Tax compliance: know who you’re working with

Damian Broughton

Advances in the construction industry could point the way to more compliant taxation practices across the whole recruitment industry, explains Damian Broughton

The national headlines are dominated by tax. From huge multinationals to one-man businesses – the Government’s drive to plug the holes in public finances is leading to the regular repositioning of the legislative goalposts and bringing compliance to the fore of thinking. 

To put it into context, compliance is simply expressed as a practice that operates legally in the eyes of Her Majesty’s Revenue & Customs (HMRC).

One of the greyer areas of tax guidance is found in the Construction Industry Scheme (CIS), which is a veritable minefield for recruitment agencies, accountancy providers and workers alike.

One of the biggest challenges with the scheme has been that it places the obligation on workers, or “subcontractors”, to determine whether or not they are eligible.

This approach leaves a lot of room for error and if a contractor is wrongly enrolled, an HMRC tribunal will scrutinise all parties in the contractual chain to determine who is responsible for the breach and paying compensation.

Ultimately, everybody from the recruitment agency to the CIS solution provider could be pursued for any monies owed.

An effective way of demonstrating the complexities of CIS legislation is to look at various types of work. A landscaper setting up gardens for a new-build housing development as part of the overall construction programme would probably be suitable for CIS (assuming other controls are met). After the build, were the landscaper to return to a maintenance contract and tending the lawns, they would not be covered. Similarly, despite being one of the larger projects currently taking place in the UK, the construction of the Royal Navy’s new HMS Queen Elizabeth aircraft carrier, is unlikely to be covered as shipbuilding is specifically excluded in the CIS legislation.

The level of scrutiny and knowledge required to fully understand these and many other legislative nuances only comes with experience and qualified staff operating diligently produced systems and processes.

Minimal guidance, maximum scrutiny

While there have been ongoing problems of interpretation resulting from the loose wording of the CIS guidelines – HMRC has demonstrated clearly what it means through its execution of the legislation.

The constant presence of ‘grey areas’ in tax legislation is something we have to tolerate, and ascertaining exactly how to best interpret these areas is the reason leading accounting service companies employ highly qualified specialist tax accountants. 

The only way for leading accountancy providers to ensure they don’t let ineligible contractors slip through the net – potentially damaging both their and the recruitment partner’s reputations – is to impose robust checks on contractors, to work closely with the HMRC and regularly review procedures ensuring full compliance.

Not only does this lead the industry to more robust risk-free practice – it points the way forward to the kind of rigorous compliance checks and procedures that will become the norm across the industry.

Industry-wide compliance

Where grey areas exist in legislation, there will always be a problem of interpretation. To gauge where the land lies, some operators of schemes may end up sailing close to the wind as they seek to maximise the take home pay of contractors – however, this is a risky practice. 

HMRC has dramatically ramped-up its compliance activity in recent months. Areas coming under increasing scrutiny include the expenses procedures used by umbrella services, IR35 and offshore solutions. Keeping systems and processes up to date with ever changing legislation is quite simply the most important thing contractor accountants do and being compliant requires constant vigilance. 

With this increased scrutiny, umbrella and limited company providers should not simply aim to comply – they should aim to put watertight protections in place for the benefit of contractors, recruiters and indeed themselves.

Intimate knowledge of tax legislation is the only safeguard. If you need compliance support, focus on companies that recognise the importance of robust risk management systems, and have invested in building them. Accounting service providers, especially those in the contractor industry should be able to demonstrate this with both internal standards such as ISO 9001, the IiP Gold Standard and those of a number of external organisations such as APSCo, Professional Passport, CIMA, ICAEW, ICA, AAT– the importance of which cannot be underestimated.

It is essential providers continually assess their policies and procedures to ensure their contractors, and as importantly the agencies and end clients, receive a compliant and lawful accountancy and taxation service.

Damian Broughton is managing director of contractor accountancy and payroll specialist Danbro