In the 2013 budget the UK government directed that changes would be made to regulations relating to Offshore Employment Intermediaries so that a deterrent against NIC and PAYE would be created. Many different tax avoidance schemes were being reviewed to clarify where avoidance was being affected and to change that. Secondary employer Class One NICs were the largest group of avoidance. Of course HMRC recognized that these schemes were flawed and created problems but understood that the current legislation was too complex to make it possible for everyone to understand where the problems lie.
The resulting legislation became the Offshore Intermediaries Legislation, effective from April 2014. This legislation reinforced rules relating to host businesses and agencies and how they interacted with offshore intermediaries. The law clarified that any UK based agency that supplied and UK based worker to a UK based site would be required to show that full PAYE and NIC contributions were being made, regardless of whether they came from an offshore intermediary or not. This clarification of course only affected those places that were problematic and did not have any effect on companies that had continued in tax compliance.
The National Insurance Regulations were published which covered Offshore Intermediaries through the Social Security categorization of earners contribution regulations amendments and covered the UK continental shelf through the Social Security (Contributions) (Amendment No. 2) Regulations 2014.
The UK Continental Shelf UKCS
The Social Security (Categorisation of Earners) (Contributions) (Amendment) Regulations created clear rules to follow when people are employed under the UKCS within the oil and gas industry through an onshore employer by stating that if the offshore employer had an onshore associate company the that associated company would be responsible for PAYE and NIC compliance. It went on to state if there was no onshore associate company the oil and gas licensee would be held responsible for NIC and PAYE inclusive of secondary employer NICs. At the same time HMRC introduced a certification system which could be followed to determine whether or not an offshore employer meets NIC and PAYE obligations.
The Social Security (Categorisation of Earners) (Contributions) (Amendment) Regulations 2014 created a more stringent set of rules for UK host businesses and agencies. The differences in legislation were down to how an employee was hired through offshore intermediaries, creating new rules that stated if a UK agency is anywhere involved in the chain of contracts then that UK agency would be responsible for ensuring proper tax deductions were made. If more than one UK agency existed then the final agency in the chain would be responsible, if there were no UK agencies then the client who employed the contractor is responsible for PAYE and NIC.
Another rule related to secondary NIC obligations to UK agencies who provided workers overseas creating the necessity for the worker to be classified as Class 1 NI when abroad. Under the legislation the rules are simplified for agencies so that workers are subject to Class 1 NI and PAYE when working via an agency and when that worker provides services to a client or there exists a contract between client and agency resulting in services provided to the client or the client pays consideration for those services. The agencies therefore saw the largest changes occur as a result of the legislation.
How the New Rules Affect Agencies
Two additional areas of legislation – ‘Offshore Employment Intermediaries’ and ‘Onshore Employment Intermediaries: False Self-Employment’, which created changes to agencies reporting requirements. From April 2015 any agency who contracts with the hirer directly has to provide quarterly reports to HMRC that details all gross payments made within the supply chain, including names, NI numbers, addresses, birth dates, gender, passport or ID card number and the reason why income tax and NIC were not deducted by the employment intermediary.
Cumulatively speaking, this meant that the agency or RPO who directly contracts the end hirer is now liable for any unpaid NIC or PAYE for every self-employed worker in the supply chain regardless of which provider pays the wage. The agency must prove criteria that that the worker wasn’t subject to control, direction and supervision. If the agency cannot provide sufficient evidence then they will be held liable for the amount of tax and NIC’s that would have resulted from the worker being employed by them under PAYE. In other words there are serious financial implications for agencies. This also eliminated any legal defence except in a fraud instance and anyone that did not follow these rules would face targeted anti-avoidance provisions (TAAR). HMRC would then pass any unpaid NIC or tax on to the agency’s directors in any case where the offshore intermediary could not prove that proper PAYE and NIC tax was paid.
How the Rules Affect Contractors
The legislation was directed at recruitment agencies and any contractor found to be operating outside of the rules were reviewed for the past few years of compliance to determine where outstanding payments should be collected. Offshore payment intermediaries offer an exceptionally high income retention rate due to their complete avoidance of HMRC rules, and any contractor who used such a tax vehicle was open to review for the years of 2008-2011. Since then HMRC reviewed more than 16,000 freelancers and contractors who they think owe them money.
This legislation is targeted at recruitment agencies but contractors were the ultimate target. Any contractor facing this scenario quickly realises the advantages of working under an umbrella company.