Corporate Criminal Offence (CCO) legislation and the recruitment sector

Tax expert, Paul Marcroft, highlights the impact of the Corporate Criminal Offence (CCO) legislation on the recruitment sector, and what companies can do to protect themselves from investigation.
HMRC is due to publish an update on its activity around the CCO legislation. It’s overdue, as we expected those statistics to be updated before the end of 2021, but as of 27 May 2021 HMRC had a total of 14 live CCO investigations, while a further 14 were under review.

Although details of these active cases have not yet been made public, we know that they involve tax and duty regimes across organisations of all shapes and sizes, spanning 10 different business sectors, including labour provision.  

What is the Corporate Criminal Offence legislation?

CCO applies to all companies, LLPs and partnerships, regardless of size. Affected entities are legally obliged to actively prevent tax crime. 

The offence, introduced by the Criminal Finances Act on 30 September 2017, can impose an unlimited fine and a criminal conviction on companies and partnerships that fail to prevent anyone acting on their behalf from facilitating a third party's tax evasion. This may include the evasion of PAYE in a labour supply chain, or the failure to operate or pay over to HMRC the appropriate level of VAT.
CCO is a strict liability offence, meaning that it applies even when the organisation was unaware of the facilitation. A company can therefore be subject to the criminal charge for being 'asleep at the wheel' while someone associated with it knowingly helped another individual or entity to commit tax evasion.

The only defence against a charge under CCO is having ‘reasonable prevention procedures’ in place. This requires a business to, at the very minimum, conduct a risk assessment to: 

• identify activities and processes which could be exploited to deliberately assist a third party to commit tax evasion; and
• address the gaps in existing controls.

What are we seeing in the recruitment sector?

We know from the information released in May that HMRC has a specific focus on the labour provision sector, and there are live criminal investigations in the sector.

In addition to the formal criminal investigations, we are seeing an increasing number of supply chain checks, and these checks are as stringent in labour provision as they are in any other sector.

In the supply chain checks, HMRC focuses closely on the due diligence procedures of agencies, particularly where umbrella companies are included in the supply chain.

It is often the case that these enquiries have originated from instances of tax evasion identified in the supply chain, and HMRC is focused on two key risks:

1. Whether the tax lost in the supply chain can be recovered from another party to the transaction (joint and several liability); and
2. Whether a person acting on that other party’s behalf has facilitated the third party’s tax evasion, and whether the CCO has been breached.

How to protect your recruitment business

If your business is the subject of an HMRC supply chain review, it is important that you’re able to demonstrate that you undertook suitable due diligence in respect of your suppliers before engagement. HMRC has published a wide range of guidance on due diligence in labour supply chains.

In the absence of such evidence, HMRC may invoke joint and several liability in respect of certain unpaid liabilities.

Where the investigation goes a step further, with a focus on tax evasion in the supply chain and facilitation of that evasion by persons associated with your business, it is vital that you can demonstrate to HMRC that you have implemented reasonable prevention procedures. This includes risk assessing your business with a view to identifying areas of vulnerability and implementing systems and processes to mitigate the risk.

In the absence of such evidence, the strict liability nature of the CCO will leave your company vulnerable to criminal prosecution.

If you have any questions about corporate criminal offence, please contact Paul Marcroft or David Williams-Richardson.