A consultation document has been issued by the UK government proposing measures to deal with issues arising from the use of offshore employers of workers based in the UK to avoid tax and national insurance contributions on wages. The consultation document discusses the issue of creating employment obligations in respect of these offshore employers and also looks at the documentation and record-keeping requirements to be associated with these obligations. The consultation closes on 8 August 2013.

The use of offshore employers for UK-based workers is not necessarily the result of an intervention to avoid tax. For example, employees may be seconded to the UK by offshore employers. These structures are however being promoted by some people as a way of avoiding income tax and national insurance obligations. The workers themselves and the people who are making use of their labor may not be aware of the use of these structures.

The proposals aim to create a liability for income tax and national insurance with respect to the UK-based employees of overseas employers. If the overseas employer does not account for and remit tax and national insurance contributions to HMRC the responsibility will move to the intermediary business contracting with the end user of the labor to supply the labor to them. If there is no intermediary business or that intermediary defaults on its obligations, the liability to account for tax and national insurance moves to the end user of the labor.

An offshore employer may claim to have, or may in reality have, no connection with the UK in terms of residence, place of business or other presence. There are however measures in UK law, called the host regulations, which require the end user of the labor to account for employer and employee national insurance contributions if the employer is outside the UK. HMRC can however often have difficulty establishing the chain of intermediaries and finding out who is the end user of the chain. Also, there are currently different tests in the tax and national insurance legislation for the requirement of the end client to deduct the relevant tax and national insurance, and this often leads to claims that no charge is created on the end client in the UK for the supply of labor.

Under the proposals the overseas employer would be the secondary contributor, responsible for reporting the income tax and national insurance obligations to HMRC under the Real Time Information reporting system. If the offshore employer defaults on its obligations the responsibility for tax and national insurance moves to the first intermediary (Intermediary 1), this being the business that contracts with the end user for the supply of the worker’s labor. If there is no intermediary, then on a default by the overseas employer the responsibility would move to the end user of the labor.

The consultation document requests feedback on whether these arrangements would cause any problems for genuine business arrangements. It also requests information on whether there would be any commercial difficulties with the proposed definition of an end user. The document also suggest that where the intermediary or end user has the responsibility to pay but is not aware of what the worker is being paid the payment of income tax and national insurance would be calculated on the amount paid by the end user or intermediary to the offshore employer for the use of the employee.

The document also looks at the arrangements already existing for specific sectors such as internationally mobile employees, mariners and oil and gas workers and the extent to which existing arrangements will be retained.