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50,000 ‘dodgy’ mini umbrella companies costing taxpayers millions

A BBC investigation finds nearly 50,000 mini umbrella companies running “dodgy” tax avoidance schemes

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. 

More than 48,000 MUCs created in five years

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.

Mini umbrella companies exploit government schemes and contractors

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.

HMRC previously warned against MUCs

“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.”

Call for government to do more to tackle schemes

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.

By Contractor Weekly

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7 thoughts on “50,000 ‘dodgy’ mini umbrella companies costing taxpayers millions”

  1. Bleary-eyed

    Another ill-thought through tax tweak by Osborne.
    Just ditch the employers NI tax break and the main incentive for MUCs disappears.
    The desperation to push contractors inside IR35 and into umbrella companies is looking like costing the treasury tax revenue rather than the gain they’d imagined. Thankfully I’m still outside ir35 so dont have to deal with yet another pointless middle company and the loss of flexibility in pension contributions, investment etc etc but my main client has taken it as an opportunity to slash rates.

  2. Geoff

    Just a matter of time before some of these do a runner, leaving PAYE and the contractor unpaid.

    That said, for those contractors that should be outside IR35 but have been forced into an umbrella company by a risk averse client, it should be noted that contractor would have been entitled to the NI reduction had they worked through their own company. All a government invented problem.

  3. Steve

    Been with a umbrella company now for 5 months… 20 years as limited contractor. I am seriously concerned that the umbrella company haven’t got a clue what they are doing.. I’ve even gone to the institute of Chartered Accountants asking them to make umbrella companies not call themselves Freelancer Accountants as they really are not.. They are book keepers at most.
    I originally went limited 20 years ago because umbrella’s at the time were collecting taxes/NI and then going bust with HMRC going to the contractor and making them pay it again. Things haven’t changed…

  4. Observer

    Contractors are desperate to switch to Umbrella route due to IR35, and MuCs are exploiting the situation. Government is fully blamed for this mess.

    • Gary Andrews

      Agree, also media needs to stop regurgitating revenue lies like this: “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.”

      The case evidence demonstrates they are refusing to prosecute all but the most blatant fraudster schemes, preferring to go after the (easy target) contractors forced into these arrangements by risk adverse clients and IR35.

      • Gary Andrews

        What HMRC always fail to mention, however, is that the obligation to deduct tax & NIC falls on the payer (typically the employer) and not the employee. Furthermore employees are given a “credit” for this tax, even in cases when it was not paid over to HMRC by the employer. This has been established in the Rangers case and confirmed on by the Upper Tribunal in the Hoey case.

  5. Geoff Robbins

    It seems that Chaplin is also disconnected from the “coal face”. The idea of being on the company or agency payroll is laughable. Also, many agencies decide on what brollies you are allowed to use.

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