Mini Umbrella Companies = Tax Fraud

A recently published report has shed light on the alarming rise of tax fraud facilitated by so-called mini umbrella companies. The author, well-known tax reporter Dan Neidle, is clear in his conclusion that these schemes are criminal tax evasion, fraud in other words, rather than tax avoidance.

Mini umbrella companies have been prevalent in the industry news, usually with a big warning attached. The schemes are set up to exploit the employment allowance and flat rate VAT scheme, both designed to support much smaller businesses.

Lack of awareness

While this report draws attention to the issue, generally there is still little awareness about the risks of getting involved with a mini umbrella scheme. Julia Kermode, of worker advice platform IWork.co.uk explains:

 “Umbrella workers will usually be completely unaware that they are in a mini-umbrella company arrangement, particularly as they will appear to be paid correctly with appropriate tax and NICs going to HMRC.  However, in reality the umbrella making the payments will be frequently changing behind the scenes, which will only be apparent if you check the company name carefully on each of your payslips. Your payroll reference number will also be different with each new company that pays you. 

The frequent change in company paying you matters because you will think you have continuity of employment, however you don’t.  This is important for both employment rights, but also for your financial history when seeking mortgages, bank loans or other similar products.”

Evasion, not avoidance says HMRC

Neidle’s report lays out detailed reasoning of why mini umbrella company operations are fraud, not simply tax avoidance. It seems HMRC and HM Treasury agree, in this statement from the recently published consultation on “Tackling non-compliance in the umbrella company market”:

5.8 The employment allowance and flat rate scheme are simple to use and rely on self-assessment of eligibility making them more easily subject to abuse by umbrella-style companies who are known to disaggregate into smaller entities (commonly known as mini umbrella companies) to meet the eligibility requirements for the employment allowance and flat rate scheme. These umbrella companies fraudulently exploit the employment allowance by ensuring the company’s employer NICs liabilities for the year are covered by the £5,000 relief meaning no employer NICs is paid. The same entities deliberately misuse the flat rate scheme to exploit the lower flat VAT rates available, often by relying on an incorrect trade classification.

5.9 These umbrella companies typically have a UK-based director when they register for VAT and claim the employment allowance before that director resigns and a new offshore director is put in place. As the new director is outside of UK jurisdiction it becomes difficult for HMRC to recover any VAT or NICs lost through fraud. There is no standard model for this fraud and arrangements are constantly evolving as organised criminals try to hide their activities from HMRC.

Speaking about the case referred to in Neidle’s report, Liquid Friday’s COO Joe Taffurelli said:

“Legitimate Umbrella companies have been calling out the use of MUC for years. This case is just one example in a sea of unscrupulous providers but well done to HMRC for dealing with this! Recruiters must continue to complete due diligence, FCSA banned the use of MUC several years ago citing concerns over the legality of VAT & NIC’s this is a clear example of being on the right side of history.”

Call for umbrella company regulation

Aside from the tax being lost from the public purse, mini umbrella companies and other fraudulent schemes are the bad apple that is poisoning the barrel of the entire umbrella company industry.

The market urgently needs regulation, both to protect workers and create a level playing field for umbrella companies. By setting legal standards and requirements, regulation would ensure that all providers operate under the same rules, preventing bad practice by non-compliant companies and allowing fair competition.

Currently, the government is gathering responses to the afore-mentioned consultation, which closes at the end of August. Regrettably, going by the pace of progress so far, regulation could still be a long way off.