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UK – Osborne Clarke considers how offshore employment intermediary changes will shape the staffing industry

17 October 2013

This week the Government announced plans to simplify its proposals regarding the taxation of offshore employment arrangements by strengthening existing legislation. International law firm Osborne Clarke has today brought out an article outlining these changes. Due to the importance of these proposals, we have reprinted this article in full below.

The revised proposal will place liability for employment tax and NICs (and associated reporting requirements), in respect of workers employed via offshore employment intermediaries, with the intermediary at the head of the staffing supply chain.  In many cases this will be a managed service provider (MSP) or preferred supply business through which staffing supplies are made to UK based end users. End users will have an obligation in respect of tax and NIC only if they contract direct with the offshore employment intermediary. The Government has also developed a separate proposal for the oil and gas sector.  Changes to existing legislation and new legislation implementing the proposals will come into force on 6 April 2014.

End users should not regard all supplies of contract or umbrella workers as inherently risky.  This is because, even if there is an offshore element with liability falling on someone in the UK, that someone will be the MSP or preferred supplier and NOT the end user (provided the hirer engages people through an onshore MSP or staffing company).  This may in fact increase the attractiveness of using an onshore MSP or staffing company: at the moment there is a risk of hirer liability under section 689 ITEPA and we assume that this risk will disappear when the legislation is updated next April.

The proposals will be of concern to MSP and preferred supplier businesses which sit at the head of complex staffing supply chains shaped by huge (often client-driven) pressures to reduce costs.  As the intermediary contracting with the end user (referred to in the proposal as Intermediary 1) any MSP or preferred supplier contracting with an end user as a principal supplier or co-ordinator of end user staffing supplies will become responsible for accounting for any offshore employed worker through RTI (Real Time Information).  If this is the case then will there be any future benefit in using offshore employment intermediaries in relation to supplies of workers to work for UK end users? Presumably an end to offshore employment schemes is exactly what the Government intends.  Whatever the case, after the amended law comes into effect Intermediary 1 businesses will need to carry out extensive due diligence to establish that there are, in fact, no offshore arrangements operating at the end of their supply chains.  The administrative burden involved in carrying out regular due diligence and changing contracts will be considerable.  HMRC’s view is that it is reasonable to expect Intermediary 1 to undertake this due diligence but this due diligence will require quite a lot of independent checking.  It will also, inevitably, involve checks on and co-operation from each link in the supply chain.

Where offshore employment arrangements exist Intermediary 1 will have to collect and pay tax and NIC and account for it through RTI in respect of such workers.  This raises the question of what the workers’ pay rate should be.  In practice this may mean that Intermediary 1 will need to dictate worker pay rates, regardless of other intermediaries’ mark up or ultimate contractual pay arrangements. 

The workers themselves are unlikely to want to have to pay more tax and NIC than under their current offshore arrangement and may well start to look for more tax efficient ways of getting paid.  The onshore PSC route seems to be the most likely option.  This, of course, will raise questions about IR35 status but the widely publicised difficulties HMRC has had enforcing this legislation means that PSC contracting remains attractive even for workers who probably do not fall outside IR35.  HMRC is still considering how the new proposals will impact on PSC arrangements. Any significant growth in PSC usage may lead to HMRC stepping up use of its Managed Service Company (MSC) tax debt transfer powers.

Not unlike the demise of composite company arrangements following the introduction of the MSC legislation, it is likely that offshore employment arrangements paying workers to work for UK based end users will eventually become a thing of the past.  This may take some time but we predict that a move away from the use of offshore employment arrangements will inevitably lead to a greater reliance on UK-based umbrella companies provided they can guarantee that they themselves are not involved with any offshore arrangements.  An ability to demonstrate independently verifiable compliance and financial viability will become ever more essential.  Several umbrella employers already voluntarily sign up to “compliance audits” but it is likely that staffing companies, seeking to rely on umbrellas to mitigate their offshore employment tax risk, will require an even greater level of due diligence carried out by suitably qualified independent third parties.

The question for the Government may then become one of whether workers, newly employed by umbrella companies and claiming travel and subsistence expenses, will result in a net gain in PAYE and NIC take as compared to the current “offshore employment” regime.  Certainly, changes to umbrella employee pay to allow for statutory increases (such as employer’s NICs, agency worker pay and pensions auto enrolment) have, in the past, resulted in a lowering of taxable pay for such workers except where hirers agreed to increase payments to help fund the costs of supplies.  Whatever the outcome, it certainly won’t be a straightforward case of increasing revenue to the tune of previously unpaid employer’s NIC. 

The Reed appeal is due to take place later this month, the outcome of which may vastly change the way less sophisticated payroll intermediaries operate travel and subsistence schemes.   This further underlines the need for true umbrella employment companies to clearly differentiate themselves from payroll operations.  The recent Employment Tribunal case of Paymaster Limited (trading as Back Office) v Mr Thompson and others (October 2013) concluded that the claimants were not employees of the umbrella company because Paymaster did not exercise control over the workers; in fact, all dealings and arrangements were concluded between the workers and the staffing agencies they worked through.  Although this is neither a binding employment decision nor a tax case it is a case specifically on the question of umbrella worker status and so is likely to be referred to in assessing whether an umbrella company acts as a true employer.  Much has been said in recent years about the need for mutuality of obligation but this is just one of the tests of employment; control is another.  Any umbrella company who, in practice, pays a worker on the strength of an agency time sheet without having first issued an assignment schedule to the worker risks failing the control test.

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