The changes, which were announced as part of this year's Budget, are intended to prevent businesses from using offshore intermediaries to avoid their employment tax liabilities. Although these structures are used for "legitimate commercial reasons" by some businesses, the Government said that some were using them to avoid paying employment taxes and National Insurance contributions (NICs) for their UK-based workers.
"We want to create a level playing field so that UK businesses that play by the rules aren't undercut by those who wrongly think they can get away without paying," said Danny Alexander, Chief Secretary to the Treasury.
"We are consulting on the design and implementation of these arrangements and will ensure that, where someone is working in the UK, their employer can't dodge paying the right amount of tax on their behalf," he said.
The consultation closes on 8 August 2013. It is anticipated that the new measures will then come into force from next April.
The Government said that there were "many legitimate reasons" why people working in the UK may be employed offshore, for example internationally mobile workers or those on secondment. The changes are intended to target the "significant increase" in the use of these structures to supply workers based in the UK to UK-based businesses for work in the UK. In some cases, neither the worker nor the ultimate user of the worker's labour is even aware of the existence of the offshore structure, it said.
The consultation proposes the creation of income tax and NIC liability for offshore employers of workers engaged in the UK. Under the new system, the offshore employer would be liable in the first instance to account for employment taxes and contributions. If it fails to do so, liability would transfer to the intermediary business contracting with the end user of the worker's labour, then to the end user if there is no intermediary or the intermediary also defaults.
The offshore employer will be responsible for deducting income tax and NICs from the worker, and would also be liable for secondary, or employer, NICs. The employer would also become liable for the payment of any statutory payments due to the worker, such as sick pay or maternity pay, and for the deduction of student loan payments due from the worker's earnings.
Tax expert Jon Robinson of Pinsent Masons, the law firm behind Out-Law.com, said that the scope of the proposals would be of some concern to legitimate users of offshore employment structures.
"The use of offshore employment intermediaries by businesses with genuinely internationally mobile workforces is not uncommon and is not regarded as objectionable, and whilst HMRC acknowledge this much in the consultation I would expect plenty of respondents to stress this point," he said.
"The mischief at which the proposals are aimed is clear – it cannot be right that tax and NICs in respect of UK residents working exclusively in the UK for a UK end client be escaped. However, businesses will be concerned over whether genuine commercial and non-abusive arrangements could be caught. There will also be concern over the scope of the proposals to make end clients liable where HMRC is unable to make recovery from the intermediary: HMRC itself acknowledges that end clients often do not know that an offshore structure is being used to provide their workers," he said.