The IR35 scenario an evasion rule behoves you to avoid

Disclosures last month that recruitment agencies are being investigated by HMRC over potential breaches of a new corporate tax evasion offence no doubt turned contractors’ heads, writes Steve Cornwall, operations director at ICS Accounting.

But if we may, we recommend that all contractors should be looking forward, because there is a scenario potentially incoming that seems tailor-made to get caught by the offence, in force since September as part of the Criminal Finances Act 2017.

This is the scenario:

1. Client confirms that chosen temporary worker is caught by IR35
2. Hiring manager then appoints agency payroll/umbrella organisation
3. The agency payroll/umbrella organisation is purposefully engaged to deem the temporary worker outside IR35, which it does.

This scenario could be playing out right now in the public sector. Or it may have done so already. In fact, there were some signs in the big long run-up to the April 2017 reform of IR35 – which put the onus on public sector clients to decide IR35 status – that the scenario first hit then. But if private sector IR35 reform happens, as many fear and assuming it too involves the client setting status, the above scenario could get its second wind. So a perfect regulatory storm could be nearing: the off-payroll framework imposed on private PSCs with the corporate evasion offence ready to sting clients or agencies who help PSCs avoid it.  

Where the evasion offence bites

Be in no doubt, this appointment of an agency payroll/umbrella organisation -- purposefully to come up with an outside IR35 decision -- is snuggly within the CFA’s crosshairs. That’s because the act makes it an offence for businesses that fail to prevent the facilitation of tax evasion. And for a typical offence to be caused, a party in the contractual chain (the client in the above IR35 scenario), will have provided a non-compliant recommendation (not necessarily for financial gain).

More specifically, in order for an ‘offence’ under the act to be enforceable, any of the following three elements may apply:

1. Criminal tax evasion by a taxpayer (either an individual or legal entity) under the existing criminal law

2. The criminal facilitation of that tax evasion by an ‘Associated Person’ of the relevant body

3. The relevant body failing to prevent its ‘Associated Person’ from committing the criminal facilitation act.

As you can see, the CFA offences concern the actions of ‘Associated Persons’ within the organisation. An ‘Associated Person’ (AP) relates to employees, agents, subsidiaries, consultants or contractors, acting on behalf of a business, who intentionally facilitate the tax evasion.

So it’s a whole host of individuals who are covered by the AP definition. That’s why experts on the legislation are right to advise that it is designed to highlight the importance of looking not only within an organisation, but also across the entire supply chain to ensure compliance remains consistent.

But in and around the typical contractual chain, contractors should be on their guard to be aware of -- or head off the following:

1. Loss of Earnings

It’s not uncommon that should a temporary worker be placed in the hands of a non-complaint umbrella firm, the pay they receive is incorrect. Typically, some agencies or umbrellas promise 90% take-home pay, which should raise a red flag.  If you are referred to a payroll provider which claims anything above 75%, we recommend raising it with your recruiter.

2. Disappearing Agencies

In the worst cases, some agencies are known to receive the pay from the end-client and then disappear! As this is an unregulated industry, you’d need to go back to your end-client to work out a remedy.

3. Unexpected Tax Bills

Even if your finances are being managed by another company, it is still your responsibility to ensure you’re paying the correct level of tax. If you are found by HMRC to be underpaying tax, you can receive an unexpected tax bill.

Head in the sand won’t help

Finally, beware hefty penalties for non-compliance. As the agencies in receipt of HMRC demands will attest, organisations will be liable under the CFA 2017 even in the cases where senior management were either uninvolved or unaware of the acts.  If it is proven that there have been systematic failures within prevention procedures, organisations will be hit with a corporate criminal offence; find themselves barred from public procurement, hit with unlimited fines, and have to deal with a damaged reputation.

Unfortunately, ignoring that this may be happening within the supply chain is simply not an option. The legislation puts the onus on the parties to clearly demonstrate that reasonable precautions have been taken. In other words, and similar to the end-game with IR35 that contractors in the private sector are hoping doesn’t come into play, HMRC’s approach is ‘guilty until proven innocent.’