Contractor clients are the only members of the contracting supply chain that will benefit from the proposed legislation to tackle tax avoidance by using offshore employment intermediaries to hire contractors. Recruiters potentially stand to lose out big time, and contractors will pay in reduced fees for their services.

If you are wondering what all the fuss is about, there is a loophole that enables employment providers based offshore, such as some of the less compliant contractor umbrella companies, to avoid paying income tax and national insurance contributions (NICs) for their workers.In practice, the loophole is mostly exploited by two groups: highly paid employees, such as financial sector workers, and low and mid paid temporary workers, such as temps, supply teachers and social workers. The numbers of contractors on these schemes are believed to be relatively low.

The former – the bankers – benefit personally because their employer employs them via the offshore intermediary. This is done specifically so they don’t have to pay so much income tax and NICs, particularly on their bonuses. In the case of the latter – the temps and contractors – the offshore intermediary and the end-user client are the ones that benefit, because they pay less to employ their contingent workforce.Back in June 2013, HMRC launched a consultation that outlined some of the measures it might take to close the loophole and recover the unpaid income tax and NICs.

The consultation has closed and HMRC proposes that recruiters, employment agencies and master vendors (agencies who contract other agencies to supply workers, but don’t supply any themselves) make up the difference of any unpaid income tax and NICs.If you are a contractor, you’re probably thinking, ‘Phew, it’s not like IR35 then’. If you are a recruiter, no doubt you are thinking ‘Oh no, not again….’. And if you are a client, you are probably not thinking about it at all, because HMRC has just suggested that it is not your problem.

But this is wrong. Clients stand to gain the most, while the other members of the supply chain get stiffed for the client’s gain. Recruiters will be required to make up any shortfall in income tax and NICs when an offshore intermediary is used, and they will pass these costs on to contractors and other temporary workers by increasing their margins.

Why should the end-user clients not pay for this, as they are the party in the supply chain to benefit the most? Could it be that HMRC has put chasing major corporates for unpaid income tax and NICs in the ‘too hard’ file, when it can chase recruiters, the bulk of which are not multinationals with tax lawyers on tap and who are therefore likely to roll over the easiest?

If you are concerned that you or, if you are a recruiter, your workers are not paying the correct amount of tax, then please get in touch. We can help you develop a tax strategy that ensures you remain compliant and fulfil all your tax obligations, and don’t fall foul of the existing, and proposed, legislation.