New IR35 rule ‘raises client risk to corporate evasion offence’

The private sector IR35 reform proposal threatens to expose clients to the new corporate criminal evasion offence if they fail to ensure PSCs pay the "right amount" of tax, a law firm is warning.

Assuming the much-disliked IR35 reform plan is adopted, the September 2017 offence could catch engagers if the contractor is found evading tax, as opposed to avoiding it, cautioned Pinsent Masons.

So rather than just simply applying a liberal interpretation of IR35 case law, the contractor could expose their client if the PSC had been outright dishonest, such as by lying to HMRC.

But Pinsent Masons partner Ian Hyde points out that for complete exposure, a client employee would also have to be aiding and abetting the criminal conduct. He also told ContractorUK:

“Turning a blind eye to a contractor deliberately misrepresenting their position when using HMRC’s employment status tool and perhaps falsifying documents to back this up, so that the company agrees to engage a worker through a PSC without deducting tax, could amount to facilitating tax evasion.” 

Parties other than the client’s direct staff could be the falsifier who brings exposure however, as the offence contains an ‘associated persons’ clause, meaning recruiters too carry a risk.

“The use of agencies is a particular concern and businesses should insist on agencies taking their own steps to prevent the facilitation of evasion,” Mr Hyde said.

“And as we are talking about criminal offences, there would be potential prosecutions of the individuals involved and for the end-client company, the risk of a corporate prosecution – which could carry a fine for the company -- but worse than this, the PR implications and being barred from government contracts.”

The corporate criminal offence of failing to prevent the facilitation of tax evasion took effect on September 30th 2017, with six-part HMRC guidance available for affected parties.

It makes business 'vicariously liable 'for the criminal acts of its ‘associated persons’ in facilitating tax evasion by others, even if the senior management of the business was not involved or aware.

However, experts say a business will have a defence if it can show that it had reasonable prevention procedures in place, or that it was not reasonable in the circumstances for it to have such procedures.

“The corporate criminal offence has applied since…September so this is a risk now – but will also be an issue under the new[ly proposed IR35] rules,” Mr Hyde said.

“End-clients need policies and procedures in place to protect them from the risks of a criminal offence in case a ‘rogue’ employee is facilitating evasion of tax by the businesses’ contractors or customers.” 

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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