Offshore employment: floating goalposts?
The impact of proposed abolition of offshore employment structures and tax increase on the oil and gas industry
Consultation has now closed on the Government’s proposals on the use of offshore employment intermediaries and has published draft legislation. These have significant implications for employers which use such structures, particularly those in the oil and gas sector. The changes are intended to take effect from the next tax year, 2014-15.
The Government recognises that there can be many reasons as to why a business may adopt an offshore employment structure – for example, where it has an internationally mobile workforce. The Government’s concern however, is the use of offshore employers for workers who are “based in the UK”. It notes that since the 1990s there has been an increase to the number of workers “based in the UK, working in the UK for UK based companies”, but being employed by an offshore employer. A reason for adopting such a structure might be to avoid liability for employer (secondary) national insurance contributions (NIC). Furthermore, such employers may only be required to operate PAYE on a voluntary basis.
The intent of the proposed changes is to ensure that whenever somebody is working in the UK, the right amount of income tax and NICs is being paid on their behalf. The proposal “at its simplest is to create an income tax and NICs charge on offshore employers of workers engaged in the UK”.
Currently where an employer is based offshore, there is no obligation to operate PAYE or account for employer NICs. There are then further provisions in terms of which a UK-based end user of the labour supplied from such an employer may be required to account for such taxes as the “host”, but only where the supply is that of “personal service”. This has led to structures, in terms of which the offshore employer is providing a “composite” service including matters such as tools and equipment. These structures prevent the UK end user being caught under the current host regulations.
In addition, there are particular provisions that apply to mariners. Offshore-based employers of mariners are excluded from the requirement to account for employer NICs, even where there is a UK host employer. This is part of the creation of a level playing field in Europe, where social security rates for mariners have been reduced. This has particular relevance to the oil and gas sector. In the Oleochem case, decided in 2008, a wide definition was given to the term “mariner”. The case concerned chemists engaged on a floating FPSO. They were deemed to be mariners, and, as a consequence, there was no requirement to deduct employer NICs.
The Government believes that both the use of composite service arrangements and the extended definition of mariner have led to avoidance of employer NICs in particular sectors. With regard to oil and gas, its proposal is that “all workers” will come within the scope of the new proposed legislation. In basic terms, this will mean offshore employers becoming liable for the payment of employer NICs for employees based in the UK or working on the UK continental shelf. They will also have to operate PAYE. The consultation was essentially about the detail as to how such a result should be achieved in terms of the amendments required to existing legislation.
The consultation document also has controversial proposals, in terms of which the liability to account for these taxes will transfer to an intermediary that contracts with the end user, if the offshore employer defaults. Ultimately the liability will then pass to the end user. For the oil and gas sector, the end user will be the licensee of the particular field where the worker is based.
Finally, the consultation document also has provisions regarding record-keeping requirements. This will require intermediaries to keep records regarding workers who are placed with end user clients about how they are paid and engaged. They will also be required to make quarterly returns to HMRC.
What should employers, intermediaries and end users do in the meantime? A close eye should be kept on the outcome of the consultation and proposed legislation. It seems inevitable that legislation will be implemented resulting in offshore employers becoming liable for employer NICs for many individuals who, in terms of the current provisions, are excluded. This in turn will result in a higher cost base for those employers.
Consideration will need to be given as to the benefit of maintaining offshore employment structures and whether it would be preferable going forward for such employees to be engaged by UK entities. That can give rise to issues regarding the transfer of such employment contracts, in particular TUPE considerations. Existing commercial agreements should also be looked at carefully. Many such arrangements have been priced on the basis that there are no employer NIC costs. If such contracts extend into and beyond the next tax year, how is the increased obligation to be accommodated, and in particular, who is liable to fund that increase?
The consultation can be found at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/203981/130530_Offshore_consultation_FINAL.pdf
Sean Saluja is head of the employment, pensions and benefits division at Burness Paull