By Wesley Scott, business development director at Liberty Bishop
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 governments 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 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 wasnt 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 governments 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 theyre now wholly and immediately liable for the tax and NICs for any candidate that is employed via an offshore solution. If taking an interest in how their candidates get paid wasnt 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 solutionbut actually doingthat through having already determined what is and what isnt 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, theres 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 thatll 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 theyll 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 listbut 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 tightlyand 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.