HMRC has reminded us that the use of umbrella employment companies for tax avoidance in relation to temporary workers may constitute a corporate criminal offence. Here is the wider picture.
The Government’s approach to combatting corruption, money laundering and tax evasion was given a boost by the Criminal Finance Act 2017, which introduced two corporate criminal offences (CCOs).
Both concern a company’s failure to prevent the facilitation of tax evasion – the first in the UK and the second in a foreign country. The offences apply to all entities, regardless of size, and carry the risk of criminal prosecution and unlimited fines. Companies operating in regulated industries will also suffer from additional regulatory scrutiny and reputational damage.
Financial industry risks
For insurance brokers and intermediaries, this means that where an act of Criminal Tax Evasion takes place under UK law, and an associated person of the broker facilitates that tax evasion while performing services for or on behalf of the broker, the broker will be guilty unless it can prove the statutory defence. Please note that a conviction is not required.
HMRC’s guidance to the statutory defence covers six principles:
The guidance is very clear that any risk assessment carried out must focus on tax and be specific to the company’s business. The larger the group, the size of its global footprint and the range of associated persons, the greater the potential exposure. Brokers re-badging Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures will not have a statutory defence unless all tax risks are considered and evaluated.
Umbrella company malpractice
In light of the above, it’s worth considering the impact of HMRC’s recent reminder in October’s Employment Bulletin about temporary workers and the use of umbrella employment companies.
Recruitment agencies may outsource their HR and payroll to an umbrella company which employs the temporary workers and many of these umbrella companies are tax compliant. However, some umbrella companies claim to offer tax avoidance / disguised remuneration schemes without any legitimacy. These schemes try to avoid the need to deduct income tax and national insurance contributions which would usually be due under PAYE. Others simply fail to operate PAYE and NI properly committing payroll fraud and/or company fraud.
Why risk reviews matter
HMRC’s guidance reinforces a company’s responsibility to understand how its workers are engaged and paid. Where workers are employed through an umbrella company, it leaves itself and its workers vulnerable to lengthy tax compliance checks, tax liabilities and penalties – as well as considerable reputational damage.
This is not just a payroll or employment matter. It is a CCO one too. Failure to review the risk and take the necessary steps to reduce that risk could leave the company unable to claim the benefit of the statutory defence when challenged by HMRC.
This misuse of umbrella employment companies is just another example of how critical the risk review and proportionate risk-based procedures under the CCO process are. They are key to making sure a company has a defensible position in the fight against facilitating tax evasion.
For further information, please contact Chris Riley.
