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net cash benefit less attractive but in large scale tax evasion schemes, this may still represent easy money. HMRC has been quoted 4 as saying that it’s de-registering mini-umbrellas and removing their right to claim employment allowance. But it is difficult for HMRC to be proactive in this scenario – the legislative framework for registering and de-registering UK companies isn’t helping it in its 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 and can be shut down with impunity, with no recourse for the employees involved, so human resource / employment law aspects can also come into it. Often, the employees are moved into a new mini-umbrella company. Part of the problem lies in the way the Companies Act is structured, which allows these companies to be set up and closed down. The scale of payroll fraud and cyber- attacks is unprecedented and now, we’re seeing hundreds of mini umbrellas being ostensibly controlled by individuals in Asian and other jurisdictions daily – resulting in revenue losses to the Exchequer. Is this tax avoidance, or payroll / VAT flat rate scheme fraud? HMRC says these schemes represent tax evasion, not tax avoidance. In 2021, HMRC published a statement and some guidance 5 on GOV.UK and in June 2023, a consultation response 6 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 7 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 8 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 9 .” What are the risks? The major risk could be that you’re unwittingly caught up in mini-umbrella fraud. If you suddenly become aware you’re involved, you should contact your principal regulator as soon as possible to obtain further advice.
Mini-umbrella fraud could also potentially involve modern slavery and other nasties – but the main themes tend to centre around large-scale claims using the 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 Spotlight 60 guidance 10 from HMRC. In addition, there have been cases where pay as you earn tax and National Insurance contributions 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 disclosure of tax avoidance schemes (DOTAS) rules and in Spotlight 24 , HMRC sets out potential fines for promoters 11 of up to £1 million. What can you do about it? You can be alert to these risks and make reports where you consider anything may be amiss. It pays to be vigilant. The comments from Julia Kermode, chief executive officer of PAYE Pass 12 in relation to the proliferation of this unwanted behaviour emphasises the sheer scale of it. There are calls for better regulation of the umbrella company sector, including from ICAS and via the employment status and intermediaries forum 13 , which is co- chaired by the very author of this article, Justine Riccomini. n
Links corner 1 https://ow.ly/FY1g50QfVs3 2 https://ow.ly/VXIT50QfVtn 3 https://ow.ly/MsNK50QfVvk 4 https://ow.ly/BYlw50QfVwz. 5 https://ow.ly/BOvA50QfVy2 6 https://ow.ly/sTmb50QfVzG 7 https://ow.ly/h8wq50QfVGu 8 https://ow.ly/yFhs50QfVMR 9 https://ow.ly/fjqN50QfVO3 10 https://ow.ly/62N450QfVQY 11 https://ow.ly/VT1850QfVS4 12 https://ow.ly/N3oA50QfVVE 13 https://ow.ly/cq8x50QfVWT.
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| Professional in Payroll, Pensions and Reward |
Issue 97 | February 2024
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