It has become common in certain sectors to take on individuals not through the payroll but as self-employed consultants or contractors or by contracting with the individual’s Personal Service Company (PSC). The reasons for engaging services in this way are numerous and not limited to just the possible saving of tax and national insurance.
This method of working however is under sustained assault both from the tax authorities and claims to employment rights and benefit by individuals to the Employment Tribunals.
There is now a further risk that organisations urgently need to be aware of which comes in the shape of the Criminal Finances Act 2017, which extends to facilitating tax evasion.
The issue with onboarding consultants
In addition to all the existing requirements already placed on the shoulders of those engaging people, organisations must also take steps to ensure that they do not facilitate UK or non-UK tax evasion when on boarding consultants. There is a significant risk where an employer deliberately turns a blind eye to the employment status of a contractor or consultant, which may even arise where they are engaged via a personal service company or an agency.
For engagers outside the public sector where an individual is engaged via a PSC the obligation to account for tax and NIC still lies with the PSC. However, if the contractor knows they should be an employee under the IR35 rules but sets up a PSC anyway and fails to account for tax under the IR35 mechanism, he or she could be guilty of tax evasion. Furthermore where an employee in the engager’s organisation is involved in engaging, paying or supervising the contractor (even where the contractor is engaged via an agency or intermediary) and knows that this is the case and ignores/encourages the practice, then the employee is possibly also facilitating evasion and his or her employer is at risk under the Criminal Finances Act 2017.
A business will however have a defence if they can prove it put reasonable procedures in place to prevent the facilitation of tax evasion taking place and they did not ignore or encourage the practice.
Who is affected?
All companies or other employing organisations and associated persons who engage contractors and do not include them within their payroll procedures, even where they are engaged via a personal service company or agency.
Organisations should therefore put in place steps to protect themselves such as:
- Carry out an assessment to identify the risk of facilitation of tax evasion within the organisation specifically looking at PSCs and other contractors/consultants.
- Identify any gaps in those procedures and controls
- Put in place policies and procedures including staff training to bridge any gaps
- Carry out a review of engagement contracts to ensure that they mirror the true working relationship with the individual or PSC and amend/update these where necessary.
- Use the HMRC online employment status tool to provide evidence of the individuals status based on the facts of the engagement
- Make sure that the processes are followed, well documented and easily assessable in the event of an enquiry.
- Review these procedures on a regular basis
If these steps are properly implemented this should mitigate the risk of falling foul of the new legislation.
The future of the onboarding process
It is likely that government will shift the PAYE liability away from the individual PSCs and onto the engager as it has already done for the public sector. All organisations who use off-payroll contractors should therefore urgently review their on boarding procedures to quantify and minimise their risk. Employment status issues can no longer be ignored.
Menzies has produced further information to assist organisations put in place processes to avoid possible prosecution under this Act and if you are interested please speak to your usual contact.
Finally, in the not for profit sector where public opinion is so key in preserving the organisation’s reputation and the continuation of its funding streams, care needs to be taken in how engagements are structured, as the BBC has recently found to is cost.