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View the related Tax Guidance about UK continental shelf

Employment on UK continental shelf

Employment on UK continental shelfPosition from 6 April 2014Significant changes were made to the provisions from 6 April 2014 and from that date the amended SI 2001/1004, reg 114 means that all employees on the UK continental shelf (UKCS), including mariners who are engaged in oil and gas-related activities on an installation, are deemed to be resident in the UK and liable to pay primary NIC. There will also be a secondary liability and the legislation determines the secondary contributor as:•the employer, if that employer has a place of business or other presence in the UK•any entity with an associated presence, if the employer has no presence (an associated company is defined in CTA 2010, s 449)•the oil field licensee, if there is no associated presenceThe key to the matter is the definition of installation. This is so widely drawn that it includes all structures including vessels on the UKCS. There are some exceptions to this general rule and they are as follows:•mariners who are engaged wholly or mainly on safety or supply vessels or a combination of both •engaged in cable-laying•individuals who are employed in one of the positions outlined in Column A and holds the relevant certificate as listed in Column B of Table 1 in SI 2001/1004, reg 114(5) (table reproduced below for ease of reference), and whose presence on board is in order to comply with the safe manning

Offshore oil and gas workers

Offshore oil and gas workersIncome tax on earningsAn employee’s tax position can sometimes depend on whether he carries out his duties in the UK or elsewhere. This is the case if the employee is non-resident in the UK, or not domiciled in the UK with the remittance basis applying (see the Tax on cash earnings ― overview guidance note for more details).As offshore oil and gas installations in waters around the UK are outside the UK’s territorial waters, duties carried out on board those installations are, as a matter of fact, carried out outside the UK. However, for income tax purposes the worker is treated as carrying out his duties in the UK if:•the worker’s duties are carried out on connection with the exploration or exploitation of natural resources on or under the seabed•he works in the UK sector of the Continental ShelfITEPA 2003, s 41For more information on the geographical limits of the UK sector of the Continental Shelf see EIM67120.Transport to and from offshore installationsNormally, if the employer meets the cost of travel between home and the workplace, this is taxable as a benefit. However, there is a specific exemption for travel for oil and gas workers for that part of their journey which is between the mainland and the offshore installation. More precisely, the exemption applies to travel between the mainland port or airport which the employer normally uses as the departure, or arrival point for transfer between the offshore installation, and the location

Offshore employment companies

Offshore employment companiesIn the past, HMRC has investigated a number of attempted avoidance schemes involving offshore employment intermediaries. Those schemes were mainly aimed at avoiding secondary (employer) Class 1 NIC. HMRC considered most, if not all, of the schemes to be flawed, and it continues to challenge them, although enquiries can be complex. Against this backdrop, HMRC conducted a review during 2013 as to how best to change the rules relating to offshore employment intermediaries being used to avoid tax and NIC to make enforcement easier. This focused in particular on the deliberate hiring via an offshore entity (agency) to take advantage of the rule that payment of contributions cannot be enforced where the employer has no place of business in the UK.As a result of the review and subsequent consultation process, the government introduced legislation effective from 6 April 2014 to prevent avoidance in the payment of secondary NIC by offshore umbrella and agency companies, and where workers are employed on the UK Continental Shelf (UKCS) (in particular, those in the oil and gas industries).However, those UK ‘host’ businesses already compliant and deducting PAYE including Class 1 NIC should not be materially affected by the revised legislation. The thought process behind the legislation is that where PAYE has not been correctly applied by an engager, HMRC will be more easily able to ascertain the facts in each case, in order to assist enforcement and ensure a clear hierarchy between the ‘host’ employer rule and the agency rule.Rules applicable

