Offshore Schemes: PAYE Assured

Government revise proposals for collecting tax from offshore employment intermediaries

Following this year’s Budget, HMRC ran a consultation titled, ‘Offshore Employment Intermediaries’, which ran from 30th May – 8th August. The consultation addressed the subject of the use by offshore employers of workers based in the UK to avoid NIC and employment taxes.

Over recent years HMRC have witnessed a growth in the use of offshore employers to employ UK workers, working in the UK for UK based companies. Whilst the Revenue accept that there can be legitimate commercial reasons for these structures a significant number of businesses are using them to avoid paying PAYE and NIC.

Original proposal

According to HMRC a growing number of businesses are setting up outside the UK with the intention of avoiding employment taxes and using structures such as:

End client/User of the labour
↑
Intermediary 1
(supplier of labour to end client/user)
↑
Intermediary 2
↑
Intermediary 3
↑
Offshore employer

Sometimes neither the worker nor the ultimate end user of the labour are aware of the structure.

The Government originally proposed that the offshore employer would be responsible for accounting for the income tax and NIC of the workers it placed in the UK. If the employer failed to pay then the debt would pass to the onshore engager of labour, i.e. Intermediary 1, that being the business closest to the end user.  If Intermediary 1 defaulted then the charge would move up the chain to the end user.

In simple terms the consultation proposed to create an income tax and NIC charge on offshore employers of workers engaged in the UK, as current legislation does not apply to employers based outside the UK.

Responses

In general, responses to the consultation document showed a broad support of the Government’s objectives and to prevent this type of tax avoidance. However, three major concerns arose:

1. Offshore employers might be encouraged not to comply with their tax responsibilities, safe in the knowledge that they are outside UK jurisdiction and the PAYE/NIC liability would pass to Intermediary 1 and/or the end user.
2. Record keeping and return requirements would impose a heavy administrative burden on all businesses involved in the employment chain.
3. The proposed legislation would add an extra layer of complexity on top of the existing legislation.

A few respondents asked how the legislation would interact with IR35. In the case of offshore Personal Service Companies (PSC), it was unclear which legislation would take precedence and whether the new offshore employment intermediaries legislation would even affect offshore PSCs. Three different respondents also suggested that if the new legislation did not affect offshore PSCs, then the use of such entities could well increase.

Revised proposals

In response to the concerns raised the Government has simplified its proposal and intends to strengthen existing legislation to make it clearer (really?!) and more effective rather than creating new legislation.  

There were significant concerns raised about the uncertainty facing Intermediary 1 and the end user with regard to being landed with the PAYE tax and NIC charge. The revised proposal will now make Intermediary 1 wholly and immediately responsible for accounting for the tax and NIC obligations of all workers who are ultimately engaged by an offshore business.

Most businesses will now be excluded from any record keeping or return requirements although some information will still be required from Intermediary 1 to help HMRC with its compliance investigations. This will take the form of accounting for any offshore workers through Real Time Information (RTI) and submitting quarterly electronic returns for all workers not already accounted for through RTI.

Separate proposals for the oil and gas sector have been developed due to contractual complexities that occur in the industry.

The Government intends to introduce the legislation for the revised proposal in forthcoming Bills. The certification process for the oil and gas sector will form part of the NICs Bill in mid-October. NIC regulations will be published in draft in November. The taxation, record keeping and return requirements, as well as related penalties will form part of Finance Bill 2014. Draft legislation, explanatory notes and guidance will be published this Autumn. Subject to approval by Parliament, all the legislation will come into force on 6 April 2014.

It was originally estimated that these proposals could raise an additional £90 million in revenue by 2018.