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National Insurance warning to employment businesses

Friday, 22 November 2013

Island-based businesses which employ staff working in the United Kingdom are being urged to make sure they are paying the correct National Insurance contributions.

The warning from Eddie Teare MHK, the Treasury Minister follows the conclusion of legal proceedings against a local company found to owe £3.2 million in employer NI contributions, ultimately payable to HMRC in the UK.

The case against Penfolds Limited centred on the Social Security Reciprocal Agreement between the Isle of Man and the UK.

In August 2008 HMRC informed the (then) Department of Health and Social Security in the Isle of Man that the company was not making the correct deductions of employer Class 1 National Insurance Contributions (NIC) as required.

Penfolds Limited was licensed in the Isle of Man as an employment business and employed individuals who were neither resident nor employed in the Isle of Man. The company employees were made available to businesses situated in the UK for which the company received payment.

As the company was the employer of the individuals, employee Class 1 National Insurance was deducted from the salaries and paid to HM Revenue & Customs but no payment of the employer Class 1 NIC was made.

The company maintained that as they had no place of business in the UK they could not be liable to pay employer Class 1 NIC on the salaries paid to their employees who worked and were resident in the UK.

DHSS held that as a result of the Social Security (United Kingdom) Order 1977 the employees working in the UK were to be treated as working in the Island and as a consequence the company was liable to pay employer Class 1 NIC on the salaries paid, the sum outstanding amounting to £3.2 million.

The company appealed this decision on the basis that the reciprocal agreement did not cover the payment of NIC but only contributory benefits such as State Pension. In July 2012 the Staff of Government Division in the High Court of the Island dismissed the appeal.

The company sought leave to appeal the decision to the Privy Council. Earlier this year the Privy Council refused leave to appeal meaning that the sum of £3.2 million in employer Class 1 NIC was due to be paid.

The appeal before the Court can be read at

Minister Teare said: 

‘Using the Isle of Man system to try to avoid national insurance payable under the reciprocal agreement is not acceptable.  The Isle of Man has worked hard to gain its reputation as a responsible centre for top quality international business. There can now be no doubt that employer NI contributions must be paid and I would urge any employer in a similar situation to contact the Income Tax Division before they contact you.’

Assessor of Income Tax, Nicola Guffogg, added:

‘This is an important issue for Isle of Man employers as ultimately they can be held personally liable for any missing NI contributions.  Any employer who has employees working in the UK and has not paid employer class 1 NIC should contact the Income Tax Division on 685041 for advice as soon as possible.’

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