediaries in order to put up more of a deterrent against NIC and PAYE avoidance schemes. HMRC was investigating various schemes that attempted avoidance using offshore intermediaries and which were mostly trying to avoid secondary employer Class One NIC’s. HMRC had these schemes in their sites, believing them to be at heart deeply flawed and problematic. However, it also acknowledged that this was an extremely complex area of regulation and that it would be simpler to reform the rules on enforcement whilst making sure they did not put extra burden on businesses.
The result of this was Offshore Intermediaries Legislation that came into force in April 2014. This new legislation basically reinforced the rules regarding host businesses or agencies in the UK and their dealings with offshore intermediaries. Under these new rules, any UK based agency that supplies any UK domiciled workers to a UK work site will be required to fully account for the UK PAYE and NIC’s for their workers, irrespective of whether they came through an offshore intermediary or not. HMRC were keen to stress that although the rules had been strengthened, any host businesses who were compliant and properly deducting NIC’s and PAYE wouldn’t notice any changes. The only difference would be in cases where NIC and PAYE hadn’t been deducted – it would now be easier to get to the truth of such cases.
With regards to the legislation itself, the UK government published National Insurance Regulations that covered Offshore Intermediaries via The Social Security (Categorisation of Earners) (Contributions) (Amendment) Regulations 2014 and also covered the UKCS (UK Continental Shelf) via the The Social Security (Contributions) (Amendment No. 2) Regulations 2014.
The UK Continental Shelf UKCS
The Social Security (Categorisation of Earners) (Contributions) (Amendment) Regulations introduced new and specific rules so that in cases where a person is employed under the UKCS as part of the oil and gas industry via an onshore employer:
(a) if that offshore employer has some sort of onshore associate company then that associate company will be responsible for sorting out the NIC and PAYE, including any secondary “employer” NIC’s.
(b) should there not be any onshore associate company, then the oil and gas field licensee will be held responsible for sorting out NIC and PAYE including any secondary “employer” NIC’s.
HMRC has simultaneously introduced a certification system by which licensees can get exemption. They will be given a certificate that shows the offshore employer has met and continues to meet all NIC and PAYE obligations (including those secondary employer NIC’s.
Offshore employment intermediaries legislation
The Social Security (Categorisation of Earners) (Contributions) (Amendment) Regulations 2014 have essentially strengthened the rules in cases in which a UK host business or agency is involved. As mentioned above, any compliant UK Host businesses that are deducting their NIC’s and PAYE shouldn’t encounter any changes – it is only those cases where deductions have not been made that the new rules become relevant. What have really changed are the regulations covering the situations in which employees are taken on, through offshore intermediaries. These new rules are as follows:
(a) If a UK agency is involved somewhere in the chain of contracts then that UK agency will be held responsible for organising and deducting the NIC’s and PAYE.
(b) In cases where there might be more than one agency (UK based) in the chain of contracts then the UK agency that deals with the end client will be deemed to be the one held responsible for sorting out the NIC’s and PAYE.
(c) If there are no UK agencies whatsoever in the contracting chain then the client who the employed contractor is working for becomes the person responsible for NIC’s and PAYE.
(d) A further rule applies secondary NIC obligations to UK agencies involved in providing workers overseas so that those workers are Class 1 NI when abroad. Under the new legislation the rules are simplified for agencies so that workers are subject to Class 1 NI and PAYE when working via an agency and when that worker provides services to a client or there exists a contract between client and agency resulting in services provided to the client or the client pays consideration for those services.
It is clear from a brief read through of these rules that the major impact of the legislation will be on agencies.
How The New Rules Affect Agencies
The arrival of two new areas of legislation – ‘Offshore Employment Intermediaries’ and ‘Onshore Employment Intermediaries: False Self-Employment’ – were part of a raft of measures by the government to crack down on schemes in which offshore employers avoided paying their NIC’s and PAYE when it came to temporary workers and onshore intermediaries avoided similar payments by employing temporary workers on a bogus self-employment classification. The combined effects of these dual strands of new regulation, however, is that there are some drastic changes as to how much agencies are required to report. As of April 2015 any agencies who contract with the hirer directly must provide a quarterly report to HMRC detailing all the gross payments made within their supply chain. Within this report they must include the following details:
- NI number
- date of birth
- passport or ID card number (if not from UK)
- reason(s) why income tax and NIC’s have not been deducted by the employment intermediary
- name and address of businesses supplying workers to the employment businesses
The combined effects of all this legislation and all these new requirements on agencies and RPO’s that provide temporary workers is as follows:
(a) The agency or RPO that directly contracts with the end hirer is now liable for any resulting unpaid NIC’s or PAYE for each and every self-employed worker in that supply chain, irrespective of which service provider or intermediary it is that pays them.
(b) The agency must prove self-employment using the usual criteria that the worker wasn’t subject to control, direction and supervision. If the agency cannot provide sufficient evidence then they will be held liable for the amount of tax and NIC’s that would have resulted from the worker being employed by them under PAYE. In other words there are serious financial implications for agencies.
(c) No legal defence is possible other than in situations where fraud occurred.
(d) Anyone trying to circumvent the rules will face Targeted anti-avoidance (TAAR) provisions.
(e) HMRC can pass on any unpaid NIC’s or tax to the agency’s directors, holding them personally liable.
(f) If an offshore intermediary is used it will need to be proved that the right amount of PAYE tax and NIC’s have been paid for each and every temporary worker.
How The Rules Affect Contractors
Clearly the main burden of the legislation lies with recruitment agencies and this has received much attention in contracting circles over the last few months. However, something that has not been so widely reported is that HMRC have been focusing on identifying those contractors who used such schemes over the previous few years and then subjecting them to rigorous investigations. Contractors should bear this in mind when looking at any similar schemes and planning their tax management.
For many contractors it is easy to see why offshore payment intermediaries look attractive, especially when they promise income retention of 90-95%. Bur as with all things in life, your gut feeling when you read it will inevitably be that it has got to be too good to be true. And it is. These intermediaries will be based offshore in one of the world’s many tax havens and will be outside of the tax law of the United Kingdom (as well as being outside the tax law of most countries.) Such schemes have therefore traditionally been difficult for HMRC to police. However, HMRC has announced recently that they will be investigating the details of any contractors who used these schemes between 2008 to 2011 – in other words, the taxman always catches up to you in the end. HMRC have contacted more than 16,000 freelancers and contractors who they think owe them money.
The point is that HMRC has clearly decided they are no longer willing to accept any instance of this particular type of tax avoidance and the offshore self-employment intermediaries legislation is an example of the direct action they are now taking. This legislation is targeted at recruitment agencies but make no mistake, non-compliant contractors are the ultimate target. For anyone not working through an umbrella company it is time to make some decisions about their tax planning in the years ahead.
Main Areas of compliance for Umbrellas