What is the Criminal Finances Act and why does it matter?

The Criminal Finances Act was introduced on 30 September 2017, and was designed to bring criminal charges against any corporate organisation which fails to prevent its employees and other associates from facilitating tax evasion.

What is tax evasion?

Tax avoidance is defined in the Oxford Dictionary as “ways of paying only the smallest amount of tax that you legally have to”.  The term is often confused with tax evasion.

Tax evasion is defined in the Oxford Dictionary as “the crime of deliberately not paying all the taxes that you should pay.”  

Tax evasion is illegal, tax avoidance is not illegal.

What does the legislation do?

The legislation provides for criminal charges to be brought against any corporate body that fails to prevent it’s employees and associated persons from facilitating tax evasion.  Those found guilty will face a potentially unlimited fine, criminal record and untold reputational damage.  

Ignorance is no defence.  The legislation states that the offences are ones of strict liability meaning that a company may still be liable even if the directors are unaware it was taking place, even if they had no reason to suspect it might be taking place.  

Recognising tax avoidance vs tax evasion is difficult, even for HMRC, and is part of the reason why, if you’re an agency worker, your agency might require you only work with an umbrella from their Preferred Supplier List (PSL).   

Click here to find out why.

This is why PSLs are so important, and why an agency may insist you work with their partners – to mitigate their financial and criminal risk by only working with trusted compliant umbrella companies.

The impact on recruitment agencies

There is a clear risk to recruitment firms if a member of their staff recommends an umbrella company that is actually evading tax.  

Simply having a preferred supplier list might not be enough – if the PSL includes a corrupt firm then the agency could be unwittingly encouraging tax evasion.  For the same reason, recruitment agency staff are often barred from working with a firm that is not on their PSL. 

The Criminal Finances Act is a key reason why agencies usually invest significant time and energy developing and enforcing their PSLs; the risk of not doing so is too great.   

Some agencies receive referral fees from their suppliers as part of a transparent B2B contract/relationship, and providing such income is processed through the business correctly then appropriate tax is likely to be paid.  However if staff members within the recruitment agency receive such incentive payments directly, there is a risk that this income is not being taxed appropriately, and therefore the recruitment business could be guilty of facilitating tax evasion.  

This could be the case even if the recruitment business is unaware that its staff are receiving such payments.  

The Criminal Finances Act legislation is significant, it is very broad and could have dramatic consequences.  

As ignorance is no defence, doing nothing is not an option for most reputable recruitment agencies.  

They need to be able to prove they have taken reasonable steps to prevent the facilitation of tax evasion associated with the business.  This usually means undertaking due diligence on their suppliers and having policies and processes that minimise their risk.  

As we’ve said a few times now, it is due to these very significant risks that recruitment agencies will often enforce their PSLs, ultimately giving you two choices – either work with one of their suppliers or don’t work at all.

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