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image of umbrella and view of sea | accountingweb | To the Philippines and back again: an MUC tale
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Mini umbrella companies’ Filipino link unfolds

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This case involving Filipino replacement directors, who were recruited by the scheme organisers, ruled that mini umbrella company arrangements are not permitted to account for VAT under the flat rate scheme.

26th Apr 2024
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In the case of Elphysic Limited & Others vs HMRC [2024] UKFTT 00291 (TC), the first tier tribunal (FTT) ruled that mini umbrella company (MUC) arrangements are not permitted to account for VAT under the flat rate scheme (FRS), nor are they entitled to the employment allowance (EA). 

MUCs in a nutshell

This case deals with the issue of MUC arrangements, by focusing on several lead cases, with many thousands of related cases being stayed until the issues in the lead cases have been decided. Although every arrangement is unique to some degree, for our purposes we can summarise the general process underpinning the MUC arrangements as follows. 

• The MUCs were incorporated in England and Wales by a “scheme organiser”. 

• The scheme organiser recruited nominee directors via social media, such as Facebook. 

• The nominee would be appointed director of various MUCs (often without their knowledge), but only for a matter of weeks at most. The nominee director then resigned from his or her post and was replaced as director, usually by a Filipino national. 

• The requirements of the nominee director were to allow the MUCs to be registered at their home address, take photos of letters received in relation to the MUCs, and upload them to the scheme organiser, all for a fixed fee. 

• To begin with, the registered office of the MUCs was that of the nominee director which subsequently changed to a virtual office address. 

• The scheme organiser would register the MUCs for VAT and apply for the FRS using the details of the nominee director (without their knowledge), even though the application was received by HMRC after the date of their resignation. 

• At no point during the VAT registration application, was it declared that the MUC’s business was that of a labour supplier. Furthermore, the telephone numbers provided on the VAT application did not belong to the nominee directors, but were numbers purchased in sequential blocks and allocated to the next MUC in line. 

• Filipino nationals who were appointed as replacement directors of the MUCs were recruited and trained by the scheme organiser. 

• Given Filipino nationals do not have a valid UK national insurance number, which is required to register for PAYE online, the MUCs applied for PAYE registration by telephone via the Employers Helpline, thus leaving no digital footprint of their interactions with HMRC. Once registered for PAYE, the MUCs were able to claim EA. 

• UK-registered promoters acted as a conduit between the recruitment agency and the MUCs, offering the recruitment agency favourable terms for outsourcing their workforce. Needless to say, the more workers, outsourced to MUCs, the greater the reliefs claimed. 

Accounting for VAT under the FRS 

The FRS allows businesses (that are not associated with another and that are eligible to be registered for VAT, with a turnover of £150,000 or less) to apply a fixed flat-rate percentage to the gross turnover to arrive at the VAT due. The fixed-rate percentages are lower than the standard 20% rate, thus helping small businesses manage cashflow. The primary intention of the FRS is to reduce the administration burden on small businesses. For limited-cost businesses, such as labour-only businesses, the flat rate percentage is 16.5%. 

As a result of the MUCs applying the FRS, HMRC contended that VAT was underdeclared and, as such, HMRC made the decision to terminate the MUCs’ use of the FRS, considering that it was necessary for the protection of the Exchequer. The focus of the FTT therefore turned to the issue of whether HMRC’s decision to withdraw the use of the FRS and issue assessments was reasonable. 

The MUCs argued that certain factors considered by HMRC were irrelevant, and accordingly that HMRC’s decision was unreasonable. However, the FTT confirmed that HMRC was entitled to take into account that: 

(i) the MUCs were, albeit unbeknown to their directors, participants in fraud

(ii) the MUCs had provided misleading information in their applications for VAT registration

(iii) the MUCs were not independent entities but under the control or dominant influence of others, namely the scheme organisers. 

Also of note is that the MUCs contended HMRC failed to take into account the views of the directors of the MUCs, prior to issuing the letters removing their authorisation to use the FRS. However, the FTT did not consider it unreasonable for HMRC to reach said decision, without obtaining the view of the directors, given the very limited role the directors had in the operation of the MUCs. 

In light of the above, the FTT upheld HMRC’s decision but also commented that, even if it was unreasonable, by virtue of the fact the MUCs were associated with another person and therefore ineligible for the FRS, it was inevitable that HMRC would have reached the same conclusion. 

Entitlement to the EA 

In MUC arrangements, typically, an employment agency’s temporary labour is moved away from their payroll (where only one EA could be claimed) to thousands of smaller employers each of which (artificially or otherwise) gives the appearance of satisfying the qualifying conditions to claim the EA. This positions each MUC as an “employer” to reduce the annual NI contributions liability by up to £5,000 per annum (the current rate) and often to nil. No doubt, the lion’s share of the savings being made is shared between the scheme organisers and promoters, who may or may not be in the supply chain. 

