Global Rights

INTERNATIONAL COMPLIANCE – Michelle Reilly, CEO 6CATS on being compliant around the world.

As authorities worldwide clamp down on incorrect tax payments and misrepresentation of employment status claims, the compliance risks for recruiters have now doubled. On the one hand, there’s the danger of non-compliant solutions being used in the host country of the professional and now on the other hand there’s the added pressure of remaining compliant with the UK Criminal Finances Act 2017 back home.

There are three key pieces of legislation and regularly misunderstood rules that could see agencies facing investigations and possible charges if they fail to abide by them.

Misuse of A1 forms

When we look at in-country issues, we’re seeing a worrying number of contractor management solution providers based in countries with preferential social security schemes misusing A1 forms (formally E101). In essence, these providers are employing contractors through their company and applying for this form in order to reduce the amount the individual has to pay for social security. In many cases, the contractor hasn’t even visited the country from where their A1 form has been issued.

Consequently, host destinations are losing out on social security contributions during the contractor’s assignment. While this loop hole has been utilised for several years now, we are seeing an increase in local authorities implementing changes to halt this abuse of the system. In fact, some contractors are now facing backdated liabilities that go back as far as 2009.

It’s important that recruiters are aware of the specific criteria for applying for A1 forms to avoid any association with non-compliant solutions. They can be applied for by workers expecting to relocate across borders for an assignment that will last no longer than 24 months. 

The individual must have pursued activity in the country issuing the A1 for the requisite period leading up to the posting overseas and demonstrate an ongoing ability to carry out substantial work in the country where the A1 form has been issued from. While allowing a contractor to operate using a solution that exploits the A1 legislation may offer the contractor a higher return on income, the financial penalties for both the individual and the agency far outweigh the gain.

Myths of the 183-day rule

We’re also hearing numerous reports of the 183-day rule being misused in host countries resulting in local authorities being deprived of the appropriate tax, VAT and social security contributions from the worker during their contract. This internationally recognised tax concept means that workers and corporations operating in a foreign country for less than 183 days aren’t required to become residents and therefore do not pay tax in the host location. However, the stipulations over this rule are easily misunderstood. For example, we often hear claims that a contractor is covered by this directive as their assignment will last less than six months. But this is simply not the case.

The 183-day rule is only applicable to dependent workers - those able to prove that they are in a full employment contract with the company in question. It does not apply to self-employed or independent workers.

Those operating through a personal service company (PSC) abroad are also unable to use this rule and will be required to become a tax resident in the host country once the contract begins. This applies for the company, its director and any employees.

Recruiters need to be aware that the wrongful use of the 183-day rule when placing contractors could have damaging consequences for their agency. With tax authorities launching an investigation and seeking to penalise your clients as a result of any misuse, relationships will be ruined and your reputation damaged. Then there’s the possible penalties that agencies themselves could face due to their association with non-compliant individuals.

Contractors themselves also risk paying the host country income tax and social security on their entire global earnings as well as corporate tax on all profits by operating through a PSC outside their home country. Should these workers choose to use a PSC which is not registered in the host destination, they risk fines, penalties and back-dated liabilities. In more severe cases, the individual and the agency could even face operating restrictions within the country and the contractor could be deported or even jailed.

Criminal Finances Act 2017

Failure to abide by the rules will now also potentially breach the recently introduced Criminal Finances Act 2017 in the UK. This means that agencies, clients and contractors could all face prosecution back home. Under this Act it is a criminal offence to fail to prevent ‘associated persons’ from facilitating tax evasion. In essence, recruitment firms incorporated in the UK or overseas agencies operating here could face criminal charges as a direct result of the actions of any individual or entity that provides a service to the company.

As the offence is that of failing to prevent fraudulent activity, recruiters can still face prosecution even if they were unaware of what the associated person was doing. The only defence is to demonstrate that you and your firm have reasonable procedures in place which are designed to prevent the facilitation of tax evasion.

It is vital, therefore, to ensure the contractor is engaged and paid compliantly. You will also be responsible for ensuring transparency, complete visibility and control of the supply chain. Remember that criminal liability cannot be passed down the chain and as such, ‘flowing down’ compliance responsibility is not an option.

Owners and directors need to be aware that they will be directly impacted by non-compliance in relation to the Criminal Finances Act both professionally and personally, regardless of their involvement in, or knowledge of, the fraud. You will be the one held criminally liable for the actions of your employees and contractors. Claiming ignorance or lack of awareness provides no legal defence for a criminal matter.

Joe Aiston, Senior Associate and specialist recruitment lawyer at international law firm Taylor Wessing LLP sees the introduction of the Criminal Finances Act as a watershed moment in terms of compliance in the industry: “This legislation puts the onus on recruiters to show that their working practices are informed, open and compliant – something which is difficult to achieve when working internationally with differing legal frameworks and tax regimes,” he says.

“In an industry where there is significant scrutiny, both from HMRC and from the Employment Agencies Standards Inspectorate the way for recruiters to gain a competitive advantage should more than ever be in ensuring compliant practices, proper due diligence and transparency, rather than in maximising margins by seeking to gain a tax advantage that is not actually available in the circumstances.”

Future-proofing: protecting your agency

International compliance is changing as legislation evolves to prevent and tackle fraudulent activity. Aside from partnering with an expert in international contractor compliance, there are a few measures that agencies can implement to minimise risks:

• Get to know all the parties involved in the contractual chain

• Ensure the company paying the worker is declaring all income in the country of work and the correct taxes are being applied

• Ensure you have a preferred supplier list in place, with robust due-diligence carried out

• Ask for a signed commitment from the owners of the company paying the worker that the payment solution provided is 100 per cent compliant in the country of work

• Train all staff that will be involved in contract placements to ensure they understand the impact of compliance risk

Joe Aiston points out that having proper policies in place is only the beginning: “It is as much about how those policies are implemented and communicated to relevant staff as it is about having the necessary paperwork in place. Staying up to date and adjusting practices where appropriate is also vital, whether than be in terms of differing international rules or potential changes in the rules, including those which may come about as a result of Brexit.”

For me, it’s certainly encouraging to see more agencies that are serious about doing business in Europe recognising the importance of compliance and implementing relevant processes within their business. However, there remain a few who are willing to move into more grey areas in order to reduce costs or give their firm a seemingly more competitive edge.

Agency owners who are growing a contract recruitment business overseas must recognise the associated risks. Jack Rawcliffe, Managing Director of JDR Energy which places contractors internationally within the oil, gas and power generation markets agrees: “I get a lot of calls from other companies in the market telling me they are cheaper, and that they can offer contractors over 90 per cent take home pay,” he says. “That’s never going to be a compliant solution.

“They often tell you what you want to hear without doing any due diligence. Then you get the companies that will pitch directly to consultants and incentivise them with kickbacks if they recommend their solutions to contractors – that is an absolutely massive risk for a recruitment company if that solution is found not to be compliant -  especially given the recent introduction of the Criminal Finances Act.” He concludes: “I think agencies have to ask themselves – do I want to save a few hundred pounds a month on my payroll or do I want to sleep easier at night knowing that our risks are completely mitigated?”