CFA risk one year on: HMRC to focus on staffing companies' and their supply chains

The new corporate offence of failing to prevent the facilitation of tax evasion, often now referred to in the staffing sector as 'CFA risk', came into force a year ago. Recent reports suggest that HMRC is gearing up to investigate high risk sectors.

A recent Tax Journal report indicates that HMRC is increasingly likely to take an aggressive approach towards businesses associated in some way with schemes designed and contrived to pay workers outside PAYE. Political all-party focus on clamping down on tax evasion is also likely to lend support to investigation of possible CFA offences.

Key take-aways for staffing companies

• HMRC's guidance confirms that use of tax advisors, complex tax structures and supply chains together with internal cultures which encourage excessive risk taking will be regarded as higher CFA-risk practices.
• Staffing companies cannot afford to treat CFA compliance as a tick-box exercise: they should carry out proper risk assessments and due diligence on all risk areas. We know that many staffing companies have considered CFA risk and updated contracts, but often they have not done enough to ensure that they have a "reasonable procedures" defence in place.
• Based on recent deals we have acted on in the sector, we know that any staffing company looking to sell will, as part the due diligence process, need to demonstrate that it has carried out appropriate CFA-risk assessments and that it has done what is needed to create a "reasonable procedures" defence.
• Staffing companies that have not already done so should act now to fully assess their risk and carry out due diligence on all relationships they hold with umbrella companies and other payment intermediaries. Simply adding confirmation of CFA compliance to standard terms of business, or relying on an occasional and limited checklist audit approach, will often not be enough to provide a defence.
• Arrangements with umbrella companies and payment intermediaries should, where possible, make it clear that the umbrella does NOT perform services for and on behalf of the staffing company. Terms, practices and marketing messages around staffing companies' engagement of and use of umbrella companies are often unclear on this point.
• Arrangements involving third party payment of lower paid workers in particular should be treated as posing a high CFA risk. Staffing companies need to be sure that they understand how the schemes actually work and that they have satisfied themselves that the schemes do not involve fraud or deception of HMRC, for example, and that they have records of what they have done to understand the arrangements and to satisfy themselves.
• Staffing companies should review any steps they have already taken in relation to identifying and addressing CFA risk to ensure that what they have done is enough to provide them with a defence.

Background: what is tax evasion?

The line between criminal tax evasion and legitimate tax avoidance is an uncertain one: the new offence does not address this question so it's unwise to assume that links or referrals to what appear to be legitimate tax avoidance schemes do not pose a risk, even those "sold" with the badge of tax QC's opinion.

Staffing companies need to be particularly careful to assess any CFA risk they might have around the use of umbrella companies who might be operating aggressive tax avoidance schemes and any other arrangements intended to treat workers as self-employed when, in fact, they would not meet the self-employment tests.

When will an offence be committed?

A corporation will be guilty of the new offence if all three steps below are established:

1. a tax evasion offence is committed by a tax payer (a tax evader) (e.g. a contractor or local payroll company);
2. the commissioning of that offence is criminally facilitated by a third party (the facilitator) (which might be a recruitment consultant who has made a recommendation); and
3. the facilitator is associated with the corporation (the recruitment consultant’s employer).

Criminal intent on the part of both the tax evader and the facilitator must be established. There are, therefore, two underlying criminal offences that must be committed in order to hold the corporation liable, although it is not necessary for the offences to be prosecuted or the perpetrators convicted. However there is no requirement to establish intent on the part of the corporate. In fact, the corporate can be convicted even if it did not benefit from the offence.

This perhaps opens the door for prosecuting authorities to make deals with evaders and facilitators in order to go after the higher-profile and deeper-pocketed corporates. The legislation is not designed to capture the misuse of legitimate services that are provided in good faith. However, looking at the UK staffing industry, there will be situations where the “solution” is offered and bought on the understanding that tax will be minimised or reduced and in some cases that may create problems and potential liabilities under the new legislation. This is the area that will require some attention, particularly if preparing for a sale.

An offence will be committed where a corporate fails to prevent an "associated" person criminally facilitating the evasion of tax, whether the tax is evaded in the UK or in a foreign country.

The definition of an associated person is deliberately broad. It includes employees, agents and anyone who performs services for and on behalf of the corporate (which could include distributors, subcontractors, consultants, joint venture partners, subsidiaries and other group companies). In other words it could conceivably apply to people to whom a staffing company has outsourced compliance or payroll activities. It may also include sales contacts at umbrella companies and other payment intermediaries where the sales effort is geared towards the umbrella selling a service to the staffing company rather than (or as well as) to the individual workers. As a result, staffing companies should CFA risk-assess all referral (formal and informal) and preferred supplier relationships to ensure, as far as possible, that they do not pose a risk.

HMRC's guidance makes it clear that, "ultimately, relevant bodies need to “sit at the desk” of their employees, agents and those who provide services for them or on their behalf and ask whether they have a motive, the opportunity and the means to criminally facilitate tax evasion offences, and if so how this risk might be managed."

In any event, the receipt by a recruitment consultant of a "kick-back" payment (whether in monetary or other form) which goes undeclared for tax and NI purposes will, almost certainly constitute criminal tax evasion, and may be seen as aggravating any offence relating to whatever referral the kick back was for. Their employers will be liable in each case. We recommend that employers carry out a thorough compliance exercise in order to put themselves in the strongest position from a proportionate procedures defence point of view.

(Staffing companies would be wise at the same time to make sure they do not have liability under the similar enabling legislation of November 2017).

What should staffing companies do to protect themselves?

As the offence is a strict liability offence, if stages one (tax evasion) and two (the facilitation of that tax evasion) are committed then the relevant associated body will have committed the new corporate offence unless it can show it has put in place reasonable preventative procedures. Once the underlying offences have been proven (but not necessarily prosecuted), the burden shifts to the corporation to show it had reasonable procedures in place to prevent the facilitator doing what it did.

Staffing companies will not be liable if they show that they have reasonable procedures in place to prevent facilitation.

There are six guiding principles which should inform a company's prevention procedures: risk assessment; proportionality of risk-based prevention; top-level commitment; due diligence; communication (including training); and monitoring and review.

What is reasonable and proportionate for a corporate will depend entirely on the circumstances particular to it. A staffing company will need bespoke procedures based on an assessment of the particular risks it faces. Upon carrying out a risk assessment, it may be reasonable and proportionate for a staffing company that pays all contract workers via its own payroll (and subject to full PAYE and NICs) to conclude that a light touch compliance regime is sufficient. However, those companies relying on third party umbrella companies and other payment intermediaries to pay temps and contractors will need to carry out a more rigorous compliance exercise.

Whilst many staffing companies will have carried out some form of assessment, this does not necessarily mean that the steps taken will be sufficient to provide a reasonable defence. Inserting CFA clauses into contracts alone is unlikely to be sufficient. Although such clauses are advisable they should be inserted as part of a wider risk assessment process.

Staffing companies should review what steps they have taken in relation to identifying and addressing CFA risk.

How can we help?

We recommend that staffing companies and other businesses involved in staffing supply chains review their CFA risk assessment and compliance approach to ensure that they have proportionate and reasonable defences in place and that all recruitment consultants understand what CFA risk might look like in practice.

We can work with you to understand what this might involve, and how you can integrate your compliance and reporting programmes to future-proof against the current trend of ever-increasing levels of corporate transparency and liability. We offer fixed priced, one-to-one workshops for businesses operating within staffing supply chains.