Offshore employment intermediaries

Offshore employment intermediaries Why offshore is not the way to go! This guide is important for any RPO, Recruiter or Freelance Contractor current...
15 downloads 2 Views 358KB Size
Offshore employment intermediaries

Why offshore is not the way to go! This guide is important for any RPO, Recruiter or Freelance Contractor currently working with offshore employers in their supply chain – AND you may not know it!

Introduction Historically there has been a difference between tax evasion - seen as immoral because it involves illegal activities taken to avoid paying taxes and tax avoidance - seen as sensible planning within the legal limits of the tax regime in order to reduce tax liabilities. Since the recession both appear to be receiving the same treatment. Over the past few years we have seen more focus placed on tax avoidance schemes and the Government’s approach has become increasingly aggressive. In 2010, the Government invested £917 million in HM Revenue & Customs (HMRC) to tackle avoidance, evasion and fraud. In late 2012 they then invested a further £77 million to ensure that this effort provided sufficient results for HMRC to continue down this path. Since then, over 50,000 taxpayers working with offshore providers have come forward generating over £1 billion in tax, penalties and interest for HMRC.

Offshore Employment As more and more people are trying to lessen any tax due on their incomes, there has been a surge in both the creation and use of offshore employers. Although, in some instances, the use of such employers will be wholly legitimate, there are a significant number of employers who structure their arrangements in such a way as to avoid paying employment taxes for their UK-based workers and often neither the worker nor the client is even aware of the offshore structure. The Government proposed new rules in the 2013 Budget announcement to combat such behaviour and to ensure that offshore employers pay the correct amounts of Income Tax and National Insurance contributions for its workers.

Offshore Intermediary legislation Government has proposed legislation to counter what it sees as avoidance in the supply chain. The legislation creates a liability that essentially forces one of the agencies in the supply chain to accept a liability for any unpaid Tax and NICs, if the contractor is engaged by an offshore intermediary. The legislation can be viewed here. The supply chain liability is best explained visually... The new legislation proposes that the employer’s obligations with regard to tax and NIC’s will move from the offshore employer to Intermediary 1, in the case of default by the offshore employer.

Hirer/User of labour

Intermediary 1

Intermediary 2

Supplies the labour to the Hirer/end-client

Page 1 of 3

Intermediary 3

Offshore Employer will be responsible for accounting for NICs and Income Tax

This image can be viewed in the HMRC document referred to on the previous page. To explain this more thoroughly: • Intermediary 1 is often referred to as the ‘Lead Agency’. It could be a RPO provider or a managed solutions provider. • Intermediary 2 might also be an agency, and is often referred to as a ‘Second Tier Agency’. That is, they supply labour to a hirer but they have to supply via the Lead Agency – usually as a consequence of a contractual commitment between the Lead Agency and the Hirer. • Intermediary 3 might be an Umbrella Company or Personal Service Company, which employs the contractor. (Note: A Personal Service Company is the same as a ‘Limited Company Contractor’) Some supply chains can get very long with more than one ‘Second Tier Agency’ in the chain. In these cases the third agency is often referred to as ‘Third Tier’; fourth – ‘Fourth Tier’; etc. Regardless of the length of the supply chain, the proposed legislation allows for any unpaid Income Tax and National Insurance, which should be paid.

The Easiest Way to Avoid the Risks How can recruitment agencies avoid this? It’s simple. Contractors employed by Orange Genie and working through either Genie Umbrella or Genie Education, and Personal Service Companies clients of Genie Accountancy are all outside the proposed legislation as NONE of our Umbrella employees nor Accountancy clients’ use or work through any form of offshore scheme. All earnings are subject to UK PAYE and National Insurance deductions (employers and employees) - no loans, no trusts, no hidden offshore intermediaries and no artificial schemes are used by the Orange Genie Group. Orange Genie is a member of the Freelancer and Contractor Services Association (FCSA) and follows a strict and transparent code of conduct which is validated annually by EY (formerly Ernst & Young) and the report is sent to HMRC to comply with the FCSA “open book” policy.

The Legislative Risk These changes come into effect in April 2014 which should give agencies enough time to put into place processes which effectively manage the risk and the extra administrative burden. Workers that are supplied through offshore employers should be completely vetted to ensure that all tax arrangements are above board. Compliance should be at the forefront of any operation if it is to be seen to be in the spirit of the recent legislative changes. If agencies start to cut corners or don’t properly manage the administrative tasks, they could face fines ranging in the millions of pounds. The other, easier, option is to make sure that all workers are only employed by those intermediaries that are seen to be fully compliant with HMRC’s rules, and those that aren’t should be moved over to compliant ones. This will also play a big part in agencies due diligence processes and will ensure that if a ‘preferred supplier list’ is utilised, that only compliant Umbrella companies/intermediaries are included on this list. This will, essentially, negate all liability for agencies because onshore, compliant intermediaries will always be paying the correct, taxed income. It also should be noted that as the administrative burden is largely one of reporting and record keeping via the Real Time Information system (RTI), any incorrect reporting will result in penalties for agencies; Orange Genie already sends the correct data for all of its employees via RTI every time we pay an employee, so agencies will not have to

Page 2 of 3

complete this task if it moved over its workers to us and will also save itself from any of the risk involved. HMRC has also had its armour strengthened in other ways. With the Finance Act 2013 enforcing new provisions as of July this year, there are certain rules that everybody should now be aware of. One of the more important underlying rules that were created is the new general anti-abuse rule (‘GAAR’). This now allows HMRC to challenge all agreements made with a view to obtaining a tax advantage, made on or after 17 July 2013, if it considers them to be “abusive”. The legislation goes into great detail as to what it considers ‘abusive’. The key points that one needs to be aware of is that any arrangement will be deemed an abuse of the process if...

• • •

the arrangements entered into “cannot reasonably be regarded as a reasonable course of action” the arrangements need “contrived or abnormal steps” to achieve any results any shortcomings in the provisions are exploited by the arrangements.

Although it is by no means confirmed, it has also been said that HMRC will look to recover tax debt retrospectively, potentially going back 7 years. Those that may get hit by this are offshore providers, agencies and clients. The best way to avoid these large fines and penalties is to ensure that all requirements for reporting and record-keeping as per the recent proposal have been fulfilled and that any business is done through compliant employment providers.

Compliance is crucial As a final point, Orange Genie is proud to be at the forefront raising awareness of key issues that affect the temporary work sector and is one of the few truly compliant employment providers in the UK. As members of organisations such as FCSA and Professional Passport we have to comply with high standards for compliance and our operations have to follow HMRC rules and other codes of conduct to ensure that our solutions are correct and risk-free for contractors and agencies alike. Some of the requirements placed on us by these organisations ensure that our operations are also wholly UK-based which means that these new regulations will NOT affect us. This will also mean that any agencies and clients we do business with do not have to worry about any negative effects or penalties associated with offshore tax activity.

Page 3 of 3

@OrangeGenie Orange Genie Group Orange Genie Group

www.orangegenie.com 0845 603 8088 [email protected]

Suggest Documents