CEO of My Digital
Share this content
Umbrella fraud
istock_XiXinXing

Mini-umbrella company fraud rises as temporary labour market booms

by

John Whelan calls for greater transparency in the labour supply chain to get a handle on fraudulent behaviour as Quantum Employment continues to grow. 

14th Sep 2021
CEO of My Digital
Share this content

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.

Tags:

Replies (7)

Please login or register to join the discussion.

avatar
By Carl London
15th Sep 2021 13:32

Wouldn't the 'limited cost trader' rules apply in most cases, significantly reducing the apparent FR VAT gain?

Thanks (1)
Replying to Carl London:
avatar
By jwhelan
15th Sep 2021 18:31

You are quite right Carl - Limited Cost Trader rules apply to all companies who use the Flat rate VAT scheme (This is the rule whereby your costs for 'tangible' goods must be no less than 2% of your revenue in any VAT Quarter) to facilitate the fraud there are example of "purchases" of, for example, work wear (often sourced from abroad to avoid a VAT loss) being used to meet the 25 threshold.

Thanks (0)
avatar
By Paul Crowley
15th Sep 2021 16:41

Claiming employment allowance is fraud?
Who says so?

Thanks (0)
Replying to Paul Crowley:
avatar
By jwhelan
15th Sep 2021 18:30

Hi Paul - thanks for the comment.
Every business has the right to claim the £4,000 annual employment allowance. but where, for example, a company of 1,000 employees has been "split" into (say) 250 entities each with 4 employees, there are various tools available to HMRC to tackle the abuse but the obvious one would be the General Anti Abuse Rule
https://www.gov.uk/government/collections/tax-avoidance-general-anti-abu...

Thanks (0)
Replying to jwhelan:
avatar
By Paul Crowley
16th Sep 2021 21:43

But surely that is just an opinion not yet tested at any tribunal

Thanks (0)
avatar
By tedbuck
16th Sep 2021 10:44

'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. '

Harnessing gains from RTI must be very difficult judging by HMRC's total inability to amend codes when it is fairly obvious that earnings have bridged the £125,000 level - even after the year end shows a higher level. Basically it seems that their systems don't work.

Like waiting 9 months or so to issue a demand note for unpaid CT instead of the 30 days which used to be the case and whacking penalty notices at people where time to pay has been agreed and so on and so on. One can make excuses but after a while it gets a bit frustrating. HMRC can make as many **** ups as it likes but expects everyone else to behave in exemplary fashion while they wfh watching the television. And of course I read that the Treasury are going to be largely working from home in the future. Just imagine all that data floating about London and its environs on the Treasury Boys' computers, in buses, tubes, cars and shopping baskets just waiting to be mislaid.

It doesn't sound to be like a well run organisation capable of 'harnessing the gains from technological advancement'.

Thanks (1)
Replying to tedbuck:
avatar
By Paul Crowley
16th Sep 2021 21:53

"Harnessing gains from RTI must be very difficult judging by HMRC's total inability to amend codes when it is fairly obvious that earnings have bridged the £125,000 level - even after the year end shows a higher level. Basically it seems that their systems don't work."
Agree
Two new clients in the last couple of weeks unable to understand why PAYE does not collect enough tax when income exceeds £100,00o
Maybe HMRC should look to fix that problem given that they get the details on a monthly real time basis

They have absolutely no chance of dealing with the alleged fraud suggested by OP
Fraud is a strong word
It is really just vanilla tax planning given that the VAT element is dubious

Nothing fraudulent about Phillipinos being directors of UK companies

Thanks (0)