In addition to the qualifying conditions, the legislation includes a targeted anti-avoidance rule (TAAR). The TAAR states that any arrangement (which includes any agreement, understanding, scheme, transaction or series of transactions) whereby the main purpose (or one of the main purposes) is to benefit from the EA, will fall within the anti-avoidance provisions and therefore be ineligible to claim the EA. 

The definition of avoidance arrangements in the legislation was, in the judgment of the FTT, sufficiently broad to encompass the MUC scheme. The FTT held that, given HMRC established that the MUC scheme (as a whole) was fraudulent (see below), it must follow that the MUCs were only entitled to qualify for EA as a consequence of avoidance arrangements. As such, the MUCs could not qualify for EA and their appeals against HMRC’s decisions, that they were not entitled to the EA, could not succeed. 

The Ablessio principle 

MUC schemes cannot account for VAT under the FRS or claim the EA, but there was another issue, dealt with by the FTT in this case, were the MUCs properly de-registered for VAT by HMRC. There were two elements to determining that issue: 

(i) whether the VAT registration of the MUCs was used or likely to be used for fraudulent purposes

 (ii) whether it was necessary for the directors of the MUCs to have known or for them to ought to have known of the existence of the fraud. 

This is known as the Ablessio principle. 

The first issue above was overwhelmingly satisfied, as far as the FTT was concerned. Based on the facts found, regarding the MUC arrangements, the nominee directors were not in control of the MUCs. The MUCs and the nominees (who the FTT considered to be directors in name only) were simply pawns being controlled by, and under the dominant influence of, the scheme organisers and promoters. 

This was evident from the manner in which the application for VAT registration was made - applications were made in the name of a nominee director, without their knowledge, after the date of their resignation, and subsequent to the appointment of a Filipino national as director. Furthermore, the fact that nominee directors were being “recruited” via Facebook and paid by a scheme organiser demonstrated their lack of independence. 

Consequently, the FTT held that the organisers of the MUC scheme must have known that the MUCs were not entitled to use the FRS and that any claim to EA would be in consequence of avoidance arrangements. Despite this, applications for the FRS and the EA were made by creating a false impression of the MUCs being independent entities, when that clearly was not the case. 

Interestingly, the second element of the Ablessio principle was not satisfied. The FTT held that any argument advanced by HMRC, on the basis of Ablessio, cannot succeed in the absence of any knowledge, by the directors of the MUCs, that they were facilitating (enabling) the fraud of the organisers of that fraud. Consequently, the MUCs succeeded in their appeal relating to the Ablessio issue. In summary, there was fraud but the FTT found that the fraud could not be the fault of the directors as they were merely pawns as opposed to facilitators of fraud. 

Fraudulent arrangements 

The ease with which the FTT found these MUC arrangements to be fraudulent is not surprising. The confusion such arrangements create for workers, being engaged and paid by MUCs, is hugely detrimental to their wellbeing and they are bounced about from one company to another, without their knowledge. 

Involvement in arrangements like these also leads to reputational damage for agencies and end-clients, reaffirming the importance of undertaking continuous due diligence on supply chains. 

This case illustrates the years of work and resources that HMRC has poured into investigating MUC arrangements. One thing is for certain, HMRC is not likely to ease up in this area and it is likely more investigations of this nature will come to light soon enough.

Replies (4)

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By FactChecker
26th Apr 2024 18:43

A curiously positive tone on a subject that has been known about for years (and ballooned massively in early days of Covid) - and that still continues (whilst HMRC deny there to be evidence of a problem when thousands of new companies are set up at a single address without the owner's knowledge).

Was this case merely about deciding general points of law (which, at least in the case of EA, has already been tightened via legislation)? If not, what penalties were levied (aka what is there to discourage repeat behaviour)?

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By cbp99
29th Apr 2024 09:10

"The scheme organiser would register the MUCs for VAT and apply for the FRS using the details of the nominee director (without their knowledge), even though the application was received by HMRC after the date of their resignation."

How incompetent does HMRC have to be to register a company for Vat when the named director on the application has resigned. (I assume the resignation had been recorded at Companies House).

Meanwhile. on the second leg of the Ablessio test, the companies surely have shadow directors who would have satisfied the test. (They are the ones who brought the appeal, among other things).

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Replying to cbp99:
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By the_Poacher
29th Apr 2024 13:14

Do you think that HMRC has the computer systems or the staff to do that level of checks on every application? Would be great if they did but….

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Replying to the_Poacher:
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By cbp99
29th Apr 2024 14:30

Please reassure me - you are joking?

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