Earners categorised by regulation

Earners categorised by regulationBackgroundWhen applying the usual employment status tests to individuals, the tax and NIC position will generally be the same. However, there are certain individuals who, because of social security benefit entitlement purposes or administrative convenience, are treated differently.SSCBA 1992, ss 2(2), 7(2) allow that regulations may provide for:•employment and the earnings from that employment to be disregarded for NIC liability purposes•a person in any prescribed employment to be treated as falling within a category of earner other than that in which they would otherwise fall•the secondary contributor to be specifically definedIn simple terms, this means that certain employments will be disregarded altogether; some individuals who would be self-employed for tax purposes under the usual rules (see the Employment status tests guidance note) would be treated as employed earners and in the same way that some employed earners would be treated as self-employed. The detail is found in the Social Security (Categorisation of Earners) Regulations 1978, SI 1978/1689.Employments to be disregarded for NICThe following types of employment are disregarded for NIC:•employment by close relatives provided that the employment is in a private dwelling house in which both the employee and employer reside and it is not employment for the purposes of any trade or business carried on there by the employer. The legislation lists the close relatives for this purpose as the father, mother, grandfather, grandmother, stepfather, stepmother, son, daughter, grandson, granddaughter, stepson, stepdaughter, brother, sister, half-brother or half-sister of the person employed.

Employment intermediaries: reporting requirements

Employment intermediaries: reporting requirementsIntroductionAs from 6 April 2015, a reporting obligation applies to employment intermediaries, requiring them to make quarterly returns to HMRC in respect of the workers they use to supply services to their clients where PAYE is not operated in respect of those workers. This reporting requirement is embedded in the PAYE regulations, despite applying to intermediaries who may have no direct employees, no PAYE scheme and no current exposure to the PAYE regime. The HMRC guidance is at ESM2070 onwards. Not only does it apply to employment agencies and intermediaries such as personal service companies (PSCs) or managed service companies (MSCs) but also to any business which uses freelancers to supply services to its clients, even if only to supplement the services supplied by its own workforce.The reporting obligation is completely detached from the RTI system and requires online submission of a free-standing quarterly report.There are penalties for late, incomplete or incorrect returns.Who is affected?This reporting obligation falls on any employment intermediary who has a contract with the third person in respect of the work being done, but only if the intermediary provides more than one worker to the client. The reporting is therefore intended to affect employment agencies and other businesses supplying workers.In this context, an employment intermediary has a very wide meaning. It is a person who makes arrangements under which (or as a result of which) an individual works for a third person or receives payment for work done for a third person.

Seafarers’ earnings deduction

Seafarers’ earnings deductionThis guidance note sets out the conditions for workers on board a ship to obtain a 100% deduction from UK employment income for income tax, where work is partly or wholly overseas. The national insurance position is also considered. See also Checklist ― seafarers’ earning deduction.Working on board a ship, conditions for claiming seafarers' earnings deductionIndividuals who are employed on a ‘ship’ may claim a 100% deduction from UK earnings for income tax, where duties are performed wholly or partly outside the UK, during an eligible period. The deduction is usually referred to as the seafarers’ earning deduction (SED). The conditions are rigorous and are subject to anti-avoidance provisions. As will be seen below, the definition of seafarer is wide and can cover, for example, entertainers working on board a cruise ship. The definition of ship for SED excludes oil and gas exploration, and has implications for divers, especially where work may be within the UK continental shelf (see working as an employee on board a ship, below).The SED will be considered under the following headings: •employee tax residence and location of work •working as an employee on board a ship•qualifying periods •anti-avoidance •claims, notification and returns •pension payments, High Income Child Benefit Charge and student loans •national insurance.Employee tax residence and location of workSED is available to UK tax resident employees and to EEA resident employees who are seafarers. In both cases, SED is against UK employment income from

DPT ― entities or transactions lacking economic substance

DPT ― entities or transactions lacking economic substanceA charge to diverted profits tax (DPT) for an accounting period can arise if one or more of the following three scenarios apply:•a UK company uses entities or transactions which lack economic substance•a non-UK company uses entities or transactions which lack economic substance•a non-UK company avoids creating a UK permanent establishment (PE)FA 2015, s 77(2)This guidance note sets out details of the charge to DPT in respect of the first two scenarios. Detailed examples of section 80 and section 81 cases can be found in HMRC’s guidance at INTM489780 onwards, including the application to particular types of assets and industries.See the DPT ― avoidance of UK permanent establishment guidance note for details of the charge arising in the third scenario.FA 2015, ss 80 and 81 are an extension of the UK transfer pricing provisions in situations where profits are diverted from a company with a UK corporation tax presence, to related persons (related by the ‘participation condition’ set out below), that give rise to a significant tax reduction as defined under the DPT legislation (using the ‘80% payment test’ ― see below). The related persons can be based either in the UK, by being resident or by having a PE in the UK (broadly in circumstances where advantageous UK tax arrangements apply), or outside the UK. Like the UK transfer pricing rules, reference is made to provision (the ‘material provision’) made or imposed between two persons (in the case

