No such thing as an HMRC approved umbrella company – watch out for the fraudsters!

11th October 2021 General CHW Accounting

What is an umbrella company?

Umbrella companies employ temporary workers on behalf of an employment agency, dealing with accountancy, taxes and payroll.

The use of umbrella companies is long-standing and due to the IR35 changes which came into effect this year, their use has recently increased.

Why do contractors use an umbrella company?

Many contractors choose to work under an umbrella company as it is widely considered an easy, hassle-free way to contract compared with operating under a limited company. The umbrella company takes care of the contractor’s invoicing and paperwork and pays them through the Pay As You Earn (PAYE) tax scheme.

With more contractors looking to use the services of umbrella companies, more umbrella companies have started to advertise themselves as HMRC approved in order to catch the attention of contractors and win their business.

In reality, there is no such thing as an HMRC approved umbrella company.

This is because an umbrella company is considered as and treated like any other type of employer by HMRC due to the fact that they employ the contractor and pay them under the PAYE. For this reason, HMRC has declared that it cannot declare an umbrella company as legitimate or not.

While the majority of umbrella companies are HMRC compliant, there are some less scrupulous ones in the market.

Using the services of a non-compliant umbrella companies who claim to be able to help contractors save on their tax could ultimately leave the contractor with a big tax bill and potential penalties.

HMRC have put together a guide to help contractors recognise these non-compliant umbrella companies. Find this here https://www.gov.uk/guidance/umbrella-companies-offering-to-increase-your-take-home-pay-spotlight-45

What is a mini-umbrella company?

Mini-umbrella companies are specifically set up to enable fraud. Criminals create multiple limited companies, with a small number of temporary workers employed by each one and are facilitated by a promoter business.

This layer of businesses creates a complex supply chain, which makes it easy to hide fraudulent activities from HMRC.

It is important for businesses to ensure they are not enabling such schemes. The schemes are tailored in a way that does not leave the contractor worse off as the gains are generated entirely from taxation.

The government has published guidance which explains mini umbrella company fraud, including checks you should complete and how to report potential fraud. This can be found here:

https://www.gov.uk/guidance/mini-umbrella-company-fraud

How can contractors and businesses reduce their risk?

Companies need to have a better understanding of their supply chain due to combat this increase in mini-umbrella company fraud.

Arrangements which are promoted because you will pay less tax tend to be extremely high risk.

HMRC will always challenge tax avoidance schemes. If you are involved in an arrangement like this, you’re highly likely to be avoiding tax and you could end up paying additional tax, National Insurance contributions and interest. Penalties may also apply.

Previous users of avoidance schemes were told that their arrangements were HMRC compliant, but later found out, to their cost, this was not true.

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. 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.

If you need any advice in this area please get in touch at hello@chw-accounting.co.uk

DID YOU FIND THIS USEFUL?

Share it with your network: