Tax compliance: it’s vital to audit your resource supply chain

With revelations about the use of umbrella companies and the advent of IR35, companies need to urgently examine their supply chains for compliance issues, writes Matt Fryer.

The recent implementation of new IR35 legislation has focused attention on resource supply chain compliance. With the changes including debt transfer provisions that forward any unpaid tax liabilities to the end hirer, it has become the responsibility of businesses at the top of the chain to ensure that all parties are following the rules.

However, there are already many existing tax legislations for which responsibility for tax due ultimately lies with the end hirer. High-profile recent examples include the use of umbrella companies by G4S highlighted by BBC File on 4. In this case, if G4S is found not to be managing its obligations under the Criminal Finance Act, it could be held responsible for any tax revenue due. In addition, the offence carries a penalty of an unlimited fine and a criminal record for corporates if convicted.

Over the coming years it is likely that HMRC will focus its resources on investigating tax compliance issues and, while a soft landing has been promised for the first year of the new IR35 regime, now is a good time to gain better visibility of all your supplier’s tax and payroll arrangements and ensure that you are not exposed to any hidden risk. It is important to remember that while fines will not be imposed for genuine mistakes made in relation to the IR35 rules before 1 April 2022, businesses will still be liable for any unpaid tax due. It should be noted, however, that the Criminal Finance Act has required businesses to prevent the facilitation of tax evasion in their supply chains since 2017 and HMRC is currently enforcing this and paying particular attention to labour supply chains.

So how can you be confident that your resource supply chain is compliant?

Supply chain audit

An audit means tracking back through your resource supply chain to determine if each stakeholder is compliant, and contractors are paid correctly and fairly for their work. This may involve ensuring compliance with recruiters, umbrella companies, contractor personal service companies as well as considering the role of tax status determinations, payroll and correct tax payments.

IR35 was introduced to the private sector at the beginning of April, so the end of the first quarter is the ideal time to conduct an audit. This allows plenty of time for any changes or new solutions to be put in place during this tax year, while HMRC is offering to help businesses get it right.

To eliminate immediate risk, it’s vital to pass down IR35 status determination statements (SDS) and inside IR35 statuses to the supply chain. However, an inside IR35 status does not automatically remove risk – it’s simply the first step – as you still need to be confident that they have been transferred to the correct payment option. This is vital to ensuring that tax is being deducted, and all contractors are receiving fair treatment.

Conducting an audit will involve working collaboratively with recruiters, umbrella companies or outsourced payroll provider.

Warning signs

There are several indicators that should instantly act as warning signs of potential non-compliance.

Firstly, is the umbrella company in a commercial arrangement that benefits the agency in any way for the weekly services of the contractor? Worryingly, the recent government How Contracting Should Work inquiry report found that some recruiters accept high value forms of incentives from umbrella companies. It claimed that companies who can “afford these types of requests tend to be less compliant organisations which do not necessarily pay all the contractor/employee costs they should”.

Another potential warning sign is off-payroll workers operating as “sole traders”. There is established legislation (similar to the IR35 rules) that governs whether a sole trader can be paid gross or should be subject to PAYE deduction. Off-payroll workers operating as sole traders within your supply chain may well circumvent the new IR35 rules. However, this brings into play different tax rules and therefore a new risk to manage.

A lack of transparency of the arrangements in place, or the over complication of what should be a relatively simple contracting supply chain, is also a further warning sign. The off-payroll worker should be paid by the same company that employs them and there is no requirement for this to be based outside of the UK. Complex supply chains with non-UK entities should be subject to additional checks and balances.

Next steps

When you’ve completed an audit, consider remedial action such as a consolidation of payroll providers, insourcing the payroll of your inside IR35 off-payroll workers yourself or rolling out an ongoing audit of the supply chain. There are many factors that can affect the route chosen – for example, whether you use technology and a neutral vend solution to help you obtain visibility and ease of management of the supply chain, or whether you have the resource, time and expertise to do this yourself.

Alternatively, you could look to recommendations from the supply chain to utilise reputable and compliant umbrella companies. If this is the chosen step, it’s important to keep in mind the warning signs used during the audit and to partner with FSCA (Freelancer and Contractor Services Association) accredited companies.

The third option is to use a professional payroll outsourcing and compliance risk management company. Innovative technology within this space can help to automate your IR35 and payment obligations as well as centralise all of your off-payroll workers into one system to provide you with the visibility you need to manage the associated risks.

The new IR35 rules have brought a number of changes for the resource supply chain, but one of the key benefits is that, if managed properly, you will have better visibility of your contingent workforce and be able to build out your strategy to attract and retain the best flexible resource.

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