The thorny issue of payroll compliance and supplier incentives

Matthew Huddleston, managing director of FPS Group, explains how new compliance legislation will affect the recruitment industry and reveals what to do to ensure you’re up-to-date.

On 30th September, a new piece of compliance legislation comes into effect. It is imperative that recruiters and recruitment businesses are aware of the implications. From this date, a company can become criminally liable for failing to prevent involvement in tax evasion by any connected party, including employees. 

The thorny issue of payroll compliance and supplier incentives

 

Whilst the intention of the legislation was to combat accountants and tax advisors who assist evaders, the legislation actually captures all UK businesses and HMRC have signalled their intent to use it wherever they deem appropriate.

The legislation means a business could be convicted of assisting tax evasion by their staff, even when the senior team were not aware. The only defence an affected company can rely upon is that they had proportionate procedures in place to prevent involvement in assisting evaders.

Where are the risk areas for recruiters?

The principle risk for recruiters is the referral of their contractors to payroll providers who are not deducting the correct levels of tax from those workers.

There have been many articles written on how to check a provider’s payroll compliance, so I will not repeat that here. The basic rule is that there is simply no legitimate way of enhancing contractor take home pay. Companies which market solutions to do so should be strictly avoided. A legitimate provider will issue a payslip to the contractor with a breakdown of exactly what has happened to every penny an agency has remitted to them. Random payslip reviews are a good basic step to demonstrate a policy of enforcing compliance and any provider failing to account for all of the funds they have received or failing to make the correct deductions should be removed from approved supplier listings.

The second area for consideration in light of the new legislation is the referral incentives both consultants and agencies may be offered by payroll service providers. The new legislation (as well as existing Anti-Bribery law) means that simply turning a blind eye to the receipt of incentives is no longer an option. The reality is that providers who avoid deducting the right levels of tax have the deepest pockets from which to pay incentives. Leaving the issue to market forces amongst providers is going to lead your staff towards the higher rewards on offer from the least compliant providers.

Understanding the impact

Since the changes to IR35 for the public sector this April, a large numbers of contractors have changed from supplying their services via their own limited companies to more aggressive solutions in order to maintain a greater proportion of their pay. This has led to the establishment of relationships between consultants and non-compliant providers already, where large incentives are being paid right now.

From the 30th September, if an employee of an agency receives an incentive from a provider who is helping the contractor evade tax, there is a clear link between the staff member and the evader. That leaves the agency liable to prosecution. Remember, at this stage the only defence is that the company had appropriate policies and procedures in force to deter this. The issue may become even harder to defend if HMRC are able to show that the employee may have failed to declare tax on the incentives they received too.

It is essential that agency owners know what is being paid to their staff from payroll providers and they have policies in place regarding this. Simple common sense comes into play - if a provider is offering ‘too good to be true’ levels of incentives, then questions should be asked and extra checks conducted.

The public sentiment seems strongly in favour of wide ranging powers for the authorities to tackle tax avoidance and evasion. Corporate entities are far easier to target and hold to account than individuals. Whether it is fair or not, all UK corporates including recruiters need to take action to ensure their houses are in order before they become liable on 30th September. 

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