It’s been well over a year since the Criminal Finance Act (CFA) was introduced 30th September 2017, which saw companies become criminally liable for any facilitation of tax evasion and tax avoidance schemes by any persons representing the company, and a recent Tax Journal has proposed that HMRC is ‘chomping at the bit to investigate.’
After the ‘off-payroll reform’ hit the Public Sector in 2017, an explosion of various tax avoidance schemes hit the scene, pouncing on affected contractors who had seen a drop in their salary retention due to the legislation change.
It has come to light that HMRC is currently looking at a variety of ‘high-CFA risk’ companies and their practices, such as those who use of complex tax structures and supply chains or work with low margin workers, alongside increased political focus to investigate and clamp down on tax evasion.
With the introduction of the new Loan Charge, HMRC is empowered to act against the thousands of contractors who’ve received their payments in various guises of tax avoidance schemes such as loan schemes or alternative disguised remuneration. We are now seeing contractors being hit with significant tax bills, that in some cases are life-changing amounts.
Unfortunately, despite the Criminal Finance Act 2017, the rise of tax avoidance schemes is still prevalent within the recruitment/contractor industry and there is a surprisingly complacent approach amongst recruitment agencies who are yet to take responsibility on how their contractors comply with UK tax laws.
How will the Criminal Finance Act affect recruiters?
Crawford Temple (CEO of Professional Passport & PRISM) has reported to the Recruiter that these legislation changes can be bad news for agencies, as “contractors are already getting demands from HMRC for non-compliance, and in some cases, these are coming back to recruitment agencies.” Contractors are likely to look back up the supply chain and point blame to the recruiter who referred them in the first place, with the possibility to cause major issues with the company. The industry has already seen that significant tax bills of up to £20K already demanded.
The contracting industry is no longer about chasing the highest retention dream and for recruitment companies who naively refer to providers who offer 80%+ take home, whether it be simply misinformed or the temptation to generous rebates; any person caught facilitating tax evasion, could see the whole company be criminally liable leading to convictions, severe penalties and a damaged reputation.
One of the biggest risks for agencies, who’ve either previously or still use such schemes, is if a person is aware of a client that is involved in such schemes, then the Director is still liable. So even if active referrals are not happening, if there is a contractor using one of these providers on your books, then the legislation still applies.
For a recruitment agency to avoid liability, there must be “reasonable prevention procedures” implemented. Once an offence has been proved, the burden shifts to the company to show that it has reasonable measures to prevent the facilitator committing the wrongdoing.
What can recruiters do next?
If your agency has not already done so, now is the time to fully assess relationships with all umbrella companies and carry out rigorous due diligence on your supply chain.
Speak with each provider on your approved list and ask them to provide a breakdown of the workers’ total pay, which should show clearly full PAYE deductions. If there is an element of pay that’s not subject to PAYE then this should raise concern.
Alongside the payslips, a compliant provider will also be able to give evidence to confirm that 100% of the gross pay is paid through Real Time Information payroll. If the answer to this is no, then it’s likely to be considered disguised remuneration.
A significant number of these providers thrive because they pay through separate entities that are offshore, so check that the umbrella provider is paying the worker through the same entity.
The most obvious sign is that these tax avoidance schemes brutally suggest that the workers can have 80%+ retention, or alternatively offering consultants ludicrous referral bonuses. These ‘kick-backs’, if undeclared for tax and NI purposes, are likely to aggravate any offence relating to the referral in which the bonus was for.
Recruitment agencies should consider working with umbrella companies who are audited by professional bodies such as Professional Passport, APSCo or FCSA. This will streamline the supply chain as these providers are regularly audited and therefore will be able to supply evidence of their compliance from these external auditors.
If you wish to discuss any of the mentioned topics within this article, please give Natasha a call on 02017 078 0211 to arrange a chat.