Q&A - Is my company fully compliant?

04-Feb-2009

Her Majesty’s Revenue & Customs (HMRC) is finally starting to bare its teeth in respect of managed service providers. HMRC is now actively pooling its resources to undertake new, more stringent compliance reviews and unsuspecting agencies may fall foul of this approach.

With the right personnel, greater sector knowledge, national resources in place and the support of some senior investigators, this new approach is now a serious threat to those providers who are not compliant. Unsuspecting agencies may unwittingly get caught in the
cross fire.

The Pre-Budget Report (PBR) was seen as great news for some, enabling them to breathe a sigh of relief when the travel and subsistence rules were left unchanged. However, this is dangerous thinking. The devil is in the detail. HMRC has been banging the drum on compliance
for a long time and repeated this in the PBR. The difference this time is that HMRC seems to be delivering on its promise.

The latest HMRC approach brings more experienced investigators with extensive powers and a desire to make life tough for the non-compliant — and even those that do not clearly appear to be compliant. Their tactics include reviewing all taxes so a service provider or
agency could find its corporation taxes and VAT being investigated as well as PAYE/NIC. This clearly demonstrates a more aggressive
approach, matching their intentions going forward.

How does this affect agencies?
It is understood that HMRC has recently sought Counsel’s opinion with regard to the operation of overarching employment contracts. It is paying closer attention to both the legal and tax aspects of these contracts and, in many cases, challenging the status of the workers, whether it relates to self-employed workers operating in the construction sector or umbrella workers claiming tax free travel andsubsistence expenses.

Nothing new there, you might say, but this has already led to some cases where agencies have been challenged in respect of them being the employer for PAYE purposes and/or having failed to operate CIS [construction industry scheme] correctly on nominee payments.

We are also hearing that the debt transfer rules are seriously being considered in a number of cases where the agency has relied on the provider’s assurances that they are compliant and it’s not just the riskier ‘overseas’ arrangements being called into question.

While you may feel this is not a problem for you, can you be so sure? Many agencies have adopted a ‘keep your heads down’ approach but continue to recommend certain providers or receive commission payment/ finder’s fees/admin fees without having any real assurance that the provider is compliant.

What should agencies do?
Agencies should, as a minimum, consider:

- what their consultants are saying to jobseekers?
- what independent support do they have for believing that the provider is compliant?
- are their own contracts, assignment notes, for example, compliant from a PAYE/NIC/CIS perspective?
- has the provider changed its business model(s) recently?
- is the agency comfortable that it has been operating the CIS correctly in respect of nominee payments?

In short, agencies need to keep on top of their internal processes and procedures. These should be managed via detailed due diligence on the service providers, particularly if preferred supplier lists are in place. Agencies shouldn’t place too much reliance on so-called
accredited schemes because, whereas previously many accreditations based on limited desktop reviews of the paperwork have previously satisfied HMRC, this is no longer the case. HMRC’s detailed investigations have shown the limitations of these accreditations and more debt transfer cases are expected to come to light, even where accreditation is in place.

It’s clear that the honeymoon period for the MSC legislation is over and HMRC is keen to lose its image of being soft on noncompliance in the sector.

John Chaplin is director, employment taxes, KPMG

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