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UK intermediaries to be responsible for offshore workers' employment taxes under simplified Government proposals

Out-Law News | 17 Oct 2013 | 3:31 pm | 3 min. read

Employment intermediaries that supply UK-based workers to UK-registered businesses for offshore work will become responsible for ensuring that those workers' employment taxes are paid correctly, under revised proposals drawn up by the Government.

It has amended an original proposal that would have made the end user of the labour ultimately responsible for meeting these obligations if both the offshore employer and intermediary defaulted, following industry feedback to a consultation exercise. A separate proposal has been developed for the oil and gas sector, involving a certification scheme for offshore employers.

Tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law.com, said that the revised proposals provided more certainty about where obligations for employment tax and national insurance contributions (NICs) would fall. However, they would likely provoke a mixed reaction from the sector, he said.

"The main winners from these amendments are the end users of labour," he said. "Under the previous proposals, they were faced with considerable uncertainty as to whether and when they might become liable to account for tax, whilst often lacking the information that they would need to properly assess the risk and comply with their obligations. End users will therefore be relieved that this threat has now been removed."

"On the other hand, putting responsibility squarely on the UK intermediary is unlikely to prove popular with the recruitment industry. However, there is at least now more certainty as to where liability will lie, such that the relevant parties can now review their arrangements and determine how any increased costs should be apportioned going forward," he said.

HM Revenue and Customs (HMRC) consulted on the original proposals in May, following an announcement in this year's Budget. At the time, Treasury Secretary Danny Alexander said that the change was intended to prevent businesses from using offshore intermediaries to avoid their employment tax liabilities; while recognising that some have legitimate commercial reasons, such as international secondment, for using this type of employment structure.

Setting out the responses to the consultation, HMRC said that there was "broad support" for the objective of the proposal. However, it said that a variety of concerns had been raised in relation to the complexity of the Government's solution and the likely administrative burden of associated record-keeping and reporting requirements.

Instead, the Government has now proposed amending and strengthening existing legislation to "make it clearer and more effective", rather than creating new legislation. Under the revised arrangements the UK-based intermediary would be made "wholly and immediately responsible" for accounting for the tax payable by UK workers who are ultimately engaged by an offshore business. Although some record-keeping and return arrangements would remain for those intermediaries, these would be based on information that they already have to supply through Real Time Information (RTI) reporting, HMRC said.

Separate proposals have been made for the oil and gas sector, due to the particular complexity of chains of contracts and sub-contracts and confusion as to the status of oilfield licensees under Joint Operating Agreements (JOAs). Under the proposal, responsibility for employment taxes would depend on whether the offshore employer has an associated company, body or agency based in the UK. If so, that body would become responsible for accounting for those taxes; otherwise, the oil field licensee would become responsible.

HMRC also intends to introduce a certification scheme in relation to employment tax accounting liability, similar to the one already in operation in relation to corporation tax. Under this scheme, a compliant offshore employer would be able to apply for a certificate removing HMRC's ability to enforce any unpaid employment tax or NICs against the licensee. The scheme recognises that licensees are generally not involved in the operation of the oil field itself, or in the complex chains of employment in the sector.

"Oil field licensees will be disappointed that they retain liability in some circumstances, but the introduction of a certification scheme will at least mitigate the risks in many cases," tax expert Chris Thomas said. "Companies operating on the UK Continental Shelf will want to ensure that where possible the intermediaries with which they deal do have this certification, but also that robust contractual indemnities are in place."

The changes will come into force on 6 April 2014, subject to Parliamentary approval, according to HMRC. The certification process for the oil and gas sector will be included in the upcoming NICs Bill; while the taxation, record keeping and return requirements, as well as related penalties, will form part of next year's Finance Bill.