HMRC ups pressure on agency staffing due diligenceby
New guidance has been issued by tax officials to help businesses spot warning signs of shady umbrella companies operating as tax avoidance schemes.
HMRC is pressing businesses to carry out stronger due diligence on staffing supply chain risks after a spate of umbrella company scandals.
The agency has issued new guidance to help businesses reduce their risk of unwittingly using a tax avoidance umbrella scheme when hiring contingent and temporary staff.
Penalties for non-compliance include 100% of the fees receivable and public identification as a tax avoider.
“Some umbrella companies are non-compliant and operate disguised remuneration schemes,” the government said. “These schemes claim to prevent certain payments made to workers from being taxable. They aim to do this by describing taxable earnings paid to a worker for doing their job as something that is non-taxable instead.”
IR35 avoidance tactics
Earlier this year, it was reported that around 48,000 mini umbrella companies (MUC) have been created in the past five years to reduce recruiters’ national insurance contribution.
Over the last year, HMRC has also become concerned that MUCs are being used to supply labour for Covid-19 call centres and testing sites, circumventing IR35 compliance.
BBC Radio 4’s File on 4 reported that more than 40,000 people in the Philippines have been recruited to front British companies through a series of MUCs to exploit employment allowance in order to save on national insurance payments.
Employment agencies employ temporary workers through the MUCs, while each MUC qualifies for the tax relief as it has only a small number of workers.
Workers at the NHS Test and Trace service blew the whistle on learning that their payslips didn’t list outsourcing companies like G4S as their employers, but an unknown company.
One worker told the BBC programme that they looked up the company on Companies House and discovered the director was from the Philippines and the company was set up a month before he started.
The scheme exploits employment allowance, but that is not the only abuse: the VAT flat rate scheme is another incentive targeted by MUC fraud and carries risks of non-payment of other taxes such as PAYE, national insurance and VAT.
The tax inspectorate is using civil and criminal powers to challenge those that are facilitating this type of fraud.
Complex supply chains
Many workforces are legitimately taking advantage of contingent workers and numbers are only likely to increase as the gig economy grows. The use of contractors also usually involves a supply chain with multiple parties, often more if a managed service provider agency is part of the agreement.
“Now that the lid has been lifted on staffing supply chains, end users and their supplier agencies can no longer afford to ignore the possible risks,” said Kevin Barrow of Osborne Clark.
HMRC first published guidance in May making it clear that it expects end users and agencies to carry out due diligence on their staffing suppliers. Barrow said the agency has started citing this guidance in recent investigations.
“Staffing companies that use umbrella companies have long had to face certain risks (such as tax debt transfer of an umbrella company's unpaid liabilities or being liable to pay out twice where an umbrella company folds and leaves contractors unpaid),” he said. “The difference we are now seeing is an increase in HMRC's targeting of users of contract workers that allow or turn a blind eye to tax evasion in their supply chains.”
HMRC is also using the Criminal Finances Act (CFA) to penalise companies who are not undertaking sufficient due diligence in their supply chain. Last month, HMRC announced it was investigating 153 enablers of tax evasion and sent compliance letters to the financial services and oil and gas sectors to check end-user compliance with IR35.