Mini-umbrella company fraud rises as temporary labour market boomsby
John Whelan calls for greater transparency in the labour supply chain to get a handle on fraudulent behaviour as Quantum Employment continues to grow.
Mini-umbrella company fraud cases are on the rise as the temporary labour market grows by 5% over the last 12 months, according to the latest Office of National Statistics (ONS) Labour Market Report.
This job market is expected to grow further as the UK economy continues to recover, with job vacancies hitting record highs in July and temporary workers filling the gaps of staff shortages in certain industries. But, as more people turn their backs on the traditional nine to five working hours, issues with payroll and taxing temporary workers rise to the surface.
Earlier this month, The Trade Union Congress (TUC) called for the government to ban the use of umbrella companies to employ temporary workers. This comes as they are under increased scrutiny for, according to the TUC, abusing workers’ rights and committing fraud - blame often allocated to inadequate regulation.
The government is making attempts to gain control over activity and recently made reforms to IR35, the UK’s anti-avoidance tax legislation which is designed to ensure ‘disguised’ employment is taxed at a similar rate to employment. But more is needed to be done to protect this growing flexible workforce.
A lack of transparency and compliance
Umbrella companies employ temporary workers on behalf of an employment agency, dealing with accountancy, taxes and payroll. The use of umbrella companies is long-standing and due to the IR35 changes which came into effect this year and restrict temporary workers to work off payroll through personal service companies, their use has recently increased.
However, companies who use temporary labour should be aware of the dangers of mini umbrella company fraud in the complex labour supply chain. Mini-umbrella company fraud reduces tax payments, including PAYE, National Insurance and VAT, to HMRC and diminishes the trust in the wider industry, giving genuine payroll providers a bad name.
How does a mini-umbrella company work?
Using some basic assumptions, the profit generated can be an additional £150 per worker per month (often shared with others in the supply chain), generated entirely from taxation arbitrage, as can be seen from the example calculation below:
Fraudsters hide in the shadows
Mini-umbrella companies are unlike umbrella companies and are specifically set up to enable fraud. Criminals create multiple limited companies, with a small number of temporary workers employed by each one and are facilitated by a promoter business. This layer of businesses creates a complex supply chain, which makes it easy to hide fraudulent activities from HMRC.
Businesses need to ensure they are not enabling such schemes (which do not leave the contractor worse off as the gains are generated entirely from taxation), otherwise, this could lead to reputational and financial damage to the business.
Earlier this year, HMRC published guidance on this type of fraud to help identify it in the supply chain. It noted for employees, who are often not aware of these arrangements, the use of this model can result in the loss of some employment rights. This would be detrimental for workers who rely on temporary contracts for income and for the businesses who rely on temporary labour to fit business needs.
Unusual company names, movement of workers between different companies and short-lived businesses are some of the warning signs HMRC notes to look out for and advises regular due diligence checks to avoid getting scammed.
Cracking down on fraud during gig economy boom
The growing use of the temporary labour market means that mini umbrella company fraud continues to be troublesome for both HMRC and temporary workers. The lack of transparency and compliance in the supply chain makes it difficult for end-clients and temporary workers to identify fraudsters.
However, recent government action and guidance issued by HMRC shows there is a crackdown on fraudulent behaviour. HMRC’s 10-year strategy to modernise tax – which focused on new technologies and real-time data to accurately account for workers – is also a vital step for the gig economy.
But, although legislation is under review and shows an active push to protect temporary workers, companies must also look at their own internal processes to ensure the correct management of temporary workers. It can be said that businesses are not currently equipped to deal with the growing gig economy.
Reducing risk and accelerating transparency
Companies should keep their workings in one unified space, allowing for extra visibility and transparency. They need to have a better understanding of their supply chain due to this increase in mini-umbrella company fraud.
Modernising accounting and payroll systems can significantly help. Access to real-time information allows companies to keep accurate and up to date accounts while ensuring compliance with the latest regulations.
HMRC also needs to do better. With the data available through the Making Tax Digital initiative, so-called ‘MUC Fraud’ should be relatively easy to identify and therefore eliminate but harnessing the gains from technological advances takes time.
While this flexible labour market continues to grow, the fight against mini-umbrella company fraud rages on.
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Experienced Chief Executive Officer with a demonstrated history of working in the accounting industry. Skilled in Tax Preparation, Business Planning, Account Reconciliation, and Accounting. Strong business development professional with a Bachelor of Commerce (B.Com.) focused in Economics from University of Birmingham.