HMRC’s intention to crack down on unscrupulous “offshore”
(non-UK) umbrella schemes has been well-publicised. However, ItsInternational, TEAM’s
international tax advisor 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
‘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,
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 ‘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 ‘offshore’, ‘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 ‘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 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 ‘disguised remuneration’.
More worryingly for recruiters:
·
Will HMRC make the new legislation similar to
Dutch ‘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 included on
the 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!
Remember, as a TEAM Member, either placing or aspiring to
place consultants or interims abroad on fixed-term assignments, you can benefit
from the TEAM INTERNATIONAL HELPLINE – a free service provided by
ItsInternational exclusively for you. For a complimentary consultation, call 020 7477 2660 or
email us at TEAM@itsinternational.ltd.uk.
For more details, visit www.jobsatteam.com/Team-Service-Provider/its-international/430/
