BBC mini umbrella company exposé sparks contractor sector blame game

An explosion in Mini Umbrella Companies broadcast last night on the BBC is being blamed on recruitment agencies, workers, contractors but ultimately HMRC.

According to its own reporting ahead of the 8pm radio broadcast, the BBC said 48,000 MUCs have sprung up since 2016, with the help of 40,000 people hired to ‘front’ them.

Plucked from the Philippines (where wages are low and work is scarce), the organisers of the MUCs likely target the country because it has no double-taxation treaty with the UK. 

As a result, it is harder for HMRC to later recover any unpaid taxes, explains Professional Passport CEO Crawford Temple, who was speaking ahead of the Radio 4 exposé.

'Data entry'

But it’s not just overseas workers who enable the fraud, which is today outlined exclusively for ContractorUK by a former tax inspector who last month detected the same batch of MUCs as those exposed in ‘File on 4.’

In fact, UK contractors are at risk of being targeted too, because each individual MUC is initially incorporated in the UK, using a UK address, and needing a British director, who is recruited via Facebook under the guise of “data entry”-type work, the BBC programme said.

After a short time and regardless of being aware they are part of a tax scam, the Briton is replaced by a Filipino in Manila who, similarly, may have innocently accepted a job to review and sign forms for an attractive fixed fee.

Using only a few workers like these, the resulting business structure -- a single ‘MUC,’ can claim the UK’s tax relief on Employer National Insurance (£4,000), and potentially abuse the Flat Rate VAT scheme too.

'Industrial scale tax abuse'

But to have 48,000 of such companies spring in the last five years is “staggering” and smacks of “industrial scale tax abuse”, leading tax barrister Jo Maugham told the BBC before the programme. 

Yet the QC is far from alone in suggesting HMRC appears to have been asleep at the wheel.

“It’s quite hard to comprehend how such abuse has been allowed to get so far out of control,” says Chris Mattingly, chief executive of IR35 Navigator, pointing the finger at the Revenue.

'HMRC can't fix one and not the other'

Trying to offer an answer is tax lawyer Rebecca  Seeley Harris. “[It’s] part of a wider problem of the use of umbrellas because of the employment status legislation in the UK.

“[HMRC and HMT] can't fix one without fixing the other,” she said. “Along with regulation of the umbrella companies, the government should be looking at responding to the Employment Status consultation which closed in June 2018.”

However any new proposals to target MUCs and even fresh guidance warning against their use (coincidentally released by HMRC on Monday), can only achieve so much.

'No visible enforcement'

“[The Revenue]….is fully aware of the schemes, but we have seen no visible enforcement”, regrets Professional Passport’s Mr Temple.

“Relying on legislation updates simply will not work [to tackle MUCs]. A proactive approach to visible enforcement needs to happen.”

However, an ex-Revenue officer who declined to be named points out that HMRC claims to have recently closed down 22,000 MUCs.

The former official also said he believes his old colleagues at the tax authority were “on to” the firm named in the BBC programme as setting up the MUCs, WRS Formations, many months ago.

'Risks for agencies and workers'

But the ex-Revenue inspector who writes for ContractorUK today said she believes agencies and contractors have a part to play too, especially if they don’t want to pay the price for using a MUC.

“Industry players should be aware that agencies paying fake umbrella companies cannot rely on merely using an umbrella to avoid all liability and responsibility – as if often touted as a benefit to using them -- to avoid their responsibilities under the agency legislation,” warns the ex-inspector, Carolyn Walsh.

Now the boss at CWC Accounting Solutions, Walsh added: “Similarly workers who are aware that their employer is not deducting the right amount of tax, and with 80-90% take home pay that should be obvious to them, are personally liable to pay the underpaid tax and NI contributions.”

'Due diligence skipped over'

At IR35 Navigator, Mr Mattingly sees things similarly, saying of the 48,000 mini umbrellas opening up in the last five years, all of which reportedly have Filipino directors:

“[Let’s] hope the supply chain are held to account for this. Clearly they skipped over the[ir]…due diligence checks.”

Tellingly according to Professional Passport, a recent update to the off-payroll working rules (which its CEO blames for the usage of MUC increasing), has the effect of passing ‘fee-payer’ debts up the supply chain.

Mr Temple said: “I believe that this change was made because of the challenges HMRC was facing in securing tax shortfalls from the fee-payers.”

'Be aware'

In its new guidance, the tax department says every business which either places or uses temporary labour should “be aware of the potential dangers posed to their business by mini umbrella company fraud in their supply chain.”

HMRC adds: “Not only can a fraudulent supply chain lead to reputational and financial damage to your business, but your workers may not receive all they’re entitled to. Mini umbrella company fraud also significantly reduces tax payments to HMRC including PAYE, National Insurance and VAT.”

But one LinkedIn user suggests it’s too little too late from HMRC. A limited company director, the user posted: “Stable door horse bolted springs to mind.”

'Gullible'

Meanwhile, speaking on condition of anonymity, an umbrella company boss suggested the issue of MUCs could be tackled more successfully if there was a change in language – and awareness.

“These fake, fraudulent organisations are not umbrella companies at all,” the boss said, “they masquerade as umbrellas to get their hands on UK taxpayers’ money.

“But if agencies and taxpayers weren’t so gullible and instead understood that there is no legal way to avoid paying the right amount of PAYE on employment income, then these fraudsters would not be able to gain a foothold in the temporary labour market in the first place.”