New rules imminent for offshore employment intermediaries

Clients and recruitment agencies engaging contractors employed by or through offshore intermediaries have “many practical issues” to resolve in a “very short timeframe,” a professional adviser is warning.

Experts at KPMG issued the alert in light of the government confirming that new rules to address the avoidance of PAYE and NICs by offshore employment intermediaries will come into force from April 6th 2014.

Under the framework, confirmed yesterday by HM Revenue & Customs, where there is a UK agency in the contractor’s contractual chain, the responsibility for operating PAYE and NIC will rest with the UK agency.

If there is more than one UK agency in the contractual chain, then HMRC says that the UK agency that contracts with the end-client will have the responsibility for operating the contractor’s PAYE and NIC.

Only where there is not a UK agency in the contractual chain can the client the contractor works for, albeit via an offshore intermediary or structure, be held responsible for operating PAYE and NIC.

Lisa Keeble of ContractorUmbrella, a UK-based umbrella company, reflected yesterday: “The guidance indicates that the responsibility for PAYE will lie with the recruitment agency that contracts with the end-client, where there is no agency involved the responsibility lies with the client.

"But it still does not appear that a tax debt would be passed from agency to end-client unless the client provides the agency with fraudulent documents regarding the control, direction or supervision which is to be exercised over the employed person.”

According to the Revenue, “compliant UK host businesses” -- those who have been deducting PAYE and NIC -- should notice no change from the strengthened legislation, designed to stop about £100m a year in employment taxes from being avoided.

The tax authority explained that it has investigated a number of attempted avoidance schemes involving offshore intermediaries (one of which was used by an IT contractor), and said most were designed to avoid ‘employer’ Class 1 NIC.

As a result, the new legislation “simplifies” the agency rules so that a worker is subject to Class 1 National Insurance and PAYE when they work through an agency and the worker personally provides, or is personally involved in the provision of services to the client.

Such secondary NI and PAYE will likewise be levied when the worker works through an agency and there is a contract between client and an agency, under or in consequence of which the services are provided.

The two liabilities also arise where the worker operates via an agency and there is a contract between client and agency under which the client provides consideration for the services, and remuneration is receivable by the worker.

However this simplified agency worker rule does not apply to those workers where it can be shown that the worker is not subject to (or the right of) supervision, direction or control by any person.

KPMG reflected: “It is clear that many practical issues will need to be resolved in the very short timeframe to 6 April 2014.”

The professional services firm added: “Consideration will also need to be given to the contractual arrangements in the labour supply chain in order to ensure compliance and to manage any additional costs.”

However the government’s impact assessment states that there will be only a “negligible” impact on businesses, which face a bigger administrative burden from having to scrutinise their supply chains.

The government also says that while it initially expects to collect £85m from the crackdown, there will be no penalties in the first year from April 2014 for those making late returns or providing incomplete information on the return.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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