Indirect and third party relationships ― overview

Indirect and third party relationships ― overviewThere are a variety of working relationships between workers and clients. The most common relationship we address in this module is that of employee and employer; however, there are also a variety of indirect and third party relationships where the work is not carried out by an employee of the ‘client’ ― the end user of the services. There is a wide range of working relationships and these can be complex in terms of PAYE treatment (references in this topic to PAYE include income tax, NIC and other payroll costs, such as the apprenticeship levy, as relevant). The most well-known example of a third party relationship is that of a worker with their own personal service company (PSC). They are the sole director and shareholder of that PSC and the PSC has a contract to provide services to the client. The worker therefore has no direct contractual relationship with the client.Indirect and third party relationships ― signposting of main guidanceThe method by which an individual is engaged and the type of ‘client’ they work for will determine the tax and NIC considerations in most cases. The table below sets out where to find the main guidance for the more common forms of engagement:DescriptionGuidance notesEmployment status tests ― the guidance on how to assess whether a worker is an employee or not, which is the basis on which the off-payroll working rules are appliedEmployment status ― why

Location of employer and effect on liability

Location of employer and effect on liabilityTaxation of UK employmentNon-resident employees’ UK-based earnings are taxed under ITEPA 2003, s 27. Employees who are not resident in the UK are only chargeable to UK tax on general earnings for duties performed in the UK. For this purpose, the critical test is the place of performance of the duties, not the location / residence of the employer.An employee who is resident in the UK is taxed on their general earnings for the tax year under ITEPA 2003, s 15 other than in the two following situations:•where a UK resident employee is able to claim overseas workday relief, earnings attributable to overseas duties will be taxable under ITEPA 2003, s 26 to the extent that they are remitted to the UK. The earnings attributable to UK workdays continue to be subject to tax under ITEPA 2003, s 15.•where a non-UK domiciled employee has chargeable overseas earnings, they are taxed under ITEPA 2003, s 22 to the extent that the earnings are remitted to the UK ― see the Remittance basis ― overview with employment focus guidance noteWhere earnings need to be apportioned to decide the extent of earnings attributable to UK duties, the apportionment must be on a just and reasonable basis. If the tax year is a split year, ITEPA 2003, s 26 applies only to foreign earnings attributable to UK workdays.Where an individual is paid in the UK for all duties, irrespective of where carried out, the income

Classes of NIC and who pays them

Classes of NIC and who pays themClass 1 NICClass 1 NIC is payable on earnings paid to an employed worker which derive from, or are treated as deriving from, an employed earner’s employment in the UK. There are two kinds of Class 1 NIC, primary contributions for which the employee is liable and secondary contributions which are payable by a ‘secondary contributor’. The secondary contributor is usually the employer, but in some cases as set out below may be another defined party.Primary (employee) liabilityFor a primary liability to arise, the employed earner must be resident or present in the UK at the time of the employment, or ordinarily resident in the UK at that time. The fact that presence in the UK is sufficient to create a NIC liability means that unless an exemption applies, employment in the UK for however short a time will create a NIC liability. Employment in an EEA country or Switzerland, or in a country with which the UK has a bilateral social security agreement will often require NIC liabilities to continue. In such circumstances, an individual is treated as being continuously resident in the UK.Secondary (employer) liabilityFor a secondary liability to arise, the person who would be the secondary contributor must be resident or present in the UK when NIC becomes payable, or has a place of business in the UK at that time. BrexitThe UK negotiated a Withdrawal Agreement and left the EU on 31 January 2020 (referred to as ‘exit day’)