UK: Consultation Targets Offshore Employment Intermediaries - Legislation Will Impact All Secondments
In its latest effort to tackle areas of the tax system where avoidance behavior is widespread, the UK government has turned its attention to the use of offshore employment intermediaries. After an HMRC review of these employment structures launched last year, the Government announced in Budget 2013 that it would be looking to strengthen its legislation in respect of offshore employment intermediaries.
On May 30, 2013, the Government published a consultation document on the use of these employment structures which have, in some industries, been increasingly used as a way to avoid paying employment taxes including National Insurance for their UK-based workers:
“A growing number of businesses are setting up outside the UK with the primary purpose of avoiding employment taxes. These businesses are located offshore but supply workers based in the UK to UK based businesses. Usually these workers are not internationally mobile but are UK residents, UK domiciled and only work in the UK. The existing legislation has been exploited, particularly in certain sectors, allowing companies who are willing to set up offshore arrangements to gain a competitive advantage over those businesses who play by the rules. This has led in some cases to other businesses in these industries feeling that they have little choice but to set up similar arrangements in order to compete. This new legislation that is proposed is intended to level the playing field and ensure that the correct income tax and NICs is paid in respect of all workers in the UK.”
The report outlines a program which, in its essence, aims to create an income tax and NICs charge on offshore employers of workers engaged in the UK. The consultation document considers how the current legislation works in practice and sets out proposed new legislation designed to strengthen employer obligations to ensure that the correct income tax and NICs are paid by offshore employment intermediaries. While the program targets employers in the oil, gas, financial services, business consumer and services industries by name, it also includes international secondment arrangements, so all employers that have employees working in the UK, including those working under a formal secondment, will be impacted. The date floated for implementation is April 6, 2014, though given the logistics of implementation involved, that may change.
A few points for employers under the proposed program:
- The offshore employer will be liable in the first instance for deducting income tax and NICs from the worker (must make UK tax withholding - operate PAYE in Real Time) and account for employer and employee National Insurance Contributions. Employers will need to take into account these additional costs as well as make clear whether the offshore employer or the UK host will be responsible for the new reporting obligations.
- As the secondary contributor, the employer will be liable to pay employer (secondary) NICs and statutory payments (e.g. statutory sick pay and statutory maternity pay) to the worker and to deduct from employees any amounts, such as student loan payments owing, and to report on these deductions.
- If the employer fails to pay, this charge will be moved to an onshore engager of the labor (in specified circumstances).
- If the offshore employer fails to account for and remit to HMRC the tax and NICs due, the employer’s responsibilities (with regard to tax and NICs) will move to the intermediary business contracting with the end client/end user of the labor to supply labor, or a service that includes the provision of labor. In the case that there is no intermediary business, or the intermediary business defaults on its new tax and NICs obligations, this responsibility will move to the end user of the labor/end client.
- Establishing the facts behind the labor supply chain can be a key challenge for the end user as well as for HMRC, so the Government has proposed introducing new record-keeping requirements. The first intermediary with whom the end user contracts will need to know how the worker is engaged and must maintain records of this.
After the consultation, primary NICs legislation will be included in the National Insurance Bill* that is planned for introduction in Parliament in September. The tax part of these proposals will be introduced into Finance Bill 2014.
*On July 15th, HMRC released the National Insurance Contributions Bill, legislation which outlines three main measures:
- Applying the General Anti-Abuse Rule for NICs
- Creating a NICs liability for Offshore Employment Intermediaries
- Enabling the reclassification of certain Limited Liability Partnerships (LLPs) members as employed earners for NICs purposes
Legislation for the new Employment Allowance will also be included in the Bill when it is introduced into Parliament.