Will HMRC really place UK recruiters in the firing line
Consultants in tax and finance, its international has published a guide to the latest controls set in place by HMRC (as below).
HMRC’s intention to crack down on unscrupulous “offshore” (non-UK) umbrella schemes has been well-publicised. However, ItsInternational, a UK-based and regulated tax consultancy specialising in the recruitment and international contracting market, conducted telephone research with SME recruiters which exposed a poor understanding of what has led to the new legislation and how it could impact a recruiter’s UK business. For those of you not up to speed with the latest developments, please read on.
What is HMRC up to?
IHMRC has no jurisdiction over offshore companies whereas they do over onshore UK recruiters and their UK clients. From April 2014, if any of your UK-based placements operate UK assignments as employees of an offshore umbrella and that & lsquo;employer’ fails to account for due UK tax and NIC, HMRC will make you, the recruiter, accountable as “the UK intermediary contracting with the UK end client”. However, if you fail to satisfy HMRC’s demand for due tax and NIC, HMRC then turns to your client who is at the end of the contract chain “unable to escape liability by arguing the placements were not subject to his control”.
There is a key exception to these rules. The transfer of historic debt and future liabilities will not occur if the offshore employer is based in one of the 30 countries making up the European Economic Area because HMRC is already able to pursue such debts through reciprocal arrangements.
Why is this a big deal for recruiters?
ItsInternational takes the view that if you ever have to face HMRC on issues related to the new legislation, you may well suffer potentially heavy costs. If your client is then exposed to HMRC investigations, at best you are likely to face a severely dented reputation.
Most pundits agree the one driving force which helped trigger this new legislation is HMRC’s dislike of umbrellas which pay their employees very low salaries and make substantial funds available to those same employees as & lsquo;tax-free’ and, in practice, non-repayable loans – thereby yielding your placements amazing and seemingly unrealistic retentions. HMRC deems such loans to be undeclared income.
How does HMRC deal with interest-free loans granted by an umbrella to your placement?
When an umbrella (whether & lsquo;offshore’, & lsquo;onshore’, inside or outside the EEA) gives its employee (your placement) working in the UK an interest-free loan (or, more likely, several interest-free loans) totalling more than £5,000, there are currently UK tax implications. Being an interest-free loan, your placement is actually receiving a benefit from the umbrella (his & lsquo;employer’) as he does not have to pay any interest on the sum(s) borrowed. The umbrella has to enter details of the benefit-in-kind (i.e. the interest saved) on a P11D. However, HMRC does expect your placement to pay tax on the amount of interest he has saved (it reviews the rate every year which has stayed at 4% since April 2010).
Once your placement stops working for his umbrella, there is no further need to enter the loan details on a P11D. Although the loan remains on the umbrella’s books as an outstanding debt, it is no longer deemed by HMRC to be a benefit-in-kind.
How does HMRC deal with interest-bearing loans granted by an umbrella to your placement?
If your placement agrees to take loans on the basis he is paying HMRC’s notional interest rate of 4%, the umbrella is not required to complete a P11D.
However, if your placement is not repaying the loan interest, the loan(s) remains visible to the authorities and his increasing tax liability on an ever-increasing amount of interest becomes onerous. Furthermore, when the recipient or beneficiary of the loan dies, his estate is expected to repay the loan. It is highly unlikely the loan would have been written off by the umbrella which granted it. Therefore, that loan plus all the accumulated interest has to be repaid.
Do loans granted by these umbrellas get repaid?
Normally, the loan documentation issued by the umbrella states either the loan is repayable on demand at some time in the future or there is a detailed repayment schedule. Both are currently legal under UK law.
In practice, offshore umbrellas rarely demand a repayment of the loan(s) or the repayment schedule is simply ignored. At this point, HMRC considers (stated as “opinion”, not “law”) the loan(s) to be “unreal” and open to interpretation as “disguised remuneration” which is subject to tax, NIC, interest and penalties. However it should be noted HMRC has not declared these loan schemes illegal under UK law.
Hot off the Press
Letters have recently been sent by HMRC to a group of contractors who, at some stage(s) since 2008, worked for umbrellas which paid relatively low salaries and granted relatively high loans which have not been repaid. It appears HMRC considers the loans to be undeclared income and the letters spell out the outstanding tax liability.
Each letter invites the recipient to either settle HMRC’s assessment (comprising the outstanding tax on the loan amount and the due interest plus discounted penalties for early settlement) or to attend a Tax Tribunal and appeal HMRC’s decision.
On one level, HMRC probably wants every recipient (and there are probably thousands on HMRC’s hit list) to settle immediately to facilitate a smooth pathway for a vast revenue haul. HMRC may believe it is a much cheaper option for contractors rather than they risk losing an appeal to the Tax Tribunal and bearing the associated legal costs, higher penalties, high stress and time pressures.
On another level, HMRC may want recipients to appeal so it can win test cases to smooth implementation of the new law. However, HMRC is risking one or more of the contractors successfully appealing against the assessments on the basis that the loans were granted within the law.
What happens next?
HMRC is likely to throw substantial resources into winning test cases so it can outlaw specific schemes and, more importantly, redefine loans or redefine & lsquo;disguised remuneration’.
More worryingly for recruiters:
Will HMRC make the new legislation similar to Dutch & lsquo;chain law’?
Will HMRC make the new legislation retrospective (as it appears to be doing in the letters sent to contractors)?
It is clear recruiters now have to review current PSLs and due diligence procedures to ensure they are truly offering their UK placements a selection of suitable service providers. If you issue a PSL, your placements will naturally presume you continually evaluate those service providers to justify them being on your PSL.
From its telephone research, Itsinternational was disappointed to uncover recruiters placing in the UK and overseas who knowingly or otherwise pay lip service to their selection of compliance service providers – an interesting topic for a future newsletter!