Workforce Solutions

HMRC keeps up investigations into tax evasion in labour supply chains

Published on 13th Jul 2022

As investigations into corporate criminal offence compliance proceed, transparency and checks will be critical to reduce risk

Man in suit signing a document

HMRC has released (30 June 2022) figures for the number of live corporate criminal offence (CCO) investigations.  The report confirms that labour provision remains a high-risk area.  

Even where its reviews have not revealed deliberate facilitation of tax evasion, HMRC confirmed that the reviews have led it to find other tax and regulatory offences to pursue. This fits with HMRC's historic stance of finding civil enforcement easier than prosecution. 

However, even if prosecution is avoided – and there are signs HMRC is now more aggressive in their pursuit so this cannot be assumed – a civil investigation with 20-years' tax exposure and penalties of up to 200% can still be a business-critical event. 

Supply-chain risks

Given the change in attitude from HMRC to tax avoidance, there are particular risks in labour supply chains.  

HMRC's and the courts' new stance is now being applied with hindsight against the backdrop of the complex interplay between different pieces of tax legislation.

These include IR35, agency-worker tax rules, offshore employer's rules and managed-service-company legislation to produce significant tax risks, even when HMRC has decided not to prosecute. 

Live investigations

HMRC had seven live CCO investigations as of 13 May 2022 and it has stated that no charging decisions have yet been made. 

A further 21 live opportunities are currently under review. To date, HMRC has reviewed and rejected an additional 69 opportunities.

These investigations and "opportunities", as they are referred to by HMRC, span 11 different business sectors and sit across all HMRC customer groups. Labour provision is one of the five sectors specifically mentioned by HMRC as an area in which investigations are occurring.

In March, Stacey Mills-Kelly, assistant director and head of strategies at HMRC Fraud Investigation Service, told an Osborne Clarke webinar that HMRC activity to prevent tax evasion in labour supply chains had started.

Supply-chain exposure

In a typical labour supply chain situation, end users and staffing companies have a particular exposure to companies they rely on to pay workers, including umbrella companies or overseas payroll partners such as employer of record companies. 

If those umbrella companies or overseas payroll partners are involved in tax evasion, the end users and staffing companies that use them may face prosecution and unlimited fines unless they have in place reasonable steps and procedures to prevent the facilitation of tax evasion. 

HMRC has recently described one type of umbrella scheme – mini umbrella company arrangements (MUCs) as tax fraud – and end users and staffing companies would, therefore, be expected to have in place procedures designed to spot whether there are arrangements like MUCs in their supply chains – and if so to stop using them.

HMRC's approach

HMRC is now visiting large businesses (the top 2,000 in the UK) to check, as part of the normal pattern of its risk reviews, what prevention procedures they have in place to police their supply chains. 

Many large businesses have been concerned about this review and are requiring their staffing company suppliers to evidence (rather than just state) that they are carrying out appropriate checks on their supply chains in the UK and overseas. 

If suppliers cannot show that appropriate checks are being carried out (and that means more than checking they are accredited by a trade body) then large businesses may want more checks to be done to avoid HMRC treating the business as high risk.

Osborne Clarke comment

By no means do all umbrella or employer of record-style arrangements involve tax evasion, and the good ones will welcome this crackdown on those operators who undercut them with unlawful tax schemes. 

But the crackdown will require good ones to be very transparent about how they pay workers, and will require end clients and staffing companies to be carrying out appropriate checks on entities they use to pay their workers.

For further information, please consult our report "Failure to prevent the facilitation of tax evasion" as well as our "Criminal Finances Act risk assessment roadmap". 

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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