Being seen to be compliant – Part 1

Julia Kermode

There is a clear appetite to rid our sector of poor practice and, given the current political climate and a raft of media exposure around ethics and exploitation, it will be no surprise to anyone that supply chain compliance is set to get tougher.

There is a raft of government activity underway all set to kick poor practice into the long grass. The Criminal Finances Act (CFA) came into effect last September. Its aim is to make companies and partnerships criminally liable if they fail to prevent tax evasion by either a member of their staff or an external agent, even when the business was not involved in the act or was unaware of it. Whilst tax evasion is already an offence, up until now it has not been possible to attribute criminal liability to the firm where it occurred.

Prosecution could lead to both a conviction and unlimited penalties. We also know that the government is keen to stamp on poor employment practices and is now in the process of considering some of the 50+ recommendations Matthew Taylor suggested in his Review into modern employment practices. Four consultations have since been issued by the government as they seek to gather feedback and take action to implement some changes. And, in addition, the Director of Labour Market Enforcement, Sir David Metcalf is keen to give more responsibility to end-hirers for compliance throughout the labour supply chain which he outlined last month.

Taking all this into account, it is vital that compliance is firmly put on the top of any recruiter’s or end-hirer’s priority list. Julia Kermode is chief executive of The Freelancer & Contractor Services Association (FCSA), the UK’s largest independent trade association whose members provide professional support services to some 130,000 freelancers and contractors. Here she outlines some of the legislative measures that have been put in place to help hirers to navigate the employment landscape and stay compliant.

The Criminal Finances Act
With the Criminal Finances Act (CFA) now law since September last year, it means that agencies must conduct due diligence on their supply chain or risk the new Corporate Criminal Offence – failure to prevent tax avoidance. Anyone found guilty could 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 of these seek to 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) continue to engage with a contractor that is known to operate through such a scheme.

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.

The Criminal Finance Act makes recruitment firms vulnerable if their supply chain is poorly managed. They must 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 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.

No firm can afford to turn a blind eye to tax evasion practices that might be taking place within their organisation. A business will have a defence against prosecution if it can show it has reasonable prevention procedures in place.

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.

Interestingly, just recently I heard from a credible source that some recruitment consultants have received a bill from HMRC for unpaid tax on incentive payments. It seems that the consultants received payment from one or more umbrellas and no tax was paid on this income, hence the bill from HMRC. So, please beware! It could be just a matter of time before the Criminal Finance Act is brought to bear on these practices.

Non-compliance in supply chains
In May, Sir David Metcalf issued the first ever Labour Market Enforcement Strategy in which he outlined proposed measures to tackle non-compliance within the supply chain, placing joint responsibility on end-clients and their suppliers to ensure that the whole workforce is not being exploited in an important move to instilling good working practices. Sir David has promised to punish rogue employers who undercut honest businesses which is a significant and positive step to genuinely levelling the playing field for compliant businesses. In the past, government policymakers have simply paid lip-service to tackling the issue and have failed to heed any warnings about the unintended consequences of unscrupulous firms exploiting the loopholes in the system.

Interestingly, the recently issued consultation on off-payroll working in the private sector also considers the possibility of requiring businesses to “secure their supply chain”. This would require hirers to do due diligence to ensure that their supply chain is compliant with a variety of employment and tax laws. If this were to go ahead it is likely that there would be some sort of financial penalty, and recruitment firms would play a key role in supporting their clients. Now more than ever it is important to get the basics right. That includes right to work checks, paying the national minimum and living wages, providing holiday pay and clear terms. All of these themes are also being explored by the government as they consider how best to implement recommendations from the Taylor review.

Sir David has also proposed that the Employment Agencies Standards Inspectorate has its powers extended to include intermediaries. FCSA has long campaigned for such regulation so that we can drive out the unscrupulous firms which have tarnished the reputation of the sector. Without regulation, we will not rid our industry of rogue businesses, so it needs to be tackled head-on and as a matter of urgency to allow the great many compliant intermediary businesses that provide a valued and professional service to all parties in the supply chain to thrive unhindered.

Part 2 of this article will be published on Thursday 5 July, and will look at agency compliance regarding the minimum wage, holiday pay, and transparency of contractual terms and conditions.

Julia Kermode is chief executive of the Freelancer and Contractor Services Association (FCSA), the UK’s largest independent trade body that is committed to setting standards for umbrella employers and contractor accountancy providers.