Chris James, director of accounting services, JSA Group and Chairman of the FCSA, and James Harris, head of compliance at JSA Group, discuss agencies should take a compliance-led approach.
The last few years have witnessed the introduction of a variety of new regulations in the recruitment industry. Starting with the Criminal Finances Act and Public Sector Off-Payroll Reforms in 2017 and progressing into our current landscape, where IR35 in the Private Sector and Brexit are the new hot topics, the recruitment industry is in a period of large-scale transformation to increase transparency throughout the supply chain and protect employees’ rights nationwide. While it is important to be focused on preparing for the current changes compliantly, remember to think about the bigger picture. The future of compliance in the recruitment industry is experiencing an overhaul, and we predict regulations will only tighten as we progress deeper into this decade.
How it started: The Good Work Plan
In 2017, the Prime Minister commissioned the independent Taylor Review of Modern Working Practices to assess the labour market and ensure it can adapt to embrace new technology, emerging business models, and new ways of working. Following the completion of the Taylor Review, the government responded in December 2018 with The Good Work Plan; a document which set out the key areas that needed addressing to protect workers and improve the quality of work in the UK.
The four key areas for review were: increasing transparency in the labour market, supporting agency workers, the enforcement of employment rights, and determining employment status. In the years following The Good Work Plan, we have witnessed various legislative milestones and, with the rapid changes we’ve seen to the labour market as a result of Covid-19, there are undoubtedly plenty more developments on the horizon to deal with the growing gig economy and regulate parts of the supply chain in new ways.
Criminal Finances Act (2017)
In 2017, before the publication of The Good Work Plan, the government had already begun to zone in on criminal tax practices and other injustices in the labour market such as money laundering, tax evasion, and the financing of terrorism. For recruitment agencies, the introduction of The Criminal Finances Act was the first step in increasing their responsibility for the actions of other members of the supply chain. While this act didn’t change the terms of what is considered criminal, it did widen the net for who can be held accountable for unlawful financial activities by making it a criminal offence for a corporate entity to fail to prevent an associated person from criminally facilitating the evasion of tax (whether within the UK or in a foreign country but in connection with the UK).
This means that law enforcement agencies and partners have the power to recover the proceeds of crime from agencies, whether or not they were the party who committed the crime. It’s important to note, however, that when your agency has followed reasonable procedures to prevent the criminal facilitation of tax evasion by an associated person, you should have a defence against accepting liability.
For agencies engaged with Umbrella companies, you must understand the terms of the Criminal Finances Act to ensure you’re only working with compliant businesses who aren’t operating any form of tax evasion scheme or facilitating tax evasion – as you too could be held liable for their offence.
Key Information Document (2018)
Following a clampdown on tax evasion, the government turned their focus to the rights of agency workers in 2018 with the introduction of the Key Information Document (KID). The establishment of the KID and its subsequent implementation in April 2020, has meant that agencies now have the legal responsibility to provide workers with a ‘Key Information Document’ before agreeing on any contractual terms.
The KID is a vital document for any agency or contractor working with an intermediary, such as an Umbrella company. In summary, it dictates that an agency must clearly document key information about the relationship between themselves, the worker, and the Umbrella, including the structure of any payments that will be made for services provided by the worker and any benefits afforded to the worker.
Once again, this document implicates the agency as the responsible party for establishing and maintaining clear and transparent relationships with their workers and related intermediaries. It ensures workers understand the contractual chain and also prevents any party from misrepresenting a worker’s pay or benefits.
Off-Payroll (IR35) Reforms (2017 & 2021)
In conjunction with the Criminal Finances Act, to continue their battle against tax avoidance and increase clarity throughout the supply chain, the government also drew up a set of reforms to the IR35 rules in both the Public Sector (implemented in 2017) and Private sector (due this April).
The reforms state that if someone is acting in the same way as an employee but working through an intermediary (such as their PSC), the supply chain must pay tax on their invoices in a similar way a normal employee would experience tax deductions. The key element to remember about the ‘new IR35’ is that it’s not the employment status checks that are changing, but who is liable if the status is determined incorrectly.
Rather than placing responsibility on the individual worker, as was previously the case, the IR35 reforms mean that you (the agency) and the hirer are now financially liable if tax wasn’t deducted by the supply chain and HMRC can show that it should have been. However, similar to the Criminal Finances Act, if your agency can prove it has taken reasonable care in ensuring parties corresponded with are acting compliantly, then it will at least reduce the financial risk.
HMRC continue to remain focused on compliance and tighter regulations, increasingly moving the responsibility and financial liability onto recruitment agencies. While their next steps in this area are still unclear, we’re certain that there will be more change to come.
So, as we approach and work through the implementation of the IR35 reforms, your agency should start to develop a more long-term view of your compliance responsibilities.
One area that we believe will be next on the agenda is formal regulation for the Umbrella sector. Over the past year, we have seen HMRC clamp down on Umbrellas who are operating tax avoidance schemes whereby they promise workers extremely high take-home pay rates (80 per cent or higher) and use the cover of a ‘bonus’, ‘loan’ or ‘credit’ to avoid the necessary tax contributions.
For some agencies who have never worked with Umbrella companies before, the idea of these tax avoidance schemes and identifying a good Umbrella partner can be daunting. We urge you to only work with companies that are transparent about how they pay workers and have clear compliance accreditations, such as JSA Umbrella.
As HMRC increases their focus on non-compliant Umbrellas and tax avoidance schemes, by making sure you’re working with compliant providers now, you can start on the best footing as the next wave of increased regulation is introduced.
BREXIT & international supply chains
Since leaving the European Union at the beginning of this year, there is yet to be a large change in the recruitment sector, other than an increased difficulty for individuals who contract their services across Europe who, in some cases, now require a VISA to work compliantly.
Nevertheless, there will no doubt be an influx of new regulations concerning international supply chains and workers’ rights across the EU. Though details of these remain uncertain for now, it’s important to bear in mind that these types of changes are coming, so be prepared to adapt to them accordingly.
Once the IR35 reforms are fully implemented and the recruitment sector settles, we’ll no doubt see an increase in initiatives that intend to follow the spirit of The Good Work Plan. Our stance is to view these changes as a positive: they’re a great way to ensure you’re protecting your workers’ rights and enhancing the quality of working relationships in the UK.
The best advice for your agency now is to lead with compliance. Focus on putting the worker first by providing the relevant protections and taking reasonable care in adhering to any regulations which apply to your agency. Honesty and compliance accreditations will go a long way with contractors as regulations undoubtedly tighten in the future.
There’s also no doubt that the kind of Blue Chip companies that a lot of agencies would like to see at the top of their supply chains will put an ever-increasing value on compliance and transparency. For reputational reasons, and to demonstrate their credentials to investors, a serious approach to compliance is the only sensible action plan.
So, take a long-term view on compliance and prepare for more change ahead.