Why the Criminal Finances Act 2017 poses problems for non-compliant supply chains

5th May, 2021

Recruitment agencies that fail to take steps to secure their supply chains by preventing engagement in disguised remuneration schemes could risk prosecution under the Criminal Finances Act (CFA) 2017.

What is the Criminal Finances Act 2017?

The Criminal Finances Act, which was enacted in September 2017, renders “relevant bodies” criminally liable for failing to prevent a party regarded as an “associated person” from facilitating tax evasion.

The issue is currently under scrutiny due to the prevalence of disguised remuneration schemes within the contracting industry, in response to heightened demand for umbrella and payroll companies resulting from the April 2021 extension of the Off-Payroll working rules to the private sector.

With conviction under the CFA carrying a penalty of an unlimited fine and a criminal record, the prospect of breaching the legislation should act as a wake-up call to recruitment agencies and their end-clients who have so far failed to apply measures to secure their supply chains.

Are disguised remuneration schemes punishable under the Criminal Finances Act?

The CFA explicitly targets the facilitation of tax evasion, which is often described as a deliberate attempt to underpay taxes by concealing income or transactions. Such actions may contain an element of fraud through the creation of false or misleading documentation that does not accurately reflect the true transaction.

Disguised remuneration schemes, which typically reduce a contractor’s tax liability by describing part of their earnings as something which is not taxable, have historically been considered tax avoidance which is not illegal. Instead, it is often described as operating within “the letter, rather than the spirit, of the law”.

“I would describe it as interpreting the legislation contrary to its intention and producing a tax position that is not aligned with the economic reality of the transaction,” explains Tom Wallace, Director of Tax Investigations at WTT Consulting. “Though tax avoidance isn’t illegal, when challenged by HMRC the courts may rule it was ineffective in achieving its aim.”

Some recruiters might assume that this distinction rids their non-compliant supply chains of risk from the CFA. However, the practices undertaken by some disguised remuneration schemes have served to blur the lines between avoidance and evasion.

Referring to the landmark Rangers FC tax avoidance case in 2017, Wallace observes: “We know from the Supreme Court decision that the redirection of earnings to a third party that then lends the money is taxable as if it was paid directly to the contractor. If this practice is still going on four years after the highest court in the land ruled on the effectiveness of such arrangements, then it could be argued that this has tipped over into fraud and evasion.”

How is liability determined under the Criminal Finances Act?

The corporate offences introduced by the CFA make businesses criminally liable if an “associated person” of theirs facilitates tax evasion. The definition of an associated person is deliberately wide and can include employees, agents, contractors, or any other person providing services for or on behalf of the business. It can also be an individual, partnership or corporate, meaning an umbrella company could meet this definition.

The CFA also creates strict liability offences, meaning a business could be convicted without having financially benefitted from, or even been aware of, the offence committed by the associated person. In the context of a non-compliant contractor supply chain, this means an agency or end-client that has unwittingly inserted a disguised remuneration scheme into the supply chain could be penalised under the CFA if the Courts decided that evasion had occurred.

As Wallace highlights, businesses that have engaged with any party committing evasion, having relied on assurances from others rather than carrying out their own due diligence, will not be viewed favourably in the eyes of the CFA:

“The only defence to a strict liability offence is being able to prove that you had procedures in place that should have identified and prevented the non-compliant practice. Ignorance of the law, and in this case of one’s own circumstances, is no defence.”

How to secure your supply chain and avoid CFA risk

Where a person associated with a business has criminally facilitated tax evasion, the burden is on the business to demonstrate that it had what the CFA refers to as reasonable “prevention procedures” in place to prevent the facilitation from occurring. Among the measures expected of businesses include:

  • Risk assessment: Businesses are expected to carry out assessments of associated persons to determine the risk of them facilitating tax evasion. This would typically involve considering the roles performed by the associated persons and whether they have an opportunity and/or incentive to facilitate tax evasion, as well as analysing what risk mitigation measures are currently in place.


  • Implement proportionate procedures: Procedures should be designed to manage the risks identified through the risk assessment. This will include establishing a written policy detailing a summary of the offences and providing guidelines for the ongoing monitoring and enforcement of compliance, including protocol for reporting suspicious activity.


  • Due diligence: This might include reviewing the trading history of those in the supply chain and ensuring that they have their own reasonable prevention procedures, in addition to clauses entitling the business to terminate the engagement should the associated person fall foul of their obligations.


  • Ongoing monitoring and review: Businesses should conduct a timetabled review of whether the threat level established via the risk assessment remains the same, whether any strategic changes are required, and of any new threats in light of changes to business practices or trading partners.

If a business is unable to demonstrate that it had reasonable prevention procedures in place, its last viable means of defence is to prove that it was not reasonable in the circumstances for it to be expected to have any prevention procedures in place. This is an unlikely scenario in most cases, particularly one concerning contractor supply chains, as Wallace explains:

“In any circumstance, the very minimum requirement is that a risk assessment is carried out. Any risks identified then need to be addressed if reasonable. It could be that the risk identified is that your bank may be facilitating evasion by banking evaders’ money. It is very unlikely that you could do anything to prevent that, so it would not be reasonable to expect you to do so.”

“However, in the case of an agency, it is unlikely you will get away with saying it was not reasonable to carry out the necessary due diligence with regards to a supplier of services which processes money belonging to people you yourself have processed payments for.”

HMRC active in pursuit of offending parties

Though no charges are known to have yet been brought in line with the CFA, recent activity suggests that HMRC has been active in its pursuit of offending parties. As of October 2020, the taxman had 13 live Corporate Criminal Offences (CCO) investigations for the failure to prevent the facilitation of tax evasion, with a further 18 opportunities under review. It is unknown whether any of those active cases were related to disguised remuneration schemes or the wider recruitment industry.

However, Wallace notes that multiple disguised remuneration schemes are currently under review by HMRC’s Fraud Investigation Service (FIS), which he observes could have significant repercussions for non-compliant supply chains:

“The involvement of the FIS indicates that HMRC considers criminal activity has occurred and may look to prosecute. This means evasion would have been proven on conviction. If those involved are prosecuted successfully then it may open the door to others in the same supply chain facing charges under the CFA.”

Orca Pay Group adopts a compliance-first approach and undertakes rigorous processes to protect contractors, recruiters and end-clients. To find out how you can benefit from our services, contact a member of our team on 0800 090 3798 or info@orcapaygroup.co.uk.