The Criminal Finances Act (CFA) means that it is now imperative for agencies to conduct due diligence on their supply chain or risk the new Corporate Criminal Offence – failure to prevent tax avoidance. Those found guilty can potentially face an unlimited fine, a criminal record and, of course lasting damage to their professional reputations.
Hardly a week goes by without some sort of tax avoidance scheme hitting the headlines or HMRC winning a tax case with significant consequences. Many tax-avoidance schemes disguise remuneration as something else, whether it is gold, annuities, loans, employee benefit trusts, or marketing expenses to name a few recent ones. By deliberately disguising remuneration, scheme promoters reduce taxable earnings, and therefore maximise take-home pay. The Criminal Finances Act makes recruitment firms criminally liable for failing to prevent tax evasion, which means that they could have a criminal liability if they (deliberately or unwittingly) recommend such schemes to contractors.
Something as seemingly innocuous as referring a contractor to an umbrella firm can have corporate criminal consequences if that umbrella is actually a tax avoidance scheme. We know that scheme facilitators are targeting contractors directly, particularly those within the public sector who may have seen their income decrease due to recent IR35 changes. Furthermore, these schemes may dress themselves up to appear compliant, meaning that recruitment firms could easily be duped – due diligence includes remembering that things may not always be what they seem.
Recruitment firms are vulnerable if their supply chain is poorly managed. They will have to exercise due diligence with regard to their Preferred Supplier List (PSL) or risk being accused of failure to prevent tax evasion by putting contractors in touch with intermediary firms who evade tax.
All recruitment firms should take action to ensure that their consultants only refer contractors to firms on a carefully vetted PSL. They need to put in place effective policies and procedures to deal with any incentives that their staff might be offered by intermediaries in exchange for referring contractors to them. Cash incentives are particularly risky if they are not declared as taxable income for the individuals receiving them.
Good umbrella firms should have already been working with their agency partners on due diligence processes to prevent their staff or associates being accused of non-payment of the correct tax. No firm can afford to turn a blind eye to tax evasion practices that might be taking place within their organisation.
Although it is yet more red tape for compliant businesses to contend with, I am hopeful that the CFA legislation will stamp out dubious and unethical practices, and go some way towards levelling the playing field for everyone.
One course of action recruitment firms can take now, is to get fully up to date with tax and employment legislation by attending the FCSA Compliance Seminar Roadshows, to be presented on 7th November in London and on 8th November in Manchester. A business will have a defence against prosecution if it can show it has reasonable prevention procedures in place, so registering for these seminars with FCSA might be a very rewarding step.