In our industry it is generally accepted that "compliance" means compliance with laws, particularly tax laws. Of course laws can be interpreted in different ways. This keeps lawyers and tax advisers in a job but can give legal and compliance teams in agencies huge headaches. Providers can produce counsel's opinions that say 'this scheme works' - the trouble is these opinions are often procured because HMRC does not agree.
At PayStream we take a low risk approach so our starting point is always "what would HMRC consider to be compliant?". For example, HMRC has made it very clear that it will pursue offshore schemes and "pay day by pay day" models, so even the most robust counsel's opinion would not persuade us down those routes. We regularly engage with tax advisers, lawyers and most importantly HMRC to keep up with changes in legislation or HMRC's approach.
Why should agencies be concerned about service provider compliance?
- There is risk of debt transfer under MSC legislation if agencies work with a service provider who is “involved” with its clients.
- If contractors are using offshore schemes, HMRC can use the Offshore legislation to automatically transfer liabilities for unpaid tax to third parties, which would include agencies and their clients.
- Under the Onshore legislation, agencies have significant responsibility in respect of contractors who operate in a self-employed capacity. Where a worker is subject to (or to the right of) supervision, direction or control, the agency has a responsibility to operate PAYE as though the contractor was an employee.
- Where deemed inside IR35, the “fee payer” paying the PSC must pay employer’s NI, the Apprenticeship Levy (where applicable) and deduct employed levels of PAYE and National Insurance Contributions (NICs) from PSCs operating in the public sector.
Agencies spend time and money on building their brand so being associated with a non-compliant provider makes little sense particularly since clients are becoming more and more interested in a compliant supply chain. The public sector and the banks now look for assurance that contractors are paying the right amount of tax.
If you are trying to embed a culture of doing the right thing for contractors it makes sense to look at the culture and values of your suppliers.
If you are looking for an exit you will need to demonstrate to a purchaser that your earnings are sustainable. For example if you work with a partner using a 'pay day by pay day' model a purchaser will undoubtedly look to discount your earnings on the basis that HMRC will challenge the model. Similarly the multiple attached to business profitability is easily discounted if non-compliance is identified.
The directors of companies are responsible for determining the risks the business is willing to take.
What is the best way to determine a service provider's compliance?
Agencies have differing approaches. Obviously if you can manage all three approaches it gives you the best chance of assessing a provider. For agencies with large PSLs this can be extremely time-consuming. The solution - reduce the size of your PSL!
Send a questionnaire
Sending out a questionnaire with a series of compliance related questions is a good starting point but the difficulty is how to validate the answers given. Everybody says they are compliant.
Rely on third party audits
Generally these give more comfort than a simple questionnaire provided the auditor has visited the service provider to examine working practices (which would be HMRC's approach). You should check this point. We are accredited by FCSA and reviewed regularly for general compliance and audited for MSC compliance by BDO.
Carry out a site visit
Actually visiting the provider and carrying out a site visit will enable you to review their working practices yourself.
Conclusion
We believe that our stance on compliance puts us in a strong position to grow our business. Clients, now more than ever before, are keen to ensure a compliant supply chain. This means that agencies are looking more closely at what service providers actually do and are gravitating to those that can demonstrate that they are operating compliantly.
