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Q&A: Changes for offshore employment intermediaries

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On 30 May, HMRC published the consultation document Offshore employment intermediaries, which proposes new legislation to tackle, in HMRC’s view, the increasing number of offshore employers avoiding NIC and employment taxes for UK workers.

What is proposed?

From 6 April 2014:

  • There will be an income tax and NIC charge on offshore employers. If the employer fails to pay this charge, responsibility for the employer obligations moves to the onshore intermediary business or the end user of the labour. Any historic underpayment by the offshore employer will be transferred as a debt.
  • HMRC anticipates the existing legislation covering host employer rules (The Social Security (Categorisation of Earners) Regulations, SI 1978/1689) will continue to be in place for the foreseeable future.
  • The offshore employer must also operate real time information for its workers.
  • The offshore employer will have fulfilled its obligations if social security has already been accounted for, e.g. under the terms of an international social security agreement.
  • The offshore employer will be relieved of the obligation to apply PAYE and NIC where already operated in full under existing legislation on a voluntary basis by, for example, a UK end user.
  • Offshore employers of mariners working in deep sea waters will continue to benefit from NIC exemptions. However, it is proposed that all oil and gas workers on floating and fixed platforms in the UK continental shelf will have employer’s NIC paid. This will lead to an increase in costs for some workers previously categorised as mariners and so entitled to the employer’s NIC concession.
  • New record-keeping requirements will set out details of how the workers are engaged and quarterly returns will be introduced for either the UK intermediary or end user.

Why introduce these rules?

For HMRC, the current rules present a loophole for employers wanting to avoid the payment of employer’s NIC. Whilst in many cases, the offshore employer makes voluntary payments of income tax and employee’s NIC, some offshore employers will claim there is no requirement to pay employer’s NIC, on the basis that the offshore employer is not present, resident nor has a place of business in GB. These employers argue that the host employer rules do not apply as there is no requirement for the personal service of the worker to be supplied in the UK.

Do these proposals apply to offshore employers in all countries?

HMRC already has the power to seek the payment of employer’s NIC from offshore employers covered by the EU social security rules (by virtue of EU Regulation 987/2009, art 21). HMRC cannot enforce this requirement against non-EU employers, e.g. those based in Jersey and Guernsey.

Who will be affected?

Initial press comments referred to the supply of teachers, nurses and workers in the oil and gas industry. However, these changes will impact all industries where an offshore company is used to provide labour through composite services arrangements. The number of companies involved and the supply chains of each of those companies operating in this oil and gas industry are complex. It’s not always clear where commercial contracts have been negotiated on the basis of reduced NIC costs from composite services arrangements.

HMRC will define the end client for the industry as the licensee of the oil field. However, there may be joint ventures in respect of oil fields, so there may not be a single end user.

Mariners enjoy NIC concessions when employed by offshore companies. HMRC has long accepted that this assists maintaining industry competitiveness. However, HMRC would like to clarify that workers on floating platforms can no longer qualify as mariners for the NIC rules. HMRC has not yet set out how it might achieve this; it may amend the definition of mariner or the continental shelf rules. What is clear is that these rules will impose change and are aimed at reversing the decision in favour of the taxpayer, in the Special Commissioners case of Oleochem (Scotland) Ltd v HMRC [2009] STC (SCD) 205.

What should companies do now?

  • Consider whether they are operating any composite services arrangements and/or if as end user, these exist in their supply chain. Consider the risk that they may be categorised as an intermediary or end user with the resulting employer obligations.
  • Look at the commercial contracts in place. Determine whether there are appropriate indemnity clauses setting out liability for additional costs in the event that the offshore employer does not meet these costs and/or a debt is transferred to the onshore intermediary/end user.
  • For mariners or workers on fixed or floating platforms, consider how the additional costs resulting from the proposed new legislation should be addressed and by which entity (or entities).
  • For oil and gas companies, review any joint ventures where the company may not be the sole licensee of an oil field.
  • Consider whether, by assuming employer obligations around tax and NIC as well as RTI, an entity may increase the risk of being deemed to be the employer for wider employment law purposes.

What’s next?

The primary NIC legislation will be included in the NI Bill in September 2013. The tax proposals will be introduced in the Finance Bill 2014.

See details of the consultation. The closing date for comments is 8 August 2013.