A different approach to offshore crewing arrangements?
A different approach to offshore crewing arrangements?
In essence, the crew involved will either not be UK tax resident, or as UK tax residents, able to benefit from the Seafarers Earnings Deduction (SED) which may take care of any tax that would arise. They are employed by an entity that is, as the name suggests, "offshore", rather than by the end user of the crew's services. This end user will not therefore consider itself as the employer, either for PAYE or national insurance purposes, and might ordinarily think that no such liabilities could arise.
With increasing focus on repairing the UK’s finances, the Government has tasked HMRC with closing the "tax gap" so HMRC is looking to deploy its resources in areas that can offer the greatest return. Over 52% of the UK's tax take arises from PAYE/NIC, and with around 22,000 UK seafarers in the maritime sector, it won’t be surprising to see HMRC dial up scrutiny. But how could HMRC approach things differently now?
Simplifying the rules
There is a general policy trend within HMRC to harmonise tax treatment and have fewer specialist rules for specific sectors. This could mean applying the normal rules for internationally mobile employees (IME's) to offshore crew members. By way of example, under general employment tax legislation, provision exists for HMRC to levy a PAYE liability on any UK entity that a seafarer "works" for, even when employed by an offshore entity. Also, you could be forgiven for thinking that the SED would extinguish a PAYE liability, but this is not strictly the case; the SED is a personal tax relief that has to be claimed - it does not remove the application of the PAYE regulations.
Who is responsible?
From a social security perspective, whether a UK NIC liability arises is subject to the interpretation of who truly is the economic employer of the crew. Is the employer the offshore entity that usually issues the employment contract, or the UK entity that benefits from their service and funds the salaries? This, in itself, is not a new point, but HMRC now has further legislation at its disposal to test it.
A range of anti-avoidance provisions, such as the disguised remuneration ("DR") legislation, can be applied to secure a PAYE/NIC liability. The only real precursor is that a third party, along with an employer and an employee are involved in the provision of remuneration. If HMRC chooses to see a UK entity as the employer for DR purposes, then the offshore entity operating the crew arrangement will be a third party in this context.
There are also a number of reporting requirements under the Senior Accounting Officer ("SAO"), Corporate Criminal Offence ("CCO") and, since April 2022, the Uncertain Tax Treatment ("UTT") legislation that also need to be considered. The SAO and UTT apply to UK entities of over £200m turnover or with £2bn in assets, but the CCO requirement applies to any UK entity irrespective of turnover or assets.
Any attempt by HMRC to use their wide-ranging powers to gather additional PAYE/NIC can often be defeated based on the facts of each case, but that might not necessarily protect employers from costly and time-consuming enquiries. If your organisation uses an offshore crewing arrangement it is important to consider testing how it would measure up to HMRC scrutiny before a letter arrives.