All that glitters overseas to IT contractors may not be gold

In the past couple of months alone, we have handled several cases relating to offshore debtors, with implications for IT contractors running into the many tens of thousands of pounds, writes Sid Home of specialist debt recovery firm Safe Collections.

In fact, three IT contractors, alongside other smaller companies, have met with extreme difficulty when trying to secure agreed payment from clients who, it has emerged, are actually registered offshore, or in tax havens like Panama and the British Virgin Islands.

You might think that you would never work for a company registered in a tax haven, but in the current business climate it can be difficult to tell where a company is ultimately domiciled. Here, exclusively for ContractorUK, we look at the fundamental argument for and against taking on offshore clients; what caused the problem for each of our recent customers, and what you can do to avoid becoming a victim yourself.

Why work for offshore firms?

Carrying out work for an offshore client comes with a certain amount of allure and prestige; being able to say you have customers all over the world, particularly if you are a contractor with a reputation to build and maintain, is desirable in itself. The advertised pay rates of some offshore hirers are also attractive.

However, there are specific disadvantages to working with customers who are not domiciled in the same country as you, ranging from the practical (such as the ability to meet with them face-to-face, or differing working hours) to the procedural (such as whether or not you are subject to the same legislation, and how easily it can be enforced).

Unsurprisingly then, international clients can be more likely to fail to pay - not just on time, but at all - and pursuing them to try and force them to do so can be particularly complex.

What can go wrong?

Here are just a few snapshots of recent cases handled by our team, highlighting that even a careful approach to your selection of customers can sometimes fail:

  • In the cases of the three IT contractors, one was left out of pocket for his expenses as well as his final invoice. The other two received no money at all from the recruitment agency incorporated in the British Virgin Islands. Total loss: almost £80,000.
  • An SME, a paper supplier, believed their customer was based in the UK, but ultimately found that they were registered in Panama, and failed to pay. Cost to the supplier: £10,000.
  • Another SME, a construction groundworks contractor, carried out work for a UK-registered limited company, which was then placed into administration. The deeds to the land on which the work was carried out were held by a British Virgin Islands-registered parent company, which sold the property at a substantial mark-up. Cost to the construction contractor: £15,000.

In the not too distant past, any mention of a company being registered in an offshore tax haven would have been enough to prevent many companies from extending credit under any circumstances - including carrying out work, or providing goods and services, without being paid up-front.

Now, however, the business landscape is much more complicated, with umbrella companies and employee benefit trusts making offshore jurisdictions a more commonplace feature in the typical contractor's lifestyle, even though it is still extremely unusual for a small, ostensibly UK or EU-based company to be registered offshore.

This has created the difficult position in which some contractors unwittingly allow offshore and overseas-domiciled firms to run up relatively large levels of credit, which then prove impossible to pursue through any legitimate legal recourse.

The risks in summary

There are several key risks that arise from the landscape detailed above, and these include:

  • The lack of available, meaningful credit information on companies registered in tax havens;
  • The lack of legal recourse to recover unpaid debts from these jurisdictions;
  • The difficulty and expense associated with attempting any such legal action;
  • And finally, if you pursue legal action and are successful in achieving a judgment in the company's registered jurisdictional domicile, there is no guarantee that they will hold any assets in that jurisdiction in order to pay you what they owe. The money may, in turn, be held in an account in a different offshore location or somewhere else that renders the judgment in your favour irrelevant.

As a specific example, one of the offshore companies involved in the cases described was registered with a UK firm that specialises in Offshore Incorporations. This company describes its own key services as including the ability to "protect your assets from attack by creditors", as well as to avoid paying tax and trade anonymously internationally.

When companies are deliberately adopting structures that allow them to avoid paying creditors, what is the appropriate course of action?

What should contractors do?

In many ways, the approach is the same as you would take with any customer to whom you were unwilling to extend a line of credit - a joined-up process of checking their creditworthiness and, if not satisfied, taking measures to protect yourself against loss.

We would recommend:

  1. Check references from at least two independent and trustworthy sources, preferably contractors who have previously been employed by the client or placed by the agency in question (be certain that these are genuine references, and not coming from 'tame' referees whose sole role is to make your would-be client sound reliable). LinkedIn profiles can be a good place to look for independent opinions.
  2. Where possible, obtain personal guarantees from the individuals involved in the client company (but again make sure that their finances are structured such that you can pursue them for payment, and if possible ensure that their assets are not all technically owned by the offshore or overseas firm. A Land Registry search on the directors' home addresses is a good place to start).
  3. If in any doubt, do not provide credit. Any legitimate firm - providing they can trust you to deliver - should be willing to provide either a substantial deposit, milestone payments, or full payment in advance.

And our fourth recommendation would be, listen to your gut instinct. As a contractor, your entrepreneurial spirit has got you this far; don't overrule it if it tells you not to trust a potential customer. If you are asking the kinds of questions described above, and are not getting the 'correct' answers, then you have reason to doubt the veracity of your potential client.

Further Reading

For some particularly interesting insights from North America, we would suggest reading My Big Fat Belizean, Singaporean Bank Account by the New York Times' Adam Davidson, or How I learned to avoid the taxman in the British Virgin Islands by the Globe and Mail's Trevor Cole.

Each article describes the reporter's first-person experience of setting up an overseas bank account - from the meagre costs involved in doing so, to the insider tricks, such as including Chinese characters in your new company name, to confuse anyone looking into your affairs from the outside.

Together, they are a fascinating insight into this practice. But there also serve as a clanging alarm bell for those of us who only see offshore client-companies as a prestigious asset to the CV, rather than what that can be - spurious outfits, hiding in hard-to-reach and less than transparent territories.

For more from Safe Collections please click here.

Friday 8th Feb 2013
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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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