Umbrella Company Fraud
It is widely known that contractors, freelancers, recruitment agencies, or employment businesses enlist the services of an 'umbrella company' for payroll management, either for their own needs or to pay temporary workers. This arrangement allows them to focus on their primary work or business activities.
Typically, the umbrella company becomes the employer and pays wages through PAYE even though the work to be carried out will be for one of the recruitment agency’s clients. This system offers workers flexibility and access to regular work while leaving the agency, free of payroll responsibilities, to concentrate on identifying and hiring such work force as required by its clients.
In a legitimate ‘umbrella’ arrangement, temporary workers will usually be employed by a single ‘umbrella’ company, which will recover the costs from the client of the contractor or recruitment agency.
However, HMRC frequently encounters tax evasion fraud, conducted through the operation of a series of ‘mini umbrella’ companies, generally employing a small number of employees, which operate in a manner designed to fraudulently deceive HMRC.
The fraud seeks, amongst other things, to take advantage of Employment Allowance and the VAT Flat Rate Scheme incentives, resulting in the non-payment of PAYE, National Insurance Contributions, and other taxes.
Mini umbrella company fraud is not limited to any trade sector and can be found in supply chains whenever temporary labour is used.
Hamraj Kang and Tim Thompson outline the nature of ‘mini umbrella’ company fraud.
Operation of an Umbrella Company
Usually, where an umbrella scheme is in operation, in a supply chain, all parties will be aware which entity is responsible for managing and deducting PAYE, National Insurance contributions, and any other necessary deductions from each worker's wages.
The supply chain is usually the:
- business seeking temporary workers and contracts with a recruitment agency to find temporary workers.
- recruitment agency which identifies such temporary workers and advertises rates of pay etc. This is not normally the rate actually paid to the worker as it will include the umbrella company’s operating costs.
- umbrella company which becomes the employer for the temporary work from the recruitment agency. It will have a contract with the agency whereby it will be responsible for paying wages to the worker and invoicing the agency for the hours worked.
- worker seeking employment from the agency. The recruitment agency may require an umbrella company to be the employer.
The Potential for Fraud
Mini umbrella fraud seeks to deprive HMRC of revenue by the abuse of:
- National Insurance Contributions
- VAT Flat Rate Scheme
- Employment Allowance.
- PAYE.
National Insurance Contributions
Usually, National Insurance Contributions are paid by employers if their employees earn more than, at the present time, £170 a week, at a rate of 13.8% of each employee’s earnings.
Small businesses, currently defined as those with less than fifty employees, are entitled to claim up to £5,000 each year towards their National Insurance costs.
VAT Flat Rate Scheme
The VAT Flat Rate Scheme provides financial advantages to those businesses with a turnover of less than £150,000, excluding VAT.
Accordingly, there is clearly the attraction, to those seeking to evade payment of the proper level of taxes due, to limit the number of employees and turnover of any company to the level where maximum advantage can be taken of the financial allowances available.
To achieve this result, thousands of mini umbrella companies have been incorporated for the sole purpose of evading the proper level of tax payable. These companies employ only the minimum numbers of workers necessary to meet the thresholds for achieving the lowest possible tax liability.
This intentional misuse of mini umbrella companies was designed to deceive HMRC and create confusion. This tactic has proven successful to the extent that many workers have reported they are receiving payments from an entity unknown to them and reported this discrepancy to HMRC.
HMRC responded by deregistering tens of thousands of mini umbrella companies and is using both civil and criminal powers to penalise those responsible.
Where HMRC has established that any company involved in a supply chain knew or should have known of the fraud (under the ‘Kittel Principle’), that party may be liable for the tax loss caused by all participants within the supply chain.
Additional frauds associated with mini umbrella companies include:
- underpaying workers and invoicing agency for the full amount.
- failing to pay workers at all.
- failing to account for holiday pay.
- invoicing agency for fictitious expenses.
Warning signs of Fraudulent Mini Umbrella activity
Indicators include:
- Recent creation of the company: mini-umbrella companies often have a short life span and may be created and closed down quickly.
- Unrelated business activity description: the business description at Companies House does not match the services provided.
- Unusually high turnover of workers: workers are frequently moved between mini umbrella companies for fraudulent purposes.
- Unusual company name: multiple mini umbrella companies are frequently set up at the same time with variations of the same name.
- Foreign directors: it is reported that many directors of defaulting mini umbrella companies are resident abroad with the result that HMRC finds it extremely difficult to impose and enforce any form of penalty upon them. Directors can all too easily close a company, and transfer employees to a new one, without their knowledge.
How Can KANGS Help?
While HMRC continues in its efforts to combat the operations of mini umbrella companies, they are still being operated by those seeking to defraud the Revenue. In cases where HMRC identifies potential tax losses, it is probable that it will issue a tax assessment on all the companies involved within the supply chain.
It is crucial for businesses to stay vigilant about associations and who they conduct business with at all times to avoid being inadvertently drawn into any form of fraudulent tax evasion.
The KANGS Tax Team has a wealth of experience in assisting clients with HMRC investigations and prosecutions over numerous years. We would be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide an initial no obligation consultation from our offices in London, Birmingham, and Manchester. Alternatively, we provide initial consultations by telephone or video.
