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As contractor accountants, Gorilla Accounting is always looking to stay on top of all contracting and freelancing news, and this includes the latest investigation by the BBC. Radio 4’s File on 4 has reported nearly 50,000 mini umbrella companies created in the last few years with the goal of evading the taxes and National Insurance Contributions paid by recruitment agencies.

Take a look at what this means and why it’s so important that HMRC cracks down on this issue.

What Are Mini Umbrella Companies?

According to the government, mini umbrella companies are an arrangement where people create several limited companies with a few temporary workers employed by each one. This allows them to evade some of the taxes they should be paying, like PAYE and VAT.

Businesses that use temporary workers can be at risk of this fraud, so it’s important they check the labour supply chain for any warning signs that things are not quite right. These can include checking for odd or unusual names that don’t seem to fit the activities the companies do, confirming whether the activities listed on Companies House matches what the company is offering, noticing whether the companies have a short lifespan before being dissolved, and more.

This happened to NHS test-and-trace employees. They were employed by G4S as subcontractors and engaged with mini umbrella companies without knowing what they were; this also meant they weren’t aware that payroll was being outsourced to a different company.

We can help you with this, so get in touch if you want to be sure you’re working with reputable businesses and we can advise your further.

The BBC Investigation

File on 4 investigated the mini umbrella companies created in the last five years and noticed a pattern. They’d start by being incorporated with a British director (often recruited through Facebook) who would then resign and would be replaced by a Filipino director. This made it more difficult for HMRC to go after them, since the directors are from a different country.

Not only do these mini umbrella companies cost millions to taxpayers, but they also abuse the Employment Allowance Scheme. While employers pay 13.8% National Insurance Contributions when their staff makes more than £170 a week, this scheme offers a £4,000 annual discount per company – this aimed to help businesses take on more staff. Mini umbrella companies abuse this scheme and, therefore, are able to dodge the taxes they owe.

The investigation found that over 40,000 people have been recruited from the some of the poorest regions of the Philippines to front these mini umbrella companies. They only needed to have Internet, a mobile phone number, an email address and an ID document. The investigation also made it clear that the Filipino directors didn’t really know the extent of what they were doing, with many likely accepting the job to support their families.

The Impact of Mini Umbrella Companies

Mini umbrella companies exploit contractors, who can lose their employment rights, are often unaware of who their employer is, can be put on an emergency tax code that charges them more tax than they should be paying, and more.

These workers can be moved between the several mini umbrella companies without even realising it, which allows the companies to make the most of the fraudulent scheme.

With so many individuals and companies following the law and paying the taxes they owe, having so many mini umbrella companies dodging their obligations leads to an “uneven playing field” – and the taxpayer ends up footing the bill. There is also less public funding available because of these companies, since they are receiving money they shouldn’t, and which could be used elsewhere.

Besides the Employment Allowance Scheme, the VAT Flat Rate scheme is also exploited by these companies, who are then able to shirk their many tax obligations and responsibilities.

Calls for HMRC to Tackle the Issue

These mini umbrella companies are not found in any specific sector, as they can be created in all types of industries, as long as temporary labour is required.

HMRC says it’s going after those exploiting the system to escape their tax obligations. This includes using its civil and criminal powers to investigate, raise awareness and arrest those involved in schemes such as the mini umbrella companies one, though many think they should be doing more.

Jo Maugham, a tax QC and founder of the Good Law Project, said that “it’s not as though this is some tiny piece of tax avoidance – you know, where your local minicab isn’t declaring all of the fares that it receives. This is industrial tax abuse. I mean, it’s really absolutely extraordinary, hundreds of millions of pounds, if not billions of pounds, is likely to have been lost due to HMRC’s apparent disinclination to tackle this abuse.”

Knowing who you work with is crucial to avoid getting caught up in these mini umbrella companies, but we’re here to offer specialist advice. Just contact us and we’ll be happy to discuss this and any other subjects you want to learn more about.