Contractors using offshore tax schemes and those trading via some of the less compliant umbrella companies are likely to feel only a marginal impact on their income, should HMRC’s offshore employment intermediaries proposals come into force. Limited company contractors and those using compliant UK-based umbrellas will be unaffected.
According to David Colom, of contractor accountant D J Colom, the proposals under consultation will only impact on workers receiving employment income, and most contractors using offshore tax schemes typically only receive a small salary.
“This specific consultation is aimed at large international groups and financial institutions with large numbers of highly paid workers, and which are seeking to avoid paying hefty employers’ National Insurance Contributions (NICs),” believes Colom.
In addition to large employers, some less compliant umbrella companies and recruitment agencies are also believed to outsource their payrolls offshore to avoid employer’s NICs, and Colom warns that the workers concerned may not qualify for some statutory benefits as a result.
How might the proposals affect contractors?
Colom confirms that limited company contractors and those using mainstream and compliant umbrella companies will remain unaffected by the rules.
“Contractors using offshore tax schemes are likely to see a small increase in their NICs, because it is likely that their offshore employer will be caught by the legislation,” he says.
“Although the rules are designed to apply to most offshore employers, NICs are calculated based on employment income, and offshore schemes typically pay small salaries, so the resulting employers’ NIC liability will be small.”
This specific consultation is aimed at large international groups and financial institutions with large numbers of highly paid workers, and which are seeking to avoid paying hefty employers' National Insurance Contributions
David Colom, D J Colom
The impact on umbrella company and agency payroll contractors employed via an offshore company will depend on their service provider. Most will benefit because their employer, or intermediary or client, will be paying the full amount of NICs, qualifying them for the full range of state benefits.
However, umbrella company contractors whose service provider passed on employer’s NICs savings under the offshore employment arrangement may suddenly be facing the loss of 13.8% of their income, because their umbrella company will start deducting employers’ NICs from their gross fees, as is normal practice for compliant umbrellas.
How offshore companies currently avoid employer’s NICs
According to HMRC’s consultation, tax legislation currently allows employers based offshore not to pay employer’s NICs. The idea is that employees come to the UK in legitimate roles such as secondments, pay income tax and employee’s NICs, but their employer, a non-UK company, should not be required to pay what is effectively a UK tax on jobs.
Colom continues: “Over the last ten years an increasing number of UK firms have been exploiting this loophole, particularly as locations such as the Channel Islands count as being ‘offshore’ for the purposes of employer’s NICs.
“UK resident companies have been outsourcing their payrolls to offshore service providers, which in turn pay their employees, deducting income tax and employee’s NICs, but not paying employers’ NICs, thus saving a 13.8% surcharge on their employees’ salaries.”
Recruitment agencies with staff on their payrolls and less scrupulous umbrella companies also adopt this practice, introducing further intermediaries, which may result in three or more companies in the chain between the offshore provider and end-client.
Colom highlights that their contractor employees may not even be aware that they are being paid by an offshore company and may lose access to benefits because their employer is not paying any NICs. And it seems the savings are unlikely to be passed on to contractors: “Whether offshore umbrella companies pass on the employer’s NIC saving to their contractor clients is questionable,” he says.
HMRC proposes to charge unpaid tax and NICs to the agency or client
Unlike IR35, HMRC’s solution is not to go after the workers, but to pass the costs of the employer’s NICs on to the offshore employer. The “offshore employer will be responsible for accounting for NICs and income tax”, says the consultation and they “will have all the usual obligations of a UK based employer”, including paying statutory employment benefits.
If the offshore employer does not pay, HMRC will move down the chain to the intermediary. If the intermediary, such as a recruiter or umbrella company, defaults, then the NIC charge will go against the client. Ultimately, the proposed legislation is designed to ensure that someone in the chain pays the full income tax and NICs due.
There are also a range of special rules that allow for existing arrangements with unusual work scenarios, such as internationally mobile workers, mariners and oil and gas workers. HMRC is suggesting that oil and gas workers working in the North Sea on floating platforms who are currently classed as mariners, and enjoy various exemptions, should also be covered by any new legislation.
The end of offshore employment schemes?
“If they are successfully adopted, HMRC’s proposals will effectively be the end of the offshore employment schemes designed to avoid employer’s NICs,” says Colom. “There is no subtlety to what these large employers are doing. It is purely for the purpose of reducing employment overheads.”
Contractors and their advisers and service providers have until 8 August 2013 to submit responses to HMRC’s proposal.