Mini-umbrella companies and the Employment Allowance: Tax avoidance or payroll fraud?
We discuss the risks that occur when mini-umbrella companies become involved in VAT Flat Rate Scheme and Employment Allowance claims.
In the summer of 2023, news began to regularly appear in the headlines involving the use of mini-umbrella companies to perpetuate fraud involving payrolls and Employment Allowance claims. This worrying development was examined by Tax Policy Associates. Their examinations revealed that one example of this was a large business which was given an opinion by a KC on using mini-umbrellas. Under normal rules, the business was too large to qualify for Employment Allowance or the VAT Flat Rate Scheme.
In an attempt to change its appearance the business was then split up into thousands of UK mini-umbrella companies, in spite of an HMRC Spotlight notice 24 which was issued in 2015 - the year before this particular scheme example launched. Those companies then advertised on Facebook and other social media platforms to recruit people from overseas (in this case the Philippines) to become shareholder directors, and paid them a nominal fee to put their name on paper. Each of the mini-umbrellas then became eligible to operate the VAT Flat Rate Scheme and claim the Employment Allowance. Note that the flat rate VAT rules were changed in 2017, which made the net cash benefit less attractive, but in large scale tax evasion schemes this may still represent easy money. HMRC have been quoted as saying that they are de-registering mini-umbrellas and removing their right to claim Employment Allowance. But it is difficult for HMRC to be proactive in this scenario as the legislative framework for registering and de-registering UK companies is not helping them in their endeavours.
What's the issue?
Mini-umbrella companies, which assist in the flexibility of the contracting labour market and can be a useful tool, usually either directly or indirectly involve recruitment/employment agencies, employees and payroll. UK mini-umbrella companies which are controlled from overseas are, however, difficult to hold accountable. This is because they can be shut down with impunity and with no recourse for the employees involved, so HR/employment law aspects can also come into it. Often, these employees are then moved into a new mini-umbrella company, continuing the cycle. Part of the problem lies in the way the Companies Act is structured, allowing these companies to be set up and closed down easily.
The scale of payroll fraud and cyber-attacks is unprecedented, and we are now seeing hundreds of mini-umbrellas being ostensibly controlled by individuals in Asia and other jurisdictions daily, resulting in revenue losses to the Exchequer.
Is this tax avoidance or payroll/VAT Flat Rate Scheme fraud?
HMRC say these schemes represent tax evasion, not tax avoidance. In 2021, HMRC published a statement and some guidance on gov.uk and in June 2023, a consultation response was published which set out how the UK government is proposing to address these concerns and review policy in this area.
What are the warning signs?
Agents, payroll bureaux and anyone involved in payroll matters or umbrella companies should be aware of the warning signs, which HMRC sets out as follows:
“As mini-umbrella companies are low down in the supply chain it may be challenging to spot them. You must be vigilant, especially where the employer of the worker is not the umbrella company you have a contract with.
A good starting point is to complete regular due diligence checks. These are some of the signs to look out for, although should not be taken in isolation. Most mini-umbrella companies will display most, if not all, of the signs in the following sections.
Unusual company names
Multiple companies are often set up around the same time and given a similar or unusual name. The registered address may not seem suitable for their types of business activities.
Unrelated business activity
The business activities listed on Companies House entries will often not relate to the services provided by the workers.
Foreign national directors
Foreign nationals who have no previous experience in the UK labour supply industry, are often listed as directors. They can replace a temporary UK resident director after a short period of time.
Movement of workers
Employees may be moved frequently between different mini-umbrella companies.
Short-lived businesses (also known as transient businesses)
These individual mini-umbrella companies have a relatively short lifespan (often less than 18 months) before being allowed to be dissolved by Companies House, as they do not meet filing obligations. New mini-umbrella companies will then take their place in the supply chain.
You should notice this as you may find that you need to issue a new key information document to workers on a regular basis.
Information from sources such as the Companies House register might help you to spot warning signs when completing your quarterly employment intermediary reports.”
What are the risks?
The major risk for members may be that you are unwittingly caught up in mini-umbrella fraud. If you suddenly become aware that you are involved, you should contact your principal regulator (e.g. ICAS) as soon as possible to obtain further advice.
Mini-umbrella fraud could also potentially involve modern slavery and other issues, but the main themes tend to centre around large scale claims using VAT Flat Rate Scheme and Employment Allowance. The main indicator of something not being right is usually that the companies are short-lived, which makes it even more difficult for the authorities to chase down the missing revenue.
There is of course the potential for other tax avoidance/evasion involving mini-umbrella companies, which can involve paying the employees using loans or other tax avoidance arrangements which are covered by other Spotlight guidance from HMRC. In addition, there have been cases where PAYE and NICs are simply deducted, but never reach HMRC.
The potential penalty for being involved in mini-umbrella fraud for anyone suspected of it is covered by the DOTAS (disclosure of tax avoidance schemes) rules, and in Spotlight 24 HMRC sets out potential fines for promoters of up to £1m.
What can you do about it?
You should be alert to these risks and make reports where you consider that anything may be amiss. It pays to be vigilant, and you should aim to liaise with your regulator and HMRC to report any cases that you come across or concerns that you may have unwittingly become involved in promoting. The comments from Julia Kermode, CEO of PAYE Pass in relation to the proliferation of this unwanted behaviour emphasise the sheer scale of this problem. There have been calls for better regulation of the umbrella company sector, including from ICAS and via the Employment Status and Intermediaries Forum, which is co-chaired by ICAS’ own Justine Riccomini.
If you wish to contribute to the debate…why not join an ICAS tax committee and bring your expertise straight to the Tax Team?