HMRC launches bid to close offshore NIC tax gap

HM REVENUE & CUSTOMS has launched a two-pronged consultation to close a tax loophole in offshore employment liabilities.

The taxman is hoping to target and close loopholes that allow UK-based companies that hire UK employees through an offshore intermediary to avoid paying national insurance and PAYE.

HMRC estimates that up to £90m in tax liabilities could be recouped following the proposed changes, whereby offshore employers will be liable in the first instance for deducting income tax and NICs from the employee through HMRC’s Real Time Information system.

This means that for tax and NICs they will have all of the usual obligations of a UK based employer, including liability to pay statutory payments to the worker such as statutory sick pay and maternity pay. Where the income tax and NICs have both been paid or otherwise accounted for to HMRC, irrespective of by whom, the legislation will treat the offshore employer as having fulfilled its obligations.

KPMG tax partner Punam Birly has warned that companies must review their staff supply and commercial arrangements to gauge whether they are exposed to future possible liabilities and to determine who will pay the likely greater costs and take responsibility for the increased administrative burden.

“If no-one in the supply chain pays the tax bill, the end-users may be liable,” Birly said. 

“Given the complexity of the supply chains involved in providing staff such as teachers, nurses and oil and gas workers, there is a very real possibility that some ultimate end-users who benefit from these individuals are unaware that they are even using agencies relying on an ‘offshore employment intermediaries’ exemption, or that they have any exposure to these significant NIC liabilities.”

Currently, tax and NI legislation differs for offshore employers of employees residing and working in the UK. There are different tests in the tax and NI legislation for these supply chains. These differences are often exploited by the offshore employer in an attempt to claim that no charge is created on the UK end-client for the supply of the employee’s labour.

“The existing legislation has been exploited, particularly in certain sectors, allowing companies who are willing to set up offshore arrangements to gain a competitive advantage over those businesses who play by the rules,” the consultation said.

“This new legislation that is proposed is intended to level the playing field and ensure that the correct income tax and NICs is paid in respect of all workers in the UK.”

The consultation will clamp down on this type of avoidance. It is divided into two sections. The first is a technical consultation creating obligations for employers, including the creation of an income tax and NIC charge on offshore employers. The second section is a collection of requirements to keep accurate records and file returns to HMRC.

After the consultation closes, NIC legislation will be updated to include the proposed changes and will be introduced to parliament in September.

Draft legislation regarding record keeping is expected to be published in the Autumn Statement and legislated in the Finance Bill 2014.

“This consultation sets out our plans to provide a level playing field so that UK businesses that are playing by the rules cannot be undercut by those who are involved in avoidance arrangements,” the consultation said.

“It is not our intention to stop anyone from being employed by an offshore employer. Instead, we intend to ensure that where someone is working in the UK the right amount of tax and National Insurance is being paid on their behalf.”

HMRC will incorporate a soft landing of the policy which will mean for the first year there will be no penalties for late returns or for providing incomplete information.

Penalties will be introduced for the fiscal year 2015/16, however, the taxman will take a lighter approach to dishing out sanctions if a company can show it has taken reasonable care to submit the correct return.

The Offshore Employment Intermediaries consultation was launched yesterday and closes on 8 August.

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