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IR35 – Could your business be facilitating tax evasion?

  • United Kingdom
  • Tax planning and consultancy

20-04-2020

What you need to know

As part of the response to COVID-19 the Government has delayed the introduction of the new IR35 rules (which extend the current IR35 rules that apply to public sector bodies to medium and large private sector organisations) until 6 April 2021. As a result many businesses have put their IR35 preparations on the back burner so that they can deal with the more pressing matter of how to deal with COVID-19. However, if a business is still engaging and using contractors who supply their services via their own personal service companies (PSC) care will need to be taken to ensure that the company does not become guilty of committing the corporate offence of facilitating tax evasion. For more background on the offence of facilitating tax evasion please see our FAQ on the topic.

In preparation for the commencement of the new IR35 rules many businesses over the course of the last few months have been carrying out ‘employment status’ determinations in respect of their contractor workforce and have been sharing these with their contactors. Where the status determinations have concluded that the contractor will be ‘inside’ IR35 and these have been shared with the contractor, if the contractor continues to provide their services in the same manner, continues to provide them via their PSC and continues to declare themselves as ‘outside’ IR35 then the contractor could be committing tax evasion as they will now be knowingly and intentionally not paying the correct taxes and NIC. If the hiring manager knows that too and ignores it they could be facilitating that evasion which would create a liability for the engaging business under the Criminal Finances Act 2017.  

Reasonable prevention measures

There is a defence to the corporate offence of facilitating tax evasion where the company has put in place reasonable measures to prevent their employees from facilitating tax evasion. This includes risk assessments to assess the risk of those who work for them facilitating tax evasion. HMRC guidance recommends that such risk assessments are revisited where circumstances change. This would certainly be one of those occasions given that the preparations which businesses have been undertaking in anticipation of the commencement of the new IR35 rules may have increased their knowledge of their contractors’ tax affairs. Other measures include carrying out due diligence to assess whether any tax evasion could or is being committed, having procedures in place to prevent employees facilitating tax evasion and communicating prevention policies and procedures to employees.

What should businesses be doing?

Businesses who will continue to use contractors who supply their services via their PSC should therefore:

  • revisit their tax evasion risk assessments in light of the fact that they may now have knowledge that some contractors should be accounting for income tax and NICs in relation to the fees that they are paying for the contractor’s services;
  • remind their employees, in particular those that deal directly with the hiring of contractors, of the company’s tax evasion policies and procedures;
  • ensure that they carry out due diligence on their supply chain; and
  • if employees believe that any parties in the chain may be committing tax evasion terminate the company’s relationship with that party.

How can we help?

Eversheds Sutherland has been advising businesses on the offence of facilitating tax evasion and reasonable prevention procedures since inception of the offence. We aim to provide pragmatic solutions for our clients that target proportionate compliance measures that can be implemented and integrated with current systems with minimal business disruption and cost.

If you would like to discuss this further, please either speak to your usual Eversheds Sutherland contact or get in touch with the following members of our tax team.