Prior to April 2014, the government identified an increase in the number of offshore employers with workers in the UK, undertaking assignments for UK companies and using their offshore status to avoid paying income tax and national insurance contributions (NICs) in respect of those workers’ incomes.
Although the obligation to pay the tax and NICs fell on the hirer of those workers (i.e. the business that the assignment was undertaken for) they were often unaware the worker was engaged via an offshore company, unaware of their responsibilities and therefore did not pay.
As the UK government’s powers do not extend to offshore employers, existing legislation was amended in 2014 to deal with the issue. These changes are widely referred to as the Onshore Intermediaries Legislation and the Offshore Intermediaries Legislation.
You can read about Onshore Intermediaries Legislation here.
The government recognised that there can be numerous onshore and offshore intermediaries in a supply chain for temporary workers which can make it difficult to establish exactly who has responsibility for the tax and NICs incurred through the work undertaken. For this reason the Offshore Intermediaries Legislation removes the tax and NICs liability from the last intermediary in the supply chain, to the last UK-based intermediary in the supply chain.
This means that the last UK-based intermediary in the worker supply chain is effectively liable for the tax and NICs on their workers’ assignment income. In turn this means that tax and NICs due on assignment income cannot be avoided by virtue of an offshore intermediary employing the worker. The last UK-based intermediary is also responsible for accounting to HMRC for any offshore workers through RTI submissions and a quarterly return.
If there is no UK-based employment intermediary, the responsibility for payment of tax and NICs will fall on the UK-based end client.
What this means for you as a worker
Though the responsibility for tax and NIC – typically deducted from the overall assignment income when paid – falls on the last UK-based intermediary, you need to be aware of your employment status so you can ensure that tax and NICs are being paid appropriately.
You should work closely with your employment intermediary to determine your status. To facilitate this, you could provide evidence that you aren’t under the Supervision, Direction or Control (SDC) of an end-client or other third-party.
If you’ve signed up with a UK-based umbrella, they should employ you and your income should be subject to PAYE, therefore you don’t need to worry about the offshore intermediaries legislation. It is always worth checking your tax record with HMRC to make sure that appropriate tax and NICs are being paid on your income.
If your umbrella is based overseas, the the next intermediary in the contractual chain becomes liable for the tax and NICs on your income. In this instance the last UK-based intermediary will often be your recruitment agency, and due to the offshore intermediaries legislation the recruitment agency might stipulate that you only work through one of their preferred list of suppliers who they know and trust not to be offshore.
You can read more about agency PSLs here.
Another key point is to do your research before partnering with an intermediary to identify whether they are based offshore or not.
A specific warning sign includes abnormally high rates of take-home pay from assignments; only typically achievable through tax avoidance schemes and loopholes.
You can read more about such schemes here.
PSLs can help comply with Onshore Intermediaries Legislation
To protect themselves against liabilities from working with offshore intermediaries, recruitment agency often have a preferred supplier list of umbrella firms that they have research with due diligence to ensure that they are suitable to do business with. Creating and maintaining a strong preferred suppliers list enables recruitment agencies to build trusted relationships and to confidently decide which businesses to work with.
Find out more about the benefits of PSLs.
If you’re already with an intermediary such as an umbrella company and you discover that it may be part of an offshore scheme, then it may be wise for you to move to a UK-based umbrella. If your umbrella is not included on your agency’s PSL then they might require you to change to one that is on their list because that will mitigate their financial risk from the offshore intermediaries legislation.
Find out your rights if an intermediary asks you to change providers here.