28th May 2019
Here at 6CATS, something we’re vocal about is the fact that the risks associated with contractor compliance are growing, and anyone working in the space needs to be aware of the global movement to stricter and more comprehensive tax systems. Unfortunately, this is something many recruitment firms are failing to recognise, with a significant number exposing themselves to unnecessary risk due to a failure to enforce compliance procedures across the board. Common factors that could potentially impact firms include: compliance functions being viewed as “business inhibitors”, inconsistent information being available and the lack of “top down” enforcement of policies within organisations. So, what are the main things recruiters need to be aware of in order to stay on the right side of the law?
Contractor compliance risks: failure to prevent the facilitation of tax evasion
The Criminal Finances Act 2017 (CFA) is one of the key developments that has added to the risks of contractor compliance and made it essential for recruiters to take seriously. The regulation contains an offence titled ‘failure to prevent the facilitation of tax evasion’, which means that if anyone associated with a company is caught evading taxes, including your international contractors, then that firm could be guilty by association. The only defence against this offence is evidence that the company had ‘reasonable’ procedures in place designed to prevent the facilitation of tax evasion. This should be a powerful incentive for agencies to ensure they have a comprehensive compliance programme or they risk suffering serious consequences.
High level of ignorance
With developments such as the CFA and the Common Reporting Standard, compliance functions should be considered valuable tools, but this often isn’t the case. For instance, we regularly review contracts from recruitment businesses, wanting to operate internationally, that use UK model documents full of references to IR35, AWR and compliance checks, but with no reference to either the host country or more generic international considerations. Aside from the potential legal and financial implications, this lack of attention could cause serious damage to a business’ brand and, subsequently, its relationship with candidates and clients. Despite this, there remains what we feel is an unacceptable number of firms unfamiliar with the potential risks their company is exposed to. In fact, a recent HMRC survey of senior individuals in 1,000 UK companies and partnerships highlighted that a staggering 75% of businesses were unaware of the Criminal Finances Act, with only 8% having carried out training on the law.
Other common mistakes
There are other mistakes recruiters commonly face which are making the risks of contractor compliance far greater. For instance, split-payroll – where an individual’s pay is divided between their local and home-country currencies – is non-compliant under the CFA. Using any loopholes that enables a professional to increase take-home pay is in breach of the Act and could affect agencies if their team has failed to notify them that a contractor is involved in such activities. Agencies should also be aware that risk can’t be offloaded to contractor management companies. Certain suppliers are using non-compliant solutions that would see agencies in breach of the CFA unless they can demonstrate that adequate procedures were put in place to prevent the facilitation of tax evasion.
Recruiters need to be aware
Tax and compliance rules in the UK are very strict, and recruitment businesses working internationally often fall foul of thinking that just because services are being delivered outside of the UK, they are somehow sheltered from risk. As a result, rather than ramping up their compliance processes, they relax them. However, this is far from the truth – and the risks of contractor compliance should make having adequate procedures in place a top priority for all firms placing contractors abroad. To avoid the common sales vs compliance battle, the need for training and guidance to be delivered in a clear and uniform manner is essential. When implemented correctly, compliance should become a sales tool – helping companies differentiate their business and brand from the crowd. As the global tax crackdown doesn’t look like slowing down anytime soon, recruiters will need to act quickly if they intend to place contractors abroad safely. By working with experts in the field, you can remove this burden, and focus solely on the task at hand.
Contact us today: