How your agency can help head off criminal liability
This is ‘ContractorUK’ and not ‘AgencyUK,’ but contractors -- there are some goings-on inside the employment business you use that you should know about. And more than that -- the actions you take on tax, could put your agency at risk, writes Lucy Smith, managing director of Contractor Umbrella.
To understand why, we need to hark back to April 2017 -- when the Criminal Finances Act (CFA) 2017 was announced. But it actually came into force on September 30th 2017.
What is the Criminal Finances Act?
The CFA makes partnerships or limited companies ‘criminally liable’ if they do not prevent their staff, suppliers and/or clients -- or any other ‘external agent’ within the supply chain -- from carrying out tax evasion. Worryingly, this ‘prevention of tax evasion’ offence can be deemed to have taken place even if the senior management team of the business in question was not involved in, or aware of, the act of tax evasion being carried out.
With the new legislation, HMRC has altered the way in which criminal liability is assigned, creating a situation where an ‘associated business’ may be liable for a tax avoidance offence by someone within the agency’s supply chain, simply because they were aware of the offence and did nothing to prevent it. The upshot is this: it is now much easier for HMRC to convict companies that facilitate tax evasion in some way, even if that is just by not taking full responsibility for ensuring their supply chain is operating in a compliant manner.
How does CFA affect me and my agency?
This has huge implications for recruitment agencies which deal with limited company contractors, umbrella companies and contractor accountancy firms. The onus is now on these parties within the supply chain to ensure that their industry colleagues are not committing, encouraging, or turning a blind eye to tax evasion activity.
The legislation requires an evidential defence if you are caught in the supply chain. So now is therefore the time to know exactly who you are dealing with and to ensure your ‘due diligence’ delivers the proof you may need, should you get caught up in an investigation by HMRC.
As to agencies supplying limited company contractors, such agencies should:
1. Whether or not related to tax avoidance activity, ensure their consultants do not accept incentive payments as they may fail to account for the tax and NI contributions due on such payments.
2. Refuse to pay an intermediary which facilitates tax evasion (e.g. disguised remuneration)
3. Refuse to refer contractors to a tax evasion scheme in return for timesheet rebates
4. Cease to trade with contractors, if you become aware that they are participating in a tax evasion scheme or activity.
Which steps constitute 'due diligence'?
Compliance standard "kite marks" may look impressive but unfortunately these are only truly valid on the day the practices got reviewed, and obviously the business and operational practices after the review date could always vary.
So how do you know what to look for as a contractor recruitment agency with, say, an umbrella in the chain? Well in terms of looking for tax-related red flags, as a minimum, you’re hoping not to see contractors using loans or offshore schemes. The easiest way to check the taxes being paid is to request a recent payslip (with personal details removed), and a corresponding RTI submission from the umbrella. If the amount of taxes differs, then questions should be asked by your agency business. But it doesn’t stop there. The legislation leads us to believe that it is a “catch-all”, so it’s not only these schemes you need to be looking out for.
To ensure proper ‘due diligence’ is carried out, it is imperative that contractors’ agencies and end-clients have an understanding of the payslips produced by the umbrella.
Firstly, it would be advisable to check that all the following elements have been included on the slip:
- Employer’s National Insurance
- Apprenticeship Levy (if the business has a payroll over £3m which the majority of umbrella’s will easily reach)
- Employee’s National Insurance
- PAYE Tax
- Childcare (if applicable)
- Expenses (Chargeables).
So that’s the first check. Secondly, look at the ‘Net Pay.’ For an umbrella worker, this should always be in the region of 52-62%, in terms of take-home, unless pension, or other deductions like childcare are present. If the net pay is significantly more than this, again it should raise red flags.
Let’s now turn to expenses, which is a slightly more complex area. Since April 2016, no umbrella company should be processing any part of the earnings as non-chargeable expenses. If a contractor incurs expenses which attract tax relief and such expenses are not reimbursed by the client, then tax relief can only be secured by the contractor submitting a claim to HMRC.
NB: chargeable expenses are another matter. For example, it may be the case that the end-client has agreed to reimburse certain expenses, in which case the umbrella can process these. However, while some expenses may be fully reimbursed, others may need to be taxed as a benefit-in-kind. The best example of a taxable, chargeable expense through an umbrella is expenses incurred on home-to-workplace travel. In a nutshell, each umbrella employee's workplace is regarded as a "permanent" workplace for tax purposes and any associated travel, subsistence, accommodations costs reimbursed fall to be taxed.
So for contractor agencies, taking these simple steps could mean they avoid criminal prosecution. If you’re in the supply chain, make sure you do the relevant ‘due diligence’ to spot any red flags on the companies you work with, and remember a simple ‘compliance’ stamp or bad will not suffice as there’s no flick-switch solution to complying with the CFA.