The Criminal Finance Act 2017

What does the Criminal Finance Act 2017 mean for recruiters?

On 30th September 2017, the Government introduced The Criminal Finance Act making partnerships or limited companies ‘criminally liable’ if they do not prevent their staff, suppliers and clients – or any other ‘external agent’ within the supply chain – from carrying out tax evasion.

As you read through the legislation, the ‘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.

CFA Considerations

The legislation looks at two areas for consideration;
the facilitation of the evasion of UK tax, by any business wherever it is located,
the facilitation of non-UK tax evasion, by businesses with a UK connection

The view of HMRC is that it is time for companies to pay attention to the activities of the people they work with, ensuring that they take due diligence seriously and monitor those within the business. If caught under the legislation, companies may become liable for their ‘failure to prevent tax evasion’. If prosecuted and convicted, there are unlimited penalties, which could be applied.

Tax Evasion

The offence of ‘tax evasion’ itself has not changed, and the same rules apply – when a person or an organisation does something intentionally, which enables them to pay less than their true tax liability, then it is an offence.

The focus with the CFA 2017 is where companies are deliberately dishonest, meaning that a genuine mistake, or even a careless act, would not result in a conviction. These tax evasion laws cover personal income tax, corporation tax, VAT and National Insurance contributions.

Assigning criminal liability

Now criminal liability may be assigned when an ‘associated business’ may be liable for a tax avoidance offence by someone within their supply chain, simply because they were aware of and did nothing to prevent it. This means that HMRC are now able to convict companies that facilitate tax evasion, even if that is just by not completing due diligence on their supply chain who may not be operating compliantly.

What does it mean for recruitment agencies?

So as a recruiter it is now your responsibility to ensure that you know the organisations you deal with, be it limited company contractors, umbrella companies and contractor accountancy firms. You will need to ensure that any businesses (and individuals) within supply chain are not committing, encouraging, or turning a blind eye to tax evasion activity.

Tax avoidance schemes have been rife in the industry for years and yet much has been done to eradicate them, no-one operating in this industry can afford to be complacent about the fact that these schemes could still be taking place somewhere within their supply chain.

Failing to prevent tax evasion

As an example, you would be deemed liable for ‘failing to prevent tax evasion’ if one of your recruitment consultants encouraged a limited company contractor client to get involved in this type of scheme, when they knew it was set up in order to avoid tax. And you would also be liable even if someone within your organisation was simply aware that a contractor client was involved in this type of scheme, even if they were not involved in encouraging or recommending it. In this situation, a Recruitment Agency would be considered to have ‘failed to prevent the facilitation of tax evasion’.

There will be no get out clause by simply stating that the management team were not aware of a scheme being non-compliant, or that your client was involved in it unless you can demonstrate that you have taken positive action to prevent any facilitation of tax evasion taking place.

Criminal Liability

So the only way to avoid criminal liability is to show that you have implemented ‘reasonable prevention procedures’ – or to demonstrate that, based on the circumstances of the case, it would have been ‘unreasonable or unrealistic’ to expect you to have had those procedures in place.

HMRC is aware that some umbrella companies are still using loan repayment and other similar schemes to help their contractor employees pay less tax and NI. Combine this with an increase in the use of umbrella companies by recruitment agencies since the public sector IR35 changes in April 2017, and it’s clear that there could be many such agencies who are open to risk without even realising it. If the taxpayer decides not to declare a loan of this type in their tax return, then it is classed as tax evasion – and suddenly, under the new prevention of tax evasion rules, the recruitment agency or the umbrella company can become liable.

Working with a compliant umbrella company is now more key than ever, so do make sure you have done your compliance checks on a business before your decide to engage with them!