Recruiters beware, the UK Criminal Finances Act 2017 is here

Criminal Finances Act

2nd October 2017

D-Day is here. This weekend saw the launch of the UK Criminal Finances Act 2017, and we can’t stress enough just how important it is for recruitment firms to remain compliant with this new legislation.

The UK Criminal Finances Act 2017

As City AM put it in early September, you can perhaps be forgiven for not knowing too much about this particular Act at the moment, but you certainly don’t want to be the last to get up to speed. So, here’s a brief overview.

The Criminal Finances Act has global significance in the crackdown on fraudulent activity and effectively makes it a criminal offence to fail to prevent ‘associated persons’ from facilitating tax evasion. It’s important to stress that this isn’t a tax issue. This law focuses on fraudulent activity that is deemed criminal in the UK and applies to any company incorporated in the country or overseas firms conducting business in this location.

It is the ‘associated persons’ element of this Act that recruiters really need to get to grips with. These can be any individual or entity that provides a service to the company, meaning that you could face prosecution for the acts of partners or subsidiaries, for example. And as the offence is that of failing to prevent fraudulent activity, you can still face prosecution even if you were unaware of what the associated person was doing.

This means that you are wholly liable and the only defence is to demonstrate that you and your firm have reasonable procedures in place which are designed to prevent the facilitation of tax evasion. And there really is no one-size-fits-all solution to this. These compliance policies need to be tailored to your firm’s activity and they need to be regularly monitored in order to ensure that they remain on point.

Example situation

Given the potential impact this Act could have on the recruitment industry, we held a seminar last month in partnership with Camino Partners and lawyers Taylor Wessing. During this event, attendees were provided with a hypothetical situation they could face.

In summary, the scenario is that of a recruitment firm which places a contractor in a position in Italy and then refers him to a management company based in Cyprus that the firm has used before. The individual – a German national who splits his time between the UK and Germany – is then advised by the management company of a means to reduce his tax payments by using an ‘expenses card’ into which 60% of his income is transferred. They further advise him to spend this money in the UK and Germany, rather than Italy. This arrangement means that he only pays taxes on the 40% of his income that is paid into his Italian bank account.

Under the new Act, the recruitment firm is considered accountable for this fraudulent activity as it has a contract with the recommended management company, making them an associated person. This means the recruiter will face prosecution.

Of course, this legislation isn’t as simple as the above example perhaps sounds and there are many complex details to be taken into account. However, the critical point to take away is this: you can face criminal charges for failure to prevent the fraudulent activity of those associated persons you work with across borders.

You need to act, now

The Criminal Finances Act 2017 is a crucial development for recruitment firms operating internationally and the sheer complexity of contractor management solutions means that businesses could very easily be caught out through no fault of their own. Don’t be fooled into categorising this new legislation as just another tax concern. It is criminal law, making it paramount that expert advice is sought immediately. Now that the Act has come into force, authorities will expect firms to have ‘reasonable procedures’ in place, so if you haven’t yet taken steps to do this this or you’re unable to demonstrate how policies work and how they will be monitored, you really do need to give us a call.


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