The consequences of
tax avoidance legislation are starting to hit home…
We
hate to say we told you so….but we did say that the Offshore Employment
Intermediaries legislation had the potential to cause “plucking carnage” (see
our blog post).
As one of only three UK umbrella companies independently involved in the
consultation process ( see the government's consultation document), you might say that we had a better view than most as to what was on the
horizon. But whilst we did hit the nail pretty firmly on the head in our blog
back in early September, the recently issued “Summary of Responses” paper does
offer some further clarification, not only of the criticisms originally levied
at the government’s original proposals, but also as to how HMRC will respond,
so it would be worthwhile revisiting the subject once again.
The basics of what recruiters need
to know…
The original proposal
The
government originally proposed that the offshore employer would be responsible
for accounting for the NI and tax of the workers it placed in the UK. In
instances where the offshore employer defaulted on this responsibility, the
liability would then pass to “Intermediary “1 (the recruitment agency), or the
end user (client) in instances where there wasn’t an “Intermediary 1” present.
To assist enforcement, intermediaries would need to collate information about
how users (candidates) they placed were being paid and report to HMRC on a
quarterly basis information about the workers that are employed offshore.
Responses to the original proposal
During
the consultation process, two general concerns were raised regarding the
government’s original proposal:
1/
Offshore employers sit outside UK jurisdiction so might be encouraged to simply
default and pass on the liability.
2/
Record keeping and reporting would place a heavy additional administrative
burden on all businesses within the employment chain.
Government response: the revised proposal
1/
In response to the concern about offshore employers simply defaulting on their
responsibility and passing on liability, the government has revised its
proposal such that the liability will not move. Unfortunately for the
recruitment industry, this is only on the basis that the liability will now
rest “wholly and immediately” with Intermediary 1.
To quote
directly from HMRC:
“The
Government has evaluated the role of employment businesses and agencies, and
concluded that it is reasonable to expect employment businesses and agencies to
undertake due diligence. Their role is supplying temporary labour to businesses
and the Government believes that it is reasonable for the end client to expect
that the appropriate amount of tax and NICs has been paid in respect of those
workers. This is why obligations will fall immediately and wholly to
Intermediary 1…” (3.17 Offshore Employment Intermediaries: Summary of Responses
14 October 2013)
2/
In response to the concern to the extra administrative burden, the government
notes that the revision whereby Intermediary 1 is “wholly and immediately”
responsible for accounting for tax and NI obligations of workers engaged with
an offshore employer actually removes most businesses in the chain from the
requirement to record and report information. Intermediary 1 will still need to
report and record the information, of course, but this will be done through
RTI, and since a large proportion of the information that would need to be
included is already required by other
government departments, there is little in the way of extra administrative
burden. And in any case, it is unrealistic to expect that tax avoidance can be
tackled without imposing some level of administrative checks!
The basics of what recruiters need
to do…
As
we can see, things have taken a bit of a turn for the worse as far as
Intermediary 1 (the agency) is concerned since they’re now “wholly and
immediately” liable for the tax and NIC’s for any candidate that is employed
via an offshore solution. If taking an interest in how their candidates get
paid wasn’t already on the agencies “to do list”, it certainly needs to be now.
The
simple answer to all of this, of course, is not to let any of your candidates
utilise an offshore solution…but actually doing
that – through having already determined what is and what isn’t an offshore
scheme – is where the effort comes in. If it is not already part of that “to do
list”, agencies will need to put in place a robust due diligence strategy that
enables them to sort the wheat from the chaff and make confident decisions as
to how their candidates are engaged and whether or not they are prepared to
place the candidate whilst engaged in that way.
So
what would a robust due diligence strategy look like? Of course, there’s more
than one way to skin a cat, but essentially it all boils down to gathering
information on their candidates’ arrangements, reviewing the information
gathered against pre-determined “yardsticks”, and, if necessary, mitigating any
potential liability away from the agency via the insistence that the candidate
use an alternative, preferred supplier of employment services
The
gathering of information will become an essential step in the agencies
on-boarding process. Agencies will need to know the details of the payroll
provider that the candidate currently has a relationship with. Our advice to
the agency would be to gather this information at the earliest possible
opportunity, ideally before the candidate has been put forward for a role (the
last thing the agency will want is for a candidate to interview and be offered
the role, only to then reject it if the agency has concerns over their payroll
provider and the candidate is refusing to use an alternative solution).
Once
the agency has gathered the relevant information, the agency needs to review it
in order to determine the level of risk that it poses them. The agency will
need to focus on the structure of the scheme in question, particularly in terms
of how it engages with the contractor and how (if at all!) it deducts UK tax
and NI from the contractors’ gross earnings. For all intents and purposes, any
scheme that does not employ the candidate as an employee and does not deduct
full UK tax and NI from gross earnings should be considered high-risk and
rejected accordingly.
The
final stage in the process – and perhaps the one that’ll require a real culture
change at many agencies – will involve the agency taking a firm stand and
refusing to engage with those scheme providers that do not meet the standards
required.
At
a practical level, this means that every agency will now have to strongly
consider having some form of structured and centralised ‘Preferred Supplier
List’ of payroll companies; a short-list of companies that they’ll introduce to
candidates in instances where the candidate either does not have a payroll
provider in place, or has one in place that has failed the agencies due diligence
checks. Of course, the agency should not force the candidate to use one of
their preferred suppliers at the expense of other fully compliant providers
that just happen to not be on that agencies preferred list…but the agency
should also bear in mind that the smaller the pool of payroll providers that
they engage with, the easier it will be for them to manage their due diligence
processes on an on-going basis. To paraphrase that well known saying, a ship is
best run tightly…and agencies will need to become accustomed to playing a much
more influential role in the relationships that their contractors have with
payroll providers.
As
with most legislation that gets introduced, the Offshore Employment Intermediaries
will shake up the industry and as such should be welcomed by providers that are
already operating correctly. As a compliant and industry-aware provider,
Liberty Bishop has been involved in the various consultation processes that
HMRC have held in the developmental stages of this legislation. It goes without
saying, of course, that we are here to help and are happy to share our
expertise with our partner agencies.
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