Criminal Finances Act 2017 - Case Studies

Tax evasion as a criminal offence sounds like something that most people will not come into contact with. However, it comes up in a number of situations that academic and administrative staff in departments will face regularly.

From research projects to departmental consultancies; overseas working to expense claims; collaborations to donations, there are many ways academic and administrative staff may inadvertantly find themselves in situations where there is a risk of tax evasion occurring.

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A PI plans to engage an individual to carry out short term work on a research project. The individual says that they are self-employed and will invoice the University. However, based on the work to be performed it is clear that the true nature of the relationship with the University is that of employment. However, when completing the Check Employment Status for Tax (CEST) tool, the department tweaks the answers until the response returned is self-employed to keep everyone happy.

 

Risks: Mis-categorisation of an individual as a self-employed contractor rather than employed

Individuals may wish to be classed as self-employed to minimise their employment taxes liabilities. Self-employed individuals pay lower rates of National Insurance on their profits and being self-employed enables them to deduct expenses not available
to employees thereby reducing the amount of income tax to be paid, additionally categorising individuals as self-employed reduces the University’s employment taxes burden as no employer’s NIC is payable. 

If the individual, or the University, evades tax or National Insurance and was enabled to do so because the University’s processes, which would have identified that the individual was an employee and tax should have been withheld at source, were not
followed, the University could have committed the corporate criminal offence.

 

 

Appropriate approach: 

Any time an individual provides services for the University, the nature of the relationship must be assessed for that piece of work. The University (not the individual) is responsible for making this assessment, and it may change depending on the
assignment (i.e. the individual might be self-employed for some work but should be treated as employed for other work). The University has a duty to follow HMRC rules and must make the correct assessment and, if appropriate, withhold employment
taxes when paying the individual.

 

MORE INFORMATION ON PAYING INDIVIDUALS

 

 

 

The department wishes to engage an individual to write some material for the website. The individual invoices via a personal services company (PSC).To avoid having tax withheld when the invoice is paid, when completing the Check Employment Status for Tax (CEST) tool, the department tweaks the answers until the response returned is that the contractor can be paid without tax deducted to keep everyone happy.

 

Risks: Failure to withold tax when paying a personal service company

Individuals may wish to be classed as employed by their own company which in turn contracts with the University to minimise their employment taxes liability. For example, company director-shareholders may pay themselves with dividends, which are not subject to NIC and attract lower rates of income tax, rather than salary. Categorising individuals contracting via PSCs as employed by the PSC rather than the University also reduces the University’s employment taxes burden as no employer’s NIC is due by the University.

If the individual, or the University, evades tax or National Insurance and was enabled to do so because the University’s processes, which would have identified that tax should have been withheld at source, were not followed, the University could have committed the corporate criminal offence.

 

 

Appropriate approach: 

Any time an individual provides services for the University through a PSC or other intermediary, the nature of the relationship must be assessed for that piece of work; this includes new contracts, contract extensions and renewals. The University must make the correct assessment and, if appropriate, withhold employment taxes when paying the individual. Under IR35 intermediaries legislation, where individuals would be employed by the University were it not for the PSC or other intermediary that they work through they pay employment taxes in a similar way to employees.

 

MORE INFORMATION ON PERSONAL SERVICE COMPANIES

 

 

 

A PI has research funding and is motivated to ensure that as much work as possible is completed; another university has been engaged to provide a DNA sequencing service. The PI describes the university as a collaborator not a supplier in order to minimise the VAT liability.

 

Risks: Mis-describing a collaboration

VAT is not accounted for correctly on the payment to the supplier and insufficient VAT is paid to HMRC.

 

 

Appropriate approach:

It is important that it is recognised when a purchase is being made. In this case, even though the supplier is another university and is providing research related services, we are buying a service not collaborating with the supplier.

Note: the University may have multiple relationships with third parties including other universities; in some situations they may be suppliers and in others collaborators, but each transaction should be assessed individually.

 

MORE INFORMATION ON COLLABORATORS

 

 

 

A PI is purchasing some equipment and states that it will be used for non-commercial medical research or educational purposes in order to obtain medical relief. In fact, the equipment will be used for commercial research.

 

Risks: Mis-applying medical relief and import VAT

The University claims VAT relief and import VAT reliefs that are not due and insufficient VAT is paid to HMRC.

 

 

Appropriate approach: 

In all cases ensure that projects are set up with the appropriate intended use default. Admin teams need to ensure that they understand the purpose that materials are going to be used for.

 

MORE INFORMATION ON MEDICAL RELIEFS

 

 

 

A colleague is undertaking a significant project overseas and has sent two researchers overseas to manage the project for 12 months. The researchers continue to use UK addresses and pay tax and national insurance in the UK.

 

Risks: Not paying due taxes abroad

Depending on the Double Taxation Agreement with that country  it may be necessary for the individual to pay tax in that country and for the University register for social security and withhold tax. This may mean that tax and social due is not paid in the other country.

 

 

Appropriate approach: 

In all cases where an individual will spend more than 30 days overseas, departments should talk to the Tax Team to ensure that the University treats all work in other countries appropriately.

Note: in this scenario, the University has requested staff to work overseas. In some cases staff may request to spend time overseas, for example during a sabbatical, to spend parental leave overseas or a request to work from home. In all situations where individuals will spend more than 30 days overseas, the Tax Team and Personnel should be consulted. In the case of individuals requesting to work overseas, the Flexible Working process should also be followed.

 

 

 

A research group is holding a social event to celebrate reaching a project milestone. The team of 15 from Oxford go out for dinner, taking two collaborators from another University. Under the tax rules, this should be classed as social entertaining, declared on a PAYE Settlement Agreement (PSA) form and tax paid. However, to save money on the grant, the researcher submitting the expense claim describes the event as business entertaining.

 

Risks: Not paying tax on benefits

Employment taxes are not paid to HMRC as they should be.

 

 

Appropriate approach: 

The substance of the event should be recognised correctly, details of the event declared, and tax paid in line with legislation.

 

MORE INFORMATION ON ENTERTAINING 

 

 

 

A donor offers a donation to the University, but asks for it to be registered in their partner's name.

 

Risks: Claiming tax reliefs which are not due

By registering a donation in someone other than the actual donors name this other individual may then claim gift aid tax relief on the donation despite not being entitled to the relief. If the donor's partner is in a higher income tax band than the donor this would result in less tax being paid to HMRC than is owed. 

 

 

Appropriate approach: 

Donations should always be registered in the name of the person who makes the donation.

 

MORE INFORMATION ON ACCEPTING DONATIONS 

 

 

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 : financial.assurance@admin.ox.ac.uk

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 Financial Assurance Team 

 
 
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