Whenever there is financial pressure on contractors, we see an increase in activity from tax avoidance schemes, many of them calling themselves umbrella companies. We saw it in 2017 and 2021, when IR35 reform caused some contractors’ take home pay to drop, and we’re seeing it again as the rogues attempt to exploit concerns about the cost of living. In this article we’ll look at how you can protect your recruitment business from the consequences of getting involved with tax avoidance schemes.
Why should recruiters care if their contractors avoid tax?
The main issue with tax avoidance schemes, is simply that they don’t work. If there was a way for contractors to legitimately reduce their tax bill, we as a responsible umbrella company employer would advise our employees to use it, but there isn’t.
Any so called “umbrella company” who claim to have such a method is lying. What they’re doing may simply involve not paying the right amount of tax, in which case your contractors will eventually receive a demand from HMRC for all the tax they’ve “avoided” plus interest and penalties, or it could involve criminal tax evasion, in which case the consequences could be much worse.
Having your contractors go through something as harrowing as a tax investigation will obviously damage your recruitment business, particularly if you encouraged them to sign up with the offending umbrella company in the first place, but there are other potential consequences too.
The Criminal Finances Act 2017 means that if a recruitment consultant directs a candidate to the services of a payroll provider with the reasonable expectation that correct tax will not be paid to HMRC, this is an act of “facilitating tax evasion”. As there is no legitimate way to reduce your contractors’ tax, this potentially includes all referrals to umbrella companies based on higher take home pay through lower tax bills.
Even if you as the owner/manager are not involved or aware, your agency could still be found guilty of “failing to prevent the facilitation of tax evasion”. This offence carries unlimited fines and a possible custodial sentence.
How you can protect yourself and your recruitment business
If your recruitment agency is investigated for failing to prevent the facilitation of tax evasion, the only effective defence is to demonstrate that you took “reasonable steps” to stop it happening. These could include:
Risk assessment
HMRC suggests that internal procedures are risk assessed to identify any practices that could be used to facilitate tax evasion. This may include highlighting instances where staff are less open about client or supplier relationships.
Review your procedures
Your risk assessment will highlight any internal procedures that need to be updated. The key is to demonstrate a high-level commitment to preventing the facilitation of tax evasion, which may include providing a safe whistle-blowing procedure, providing staff training on identifying and preventing financial crime, and monitoring, enforcing and reviewing prevention procedures.
Train your staff
It is essential that all employees and other representatives of the business are aware of the company’s stance on preventing the facilitation of tax evasion and the seriousness of a breach. Training can either be carried out in-house or using a third-party specialist.
Audit your supply chain
For recruitment businesses, this legislation makes it more important than ever to know that your preferred umbrella and contractor accounting suppliers are above board. Using only established umbrella suppliers who can demonstrate a commitment to compliance is the best way to protect your business and your contractors.
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.