Employment tax issues and the corporate criminal offences

Out-Law Analysis | 17 Apr 2018 | 1:29 pm | 3 min. read

ANALYSIS: Employment tax compliance is a significant risk area for the UK's new corporate criminal offences of failing to prevent the facilitation of tax evasion.

An employee who deliberately turns a blind eye to a contractor misrepresenting their position could be facilitating tax evasion, exposing their employer to criminal liability. The use of agencies is a particular concern and businesses should insist on agencies taking their own steps to prevent the facilitation of evasion. It would send a powerful signal if a business is prosecuted for employment tax compliance failures and then cannot bid for government contracts.

The new corporate criminal offences of failing to prevent the facilitation of tax evasion came into force on 30 September 2017. They effectively make a business vicariously liable for the criminal acts of its 'associated persons' in facilitating tax evasion by others, even if the senior management of the business was not involved or aware of what was going on. A business will have a defence if it can show that it had reasonable prevention procedures in place, or that it was not reasonable in the circumstances for it to have such procedures.

By now businesses should have conducted a risk assessment as to their exposure under the new offences and should have put their reasonable prevention procedures in place (or be in the course of doing so). With the increasing focus on employment tax compliance from HM Revenue & Customs (HMRC), this is a risk area for many businesses.

Until the new corporate criminal offences came into force, outside the public sector and leaving aside brand issues, a business which was engaging individuals who were operating through personal service companies (PSCs) or other intermediaries could be relatively relaxed about its tax exposure provided the arrangements were not a complete sham. In fact, owing to employers' NICs savings, there was an incentive for engagers to 'persuade' individuals to contract through PSCs and if HMRC investigated, the risk of potentially having to account for back tax and penalties would fall on the PSC and not the engager.  The new offence potentially changes this.

Businesses need to consider employment tax risks when implementing reasonable prevention procedures. This will be a particular concern for those with large numbers of off-payroll workers. 

For some businesses, where engaging workers through PSCs is not the industry norm, it may be simpler to have a policy that, except in exceptional circumstances, all workers will be engaged as employees, with tax deducted under PAYE. Where this is not an option, businesses need to make sure their reasonable prevention procedures adequately cover contractors and employment status.

HMRC has provided its online employment status tool to help individuals and engagers to determine HMRC's view of their status. Requiring the payroll team to use this tool could be part of a company's risk procedures. However, it is difficult to impose 'rubber tight' procedures, as the answer from such a tool is only of any use if the true facts have been entered into it in the first place.

Turning a blind eye to a contractor deliberately misrepresenting their position when using the tool and perhaps falsifying documents to back this up, so that the company agrees to engage a worker through a PSC without deducting tax, could amount to facilitating tax evasion. 

Employees are associated persons, but the definition can often include contractors and intermediaries, effectively putting the business's compliance in the hands of third parties.

The use of agencies is a particular concern and businesses should insist on agencies taking their own steps, including risk assessments, staff training and so on.  Equally importantly the business should monitor and review the agency's implementation.

As highlighted by the government's recent consultation on employment status, following on from the Taylor review, the current law in relation to employment status for both tax and employment rights purposes is difficult to apply, requiring case law to be applied to the facts of each individual. This means that errors in employment tax compliance are not necessarily due to the use of artificial schemes. HMRC is also taking a much tougher line on more routine items such as expenses payments.

HMRC recovered an additional £819 million from investigations into payroll taxes in 2016/17, up by 16% from the amount collected in 2015/16, according to figures obtained by Pinsent Masons. In 2016 HMRC established a new Employment Status and Intermediaries Team, specifically tasked with improving compliance in this area. Since then many businesses have been the subject of employer compliance reviews, where HMRC has looked in considerable detail at the arrangements a business has with consultants and freelancers, frequently finding underpaid tax and national insurance.  

Going forward, HMRC is likely to use all the weapons at its disposal to tackle the perceived abuses in the self employed/contractor area. It would send a powerful signal if a business is prosecuted under the new corporate criminal offences for employment tax compliance failures, particularly if that means it is then barred from bidding for government contracts.

Ian Hyde is a tax disputes expert and Chris Thomas is an employment tax expert at Pinsent Masons, the law firm behind Out-law.com. This is based on an article which was first published in Tax Journal on 6 April 2017.