HMRC have issued guidance on what mini-umbrella company fraud is. It follows a BBC Radio File on 4 programme which revealed that as many as 48,000 companies had been created in the last five years under such arrangements, at a cost of potentially millions in lost tax revenue.
The HMRC guidance sets out the key characteristics of mini-umbrella company fraud, the warning signs for employers and employees, as well as how to report the fraud.
The key characteristics include:
- The creation of multiple limited companies, each employing only a small number of workers.
- The company is used to place temporary workers.
- The company can often be found low down the employee supply chain beneath other Employment Intermediaries.
Primarily the arrangements allow the perpetrators of the fraud to exploit the VAT Flat Rate Scheme and the Employment Allowance, but they can also lead to non-payment of Pay-As-You-Earn (PAYE), National Insurance Contributions (NICs) and VAT.
For the employers who use such companies, it can result in financial loss or reputational damage. For those employed by such companies, they often do not receive the full pay that they are entitled to and may even lose employment rights.
HMRC list the warning signs as:
- Unusual company names.
- Unrelated business activity listed on Companies House compared to the services actually provided.
- Foreign national directors.
- Frequent movement of workers between companies.
- Transient business (often less than 18 months in duration).
Businesses are encouraged to contact HMRC if they have concerns or use the online tool to report someone who is evading tax.
The File on 4 investigation focused on companies exploiting the Employment Allowance.
- British directors are recruited via private Facebook groups and paid a small amount to front these companies for a short period.
- Then they resign and are replaced by a Filipino director.
- Employees apply for jobs through employment agencies but are unaware of the actual company that pays their salary. With only a small number of employees, each company can use the Allowance to escape paying any employers national insurance at 13.8%.
- Non-resident directors are more difficult for HMRC to pursue for outstanding liabilities.
- It revealed that HMRC had recently deregistered 22,000 such companies thought to be involved in such schemes.
Useful guides on this topic
Spotlight 45: Umbrella Companies
This HMRC Spotlight highlights the fact that many employees and self-employed contractors are failing to realise that some staff agencies and umbrella companies are flouting tax anti-abuse rules.
Agency Workers: Employment intermediaries rules (subscribers)
What are the tax rules for Employment Intermediaries and Agencies? Are agency workers subject to PAYE?
VAT: Flat rate scheme
What is the VAT Flat Rate Scheme (FRS)? Who can apply? How do you apply? What are the rules? What are the rules for capital expenditure and pre-registration VAT?
Corporate anti-tax evasion policy template
S.44 to s.52 of the Criminal Finances Act 2017 lays out the corporate criminal offences of facilitating tax evasion. As part of the qualifying defence to such a charge, HMRC expects all corporate entities to have an Anti-Tax Evasion policy in place