Thousands of mini umbrella companies abusing tax system

Manila in the Philippines. Thousands of Filipino company directors are said to have been recruited.
travelevents / Shutterstock.com

Around 48,000 ‘mini umbrella’ companies have been created in the past five years in a bid to reduce recruitment agencies’ tax and national insurance liabilities, according to a BBC investigation.

Its File on 4 programme discovered that more than 40,000 people in the Philippines had been recruited to front British companies that would then employ staff as subcontractors for employers including G4S.

The companies were able to claim the government’s Employment Allowance, which offers an annual discount of £4,000 per company on national insurance contributions as an incentive to take on more workers.

Without this, the employer would pay 13.8% in NI contributions on employee earnings if they earned more than £170 per week.

Instead, recruitment agencies working on behalf of clients employ temporary workers through a series of mini umbrella companies. Because each “MUC” has only a small number of workers, it can qualify for the NI relief.

The BBC found that the companies tended to incorporate in the UK with a British director, who would then resign after a short period of time with a Filipino director appointed in their place. These directors would be recruited through Facebook and word of mouth.

One contractor working for G4S in a Covid testing site said he had got his job through an agency called HR GO, but noticed on his payslip he was being paid by a company he’d never heard of. He looked it up on Companies House and discovered it was only a few weeks old and its director was in the Philippines.

Both G4S and HR GO have responded to the BBC investigation to say their payments are in line with HMRC requirements.

Late last year, HMRC warned against the potential dangers of MUC fraud, urging businesses to do their due diligence on their supply chains to ensure agencies were conducting their tax affairs properly.

Some of the hallmarks of MUC fraud include unusual company names, unrelated business activity descriptions on Companies House, foreign nationals listed as directors, unusually high turnover of workers, and short periods of being established.

Dave Chaplin, CEO of contracting authority ContractorCalculator, said these schemes had been running for years but HMRC had 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,” he said.

“Recently we have seen malpractice by umbrellas and agencies who ask contractors to indemnify the entire supply chain against tax loss before using their umbrella in conjunction with a non-disclosure agreement. They might as well say ‘if we don’t pay the taxman properly, you will owe them the money, and by the way, you can’t tell anyone what happened’. And these firms are supposedly their employers.

“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. A better slogan might be ‘if something looks dodgy, then it probably is’.

“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.”

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