Without doubt, the General Anti-Abuse Rule (GAAR) is shaping-up to be the most heavy-hitting piece of legislation to come into force in recent years. If you thought that the MSC and Debt Transfer legislation ruffled a few feathers, well just you wait until the ‘Offshore Employment Intermediaries’ kicks in (April 2014) under the GAAR banner; it has the potential to cause plucking carnage. The fancy plumage of those “sophisticated” tax avoidance schemes won’t look so pretty when it’s scattered about the place…but that’ll be nothing compared to the sight of the tax man making a well-deserved meal out of the now fully-exposed carcass!
If you think this is overly dramatic, then you probably haven’t read the proposals or been involved in any of the “round table” events where HMRC have actually talked about what they’re trying to achieve.
The crux of the GAAR proposal is this; a recruitment agency will have an obligation to ensure that its contract workers are engaged compliantly. Previous 3rd party debt transfer legislation has made the agency (potentially) liable if they actively refer or recommend one of their contractors to a payroll provider who turns out to not be deducting tax correctly. GAAR goes one (big) step further by putting the agency at risk simply by engaging with a contractor using a tax avoidance scheme regardless of whether or not the agency was actually involved in setting-up the relationship between the contractor and provider.
In other words, if an agency sources and places a candidate onto an assignment, the agency could find themselves liable for unpaid tax even if the contractor had established their relationship with their scheme provider long before the contractor and the agency ever came into contact with each other. This is a game-changing development!
The way we see it, agencies have got two choices; they can bury their heads in the sand like the proverbial ostrich (and run the risk of being plucked from behind!), or they can take a proactive stance and put a robust due diligence strategy in place in order to navigate this new, more hostile landscape.
So what would a robust due diligence strategy look like? Of course, there’s more than one way to skin a cat, but essentially it all boils down to three key components: gathering information, reviewing the information gathered, and, if necessary, mitigating any potential liability away from the agency via the implementation of alternative, preferred supplier relationships.
Gathering of information will become an essential step in the agencies on-boarding process. Agencies will need to know the details of the payroll provider that the candidate currently has a relationship with. Our advice to the agency would be to gather this information at the earliest possible opportunity, ideally before the candidate has been put forward for a role (the last thing the agency will want is for a candidate to interview and be offered the role, only to then reject it if the agency has concerns over their payroll provider and the candidate is refusing to use an alternative, compliant solution!).
Once the agency has gathered the relevant information, the agency needs to review it in order to determine the level of risk that it poses them. The agency will need to focus on the structure of the scheme in question, particularly in terms of how it engages with the contractor and how (if at all!) it deducts tax and National Insurance from the contractors’ gross earnings. For all intents and purposes, any scheme that does not employ the candidate as an employee and does not deduct full UK tax and NI from gross earnings should be considered high risk and rejected accordingly.
The final stage in the process – and perhaps the one that’ll require a real culture change at many agencies – will involve the agency taking a firm stand and refusing to engage with those scheme providers that do not meet the standards required.
EVERY agency will now have to strongly consider having some form of structured and centralised ‘Preferred Supplier List’ of payroll companies; a short-list of companies that they’ll introduce to candidates in instances where the candidate either does not have a payroll provider in place, or has one in place that has failed the agencies due diligence checks. Of course, the agency should not force the candidate to use one of their preferred suppliers at the expense of other fully compliant providers that just happen to not be on that agencies preferred list…but the agency should also bear in mind that the smaller the pool of payroll providers that they engage with, the easier it will be for them to manage their due diligence processes on an on-going basis. To paraphrase that well known saying, a ship is best run tightly…and agencies will need to become accustomed to playing a much more influential role in the relationships that their contractors have with payroll providers.
As with most legislation that gets introduced, GAAR will help sort the wheat from the chaff and as such should be welcomed by providers that are already operating correctly. As a compliant and industry-aware provider, Liberty Bishop has been involved in the various consultation processes that HMRC have held in the developmental stages of GAAR. It goes without saying, of course, that we are here to help and are happy to share our expertise with our partner agencies.
Final drafts of the legislation are due to be released at some point during the Autumn, keep an eye on our blog and website for further developments.