A tax expert from the global professional services firm Ernst & Young has predicted that the chancellor’s budget re-assertion of a clampdown on tax-dodging offshore Umbrella Companies will result in new legislation by 2014.

By operating in low tax jurisdictions such as the Channel Islands and the Isle of Man, these offshore intermediaries exploit a legal loophole, employing UK workers but evading UK tax and national insurance obligations. The loophole is estimated to have deprived the Exchequer of £100 million last year.

The Red Book accompanying the budget clearly states that the government will “consult on strengthening obligations to ensure the correct income tax and NICs are paid by offshore employment intermediaries.” Even before the consultation has started, however, Ernst & Young’s director of global employment tax services, John Chaplin, has predicted an early change in legislation. He said: “I would be amazed if it wasn’t aimed at closing what is perceived to be a tax leakage in this case of employers’ NICs in respect of people working and earning their living in the UK.”

Mr Chaplin continued: “Effectively you have got UK-based people working in the UK for UK employers but simply because the payment and employment mechanism is based outside the UK, employers’ NICs are avoided.”

The REC’s director of policy, Tom Hadley, also applauded the clampdown. He said that the recruiters who abide by the rules have been disadvantaged for too long by less scrupulous businesses skirting round the law.

His sentiments will be shared by the the UK’s legitimate onshore Umbrella Company Services, which automatically pay tax and NICs for all their employees on a PAYE basis.

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