Recently reformed IR35 has forced many contractors into using umbrella companies, which act as the ‘employer’, typically processing payroll of the worker. It is also a vehicle which means IR35 is not a consideration.
But an investigation by BBC Radio 4’s File on 4 has found that more than 40,000 people have been recruited from the Philippines to front mini umbrella companies (MUCs) in the UK and it is costing the taxpayer millions.
A mini umbrella company is when the agency splits up its contractor workforce so it is only providing payroll processing services to a small number of workers at one time.
According to File on 4, more than 48,000 MUCs have been created in the past five years, and each follows a certain pattern.
It said that the companies would initially be incorporated with a British director – usually recruited through private groups on Facebook. After a short period, they resign and a Filipino director is appointed – again recruited via Facebook or word of mouth.
File on 4 discovered tens of thousands of Filipinos had been recruited in this way and highlighted that the reason was because it is “harder for HMRC to pursue companies with directors in other jurisdictions.”
The MUCs were found to exploit the Employment Allowance scheme – a government initiative aimed at encouraging small businesses to hire more staff by reducing the amount of Employers’ National Insurance Contributions (NICs) they pay.
Typically, an umbrella company is responsible for covering Employers’ NICs, which is currently 13.8 per cent, for all its contractors.
A MUC takes advantage of this scheme by only processing a handful of contractors on their payroll and as a result, they can cut their annual Employers’ NICs liability by up to £4,000.
Dave Chaplin, Founder of Contractor Calculator, highlighted that having so many MUCs operating in the labour supply chain has created a lack of transparency and the opportunity for these companies to “skim” contractors.
He said: “These types of dodgy umbrella schemes have been running for years, yet HMRC has been unable to shut them down.
“Skimming by umbrella companies who deal in volume is one way they rake in millions, whether they are skimming from the taxman or from the contractor, by leveraging a lack of transparency, withholding holiday pay, or by various other mechanisms.
“[…] A skim of £20 per week can go unnoticed by contractors, and HMRC’s mantra of warning people to avoid ‘too good to be true’ schemes does not apply.”
HMRC is aware of the MUCs and has warned against them in the past – as early as 2015, according to the BBC report.
Guidance published by the tax watchdog this week stated: “HMRC’s Fraud Investigation Service is using both its civil and criminal powers to challenge those who are involved in and facilitating this type of fraud.
“HMRC is working with trade bodies and other government departments to raise awareness.”
It added that “a number of arrests in relation to mini umbrella company fraud” have also been made.
In the wake of the BBC investigation, reported on here, experts are calling on the government to do more to tackle these tax avoidance schemes.
Former Shadow Chancellor, Annelise Dodds, told the BBC: “We do need to see greater action being taken by HMRC […] and the Conservative government really should have been facing up to this, because certainly, the alarm bell has been rung by many over many years.”
For contractors operating via an umbrella company, Chaplin advised: “The simplest option if operating ‘inside IR35’ is to go on the company or agency payroll. I would urge anyone who uses an umbrella scheme to make sure you understand how they are supposed to work, and don’t work for one unless you do.”
You can read an expert guide to working through an umbrella company here.