Off Payroll rules & the rise in non-compliance in the Public Sector
Following the IR35 reform in the Public Sector in 2017, SThree and our brands have been supporting customers to engage with their contract workforce compliantly.
Unfortunately, it has become more commonplace to see non-compliant providers in the market putting Public Sector businesses and individuals at significant risk.
The government introduced new corporate offences of failure to prevent the facilitation of tax evasion contained in the Criminal Finances Act 2017 which came into force on 30th September 2017.
The Act makes businesses liable for the actions of their employees and other ‘associated persons’ who intentionally facilitate tax evasion. Businesses will be liable even in cases where senior management were either uninvolved or unaware of the acts. Those found guilty will potentially face unlimited fines, a criminal record, and will be barred from public sector procurement.
Non-compliant payment models and the Criminal Finance Act
Let’s look at the Act and how it could manifest itself in one of the many recent examples that we have been made aware of.
A Public Sector client, rather than choosing to engage a contractor by the Agency who introduced them, decide to engage them through another Agency.
Why did they do that?
They did this because the contractor had requested to work through this Agency as they would allow them to use a non-compliant Umbrella Company and the Agency would also introduce them to companies that used non-compliant models. As a result of this the contractor would receive a higher take home or net retention on their earnings than they should have received due to the Umbrella Company offering a non-compliant model. The contractor was aware of the scenario and actively pursued/sought to use the model to increase their take home pay.
The Agency involved knew that the Umbrella Company were not offering compliant services but worked with them as they knew it would result in more business. The client were facilitating the act by allowing this to happen whilst knowing the reasons for the use of the non-compliant providers.
In this scenario there is fraudulent tax evasion by the tax payer, criminal facilitation of the tax evasion by the person associated with the relevant body and a failure of the relevant body to prevent the person associated from committing the criminal facilitation act.
Does this sound familiar?
Client determine Inside, Agency pay Outside (yes, really)
This is another example of some of the non-compliant behaviour we are aware of in the Public Sector. Some agencies, despite receiving a very clear Inside IR35 determination on an from a Client will ignore this determination and continue to make gross payments to a contractor’s Limited Company. By purposely breaching the Legislation they hope to gain a competitive edge.
This practice puts the contractor and the agency at risk and after an investigation, should the agency disappear, the end client will be the one left with the tax liability, fines and PR nightmare.
How to stay compliant and minimise risk
All of this is avoidable by only working with compliant providers. SThree are a compliant PLC - we conduct a tender process every two years to select an Approved Supplier List (ASL) of Umbrella Companies who have to pass a very strict compliance checking process before being able to tender. All five of our ASL companies are FCSA accredited which is widely recognised as the industry’s compliance gold standard.
If the contractor is using a Limited Company and we receive an Inside IR35 determination, we have a process in place to make the Deemed Payment in line with the Legislation.
If the contractor is using a Limited Company and we receive an Outside IR35 determination, then we make the gross payment as contractually agreed, again, in line with the Legislation.
In short, trading through any of the SThree brands, you are in safe hands.
If you are a client, what should you do next?
- Look at your agencies and the supply chain below them
- Ask suppliers for evidence of compliance if you have any concerns
- Train and educate your hiring managers on the risks of facilitating non-compliant supply chain providers
If you are a contractor, what should you do next?
- Ensure that you are only working with reputable agencies. If you have any doubts about the currently supply chain you are in or the payment mechanism, make sure you ask questions
- Ensure that the determination that was provided by the client for the Assignment you are working on mirrors that in the way you are being paid
If you would like to discuss any specific concerns, please contact myself or Kellie Kwarteng and we'll be happy to help.
And who decided that FCSA accredited umbrellas were the holy grail? It is getting rather tedious hearing this term -"compliant umbrella"- what is a compliant umbrella and what is it compliant to? There is just too much misinformation out there and we, as contractors, simply cannot just stand by and read such inaccuracies.
This article is full of inaccuracies and completely misrepresents the CFA. And why on earth would the fee payer pay the contractor as a deemed employee if he (the feepayer) doesn't agree with the client's determination?
Experienced director level interim and change professional leading on governance, policy, strategy, performance and risk, largely within the public sector
5 年Good article but does nothing to address the real problem that IR35 is fundamentally flawed. I have had a role determined by HMRC calculator as outside IR35 but the organisation had a blanket approach of all roles being inside IR35 meaning I have no right to appeal, am left without a role or picking up ￡20k per year of expenses (after tax) for travelling to do the tole. The real issue is that IR35 is ill conceived and fails to recognise or care for how people work these days and is merely there to generate more revenue for HMRC rather than them racking the underlying issue of massive tax avoidance / evasion by big businesses, finding it easier to Harry’s, bully and shift the tax burden to individuals...
Senior Business Leader | Change Management | Risk, Regulatory, Finance | Board Advisor | Financial Services & Banking | Looking to support businesses to attain objectives in an interim, board and consultancy capacity
5 年I've heard of roles being offered by corporations on the basis of 'inside IR35 or via an umbrella company' and leaving the 'choice' with the contractor.
This is interesting, and a warning for agencies who are considering non-compliant models. One observation though - it is not a breach of the legislation if the client provides an opinion of ‘inside IR35’ and the agency makes a fresh determination of ‘outside IR35’. This is because neither the client or agency have the statutory power to make a definitive decision, only HMRC or the courts do. Also, the agency are not legally obliged, by the legislation, to follow the clients determination. There are in fact 16 variations based on the daft (I’ve omitted the ‘r’ on purpose) legislation, which I’ll be talking about next week.