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BBC condemns umbrella company fraud

Accountants need to be aware of allegedly illegal activity by umbrella companies and, where necessary, take action. BBC's Money Box has exposed the use of umbrella companies to cheat HMRC through payments to emergency workers. Philip Fisher investigates.

11th Jun 2020
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For many years, HMRC has been playing cat and mouse with the tax avoidance industry. One of the Revenue’s biggest targets has been the conversion of what the man in the street would regard as salary into payments that escape income tax and/or National Insurance Contributions.

Last Saturday, Radio 4’s Money Box, which is still readily available on BBC Sounds, unusually devoted the whole programme to a single topic.

Its subject was the use of umbrella companies to avoid tax in just this manner. Indeed, the reason for the BBC’s obvious distaste was the marketing of schemes to take advantage of those working themselves into the ground in the health service, as they try to stem the pandemic.

HMRC shone its spotlight 54 on the marketing of such schemes to returning NHS workers back in March, and even today it is running adverts on social media warning NHS staff to avoid these schemes.   

NHS re-joiners targeted by promoters of tax avoidance schemes

Without going into great detail, the sophisticated arrangements operate in a manner that will be familiar to many, although most readers might have expected that the abusive elements had disappeared following various legislative changes in the last few years.

Rather than receiving payments directly, the workers provide services through the auspices of an umbrella company. This guarantees to pay them (say) 78% of gross pay, even after taking what can turn out to be a very hefty fee.

The methodology is pretty simple. The taxpayer purportedly receives part of their pay in the form of a salary, which is correctly subjected to tax, with the rest described variously as a “repayment” or “bonus”. These latter amounts are, according to the promoters, not subject to tax or NIC and need not be reported at all to HMRC.

As an old colleague of mine, the solicitor and barrister David Pett, confirmed in the programme, there are a number of different approaches that HMRC could take but, whichever is favoured, these payments are fully taxable. The most forceful and convincing approach would be to impose charges under the disguised remuneration legislation, which seems to fit the bill perfectly.

You can bet that in a few years’ time, when HMRC catches up with the unfortunate healthcare workers and they are obliged to pay all of the back taxes, along with interest and a hefty penalty, the promoters who guaranteed that the scheme was watertight will either have disappeared from the face of the earth or claim that it worked at the time and refuse to assist or provide compensation.

Tax avoidance becomes fraud

In the conversation, the arrangements were described as “abusive tax avoidance”. However, if promoters instruct taxpayers to refer to payments in a misleading way and completely ignore them for tax purposes, HMRC could plausibly make the case that a more accurate description would be “fraud”.

There must be every chance that some tax inspector who listened to the broadcast while preparing lunch will now be on the case. Therefore, anyone receiving income from an umbrella company under arrangements that sound too good to be true might wish to review the position as a matter of urgency, as should their accountants.

The involvement of tax professionals in the development and marketing of these schemes should also be of particular concern to some readers.

First, there is the question about the validity of a counsel’s opinion. One of the promoters was keen to emphasise that they have received a green light from counsel. It is possible that they were lying. There is also a chance that they had an opinion based on out-of-date legislation. However, as Mr Pett observed, it is not unprecedented to discover that the views of distinguished tax barristers, some of them QCs, prove to be incorrect.

While the vast majority of barristers do a wonderful job in fairly determining the law for their clients, there are occasions when some appear to have been overly bold in giving opinions on the validity of potentially abusive tax avoidance schemes that ultimately fail.

Accountants can also get drawn into situations that could be career-threatening. Acting as what has become known as “an enabler” of a tax avoidance scheme can now get those in the profession into big trouble, if the scheme turns out to be abusive or, worse, is determined to be tax evasion rather than tax avoidance.  Also accountants and tax advisers who are members of one the sponsoring bodies of the code: professional conduct in relation to taxation (PCRT) could find themselves up before the disciplinary board of their professional body.  

There is much food for thought arising from a good piece of investigative journalism and readers are urged to listen to the broadcast and, if necessary, take protective action.

Replies (9)

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By memyself-eye
11th Jun 2020 19:54

NHS workers - same old same old:the best paid and dumbest people on the planet.

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Replying to memyself-eye:
By Duggimon
12th Jun 2020 10:37

I'm not entirely sure I agree with that. The only clients I have working for them were both very smart and terribly paid.

Thank god for all that applause they got, I'm sure that's gone a long way towards helping.

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By Justin Bryant
12th Jun 2020 11:11

Rather hypocritical isn't it, given all the IR35 abusive arrangements of BBC staff over the years that were positively encouraged by the BBC?

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By johnfrancis
12th Jun 2020 11:20

I heard the programme - and was concerned that the strongest word used was 'avoidance'. The arrangements described sounded like pretty straightforward evasion and fraud. I wonder whether the presenters were under the thumb of nervous BBC lawyers.

Our society is rife with fraud of all sorts and I wonder whether, as a nation, we devote sufficient resources to its elimination and punishment. The amount of effort required to protect against phishing emails and malevolent links suggests to me that we live in a world where crime pays. Do we have to accept that this is how it's going to be for the long term?

Philip: I hope you are feeling a lot better now.

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Replying to johnfrancis:
Philip Fisher
By Philip Fisher
14th Jun 2020 09:15

Thanks for your response, johnfrancis. I wholeheartedly agree with your sentiments.

Your concern is greatly appreciated. My recovery continues to be painfully slow but I seem to be heading in the right direction.

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By Moo
15th Jun 2020 08:51

One clear signal that this sort of arrangement contravenes UK tax law is when the organisers are in an offshore tax haven. I have seen a fair number of clients who have worked through disguised remuneration schemes and all but one of these schemes was based in the Isle of Man.

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Hallerud at Easter
By DJKL
15th Jun 2020 16:34

"with the rest described variously as a “repayment” or “bonus”. These latter amounts are, according to the promoters, not subject to tax or NIC and need not be reported at all to HMRC."

Has anyone ever read the guidance from said promoters that "supports" their viewpoint on the tax position, there must be something more than "we say it is not taxable" within their reasoning or do they manage to market these whilst displaying no evidence?

If they do then after we leave the EU on 1/1/21 I will be off to Sweden to sit on my verandah, invent some fine sounding literature for "Extract Box 9", and flog my made up scheme into the UK; in effect fiction without characterisation, dynamic plot, pathos, comedy or tragedy- in the words of Yosser , "gizza job, I could do that"

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By jon_griffey
16th Jun 2020 11:15

It seems to me that this should be very simple to sort out. All they need to do is to make every employment agency, accountant, promoter, lawyer, introducer etc who is any way involved in the chain jointly and severally liable for the tax lost. That will soon focus minds.

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Replying to jon_griffey:
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By Moo
22nd Jun 2020 16:44

And how precisely do you plan to enforce that when they are invariably based in different jurisdictions to the one where tax is being avoided?
HMRC are not entirely stupid, and this problem is not entirely straightforward.

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