HMRC has issued new guidance on the fraudulent activities of so-called ‘mini-umbrella companies’ sometimes created to avoid paying tax and national insurance. ICAEW’s Tax Faculty calls on members to ensure they are informed.
In light of a BBC investigation, HMRC has issued guidance on mini umbrella company (MUC) fraud, outlining what such fraud looks like and listing five key warning signs to watch out for.
On 10 May, BBC Radio 4’s File on Four alleged that more than 48,000 small companies had been created in the UK over the past five years with the purpose of avoiding tax, such as employers’ national insurance contributions (NIC).
The BBC investigation highlights the case of subcontractors working at UK COVID-testing sites run by G4S who were ultimately employed by newly formed MUCs with directors located offshore.
HMRC confirms that criminals create multiple limited companies with only a small number of temporary workers employed by each one to take advantage of tax incentives aimed at smaller businesses.
For example, by creating a series of MUCs that appear unconnected and claiming the NIC employment allowance of £4,000 for each company, and then allowing the company to be struck off after about 18 months, the criminals can avoid paying thousands of pounds of employers' NIC.
Following the introduction of the off-payroll working (OPW) regime, there has been an increase in the number of umbrella companies. This is because individuals employed by an umbrella do not need to be considered for the OPW rules as PAYE is already being operated.
Organisations and businesses in the public and private sectors are urged to carry out due diligence checks on their labour supply chains and to ensure that they know how workers are paid.
HMRC has also updated its advice on applying supply chain due diligence principles to labour supply chains, highlighting the risks should HMRC find non-compliance or fraud in the chain. These risks include:
- liability for unpaid taxes and national insurance contributions including employment allowance overclaimed;
- the denial of the right to claim input tax if the trader should have known their transactions were connected with VAT fraud;
- criminal offences relating to national minimum wage and national living wage;
- loss of gross payment status for businesses operating in the construction industry scheme;
- corporate offences for failure to prevent the criminal facilitation of tax evasion;
- challenges to any tax avoidances arrangements;
- disruption to the supply of labour if HMRC or other law enforcement agencies take action against a labour supplier in the chain; and
- reputational damage.
Alongside risks related to payment of taxes, private businesses should also be aware of the risks posed by these companies in relation to breaches of the Modern Slavery Act.
Meanwhile, ICAEW calls on members to familiarise themselves with HMRC’s guidance and the key warning signs that clients could be involved with a MUC. These include:
- Directors that are foreign nationals with no previous experience in UK labour supply. Often they replace a temporary UK-resident director.
- Employees being moved frequently between MUCs.
- Business activities listed on Companies House entries often do not reflect the reality of what the company does.
Anyone who has concerns about labour supplies are urged to contact HMRC.
- Crucial steps for supply chain resilience
- Supply chain assurance in the retail sector
- Make your supply chain stronger
- ICAEW support on modern slavery
- Spotting modern slavery
- TAXguide 01/21 Off-payroll working from April 2021
- TAXguide 07/21 Off-payroll working practical Q&As
- Tax ethics and fraud, TAXline May 2021
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This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.