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

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

 

 


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

DID YOU FIND THIS USEFUL?

Share it with your network:  

Want more great content?
Sign up to our newsletter

    Follow us

    Tweets by @CHW-accounting

    CHW-Accounting
    @chw-accounting


    Twitter: chw_accounting

    WHAT'S THE NEWS?

    Grab a biscuit and a brew and read our latest news.

    29 May 2024

    VAT bank details fraud

    by

    Reports have been circulating in recent weeks that taxpayers’ bank account details are being altered on the HMRC portal without their consent or knowledge. This in…


    Read more >

    1 May 2024

    Where VAT is concerned, size does matter – for...

    by

    HMRC has recently lost a long running case over the VAT status of giant marshmallows with the Upper Tribunal ruling that they are not confectionery! Innovative…


    Read more >

    1 May 2024

    HMRC phone lines remain open but waits get even...

    by

    Last month, HMRC announced that its self-assessment phoneline will close between April and September every year following a trial of the move in 2023. Less than…


    Read more >

    1 May 2024

    Tax relief on travel expenses if you are working...

    by

    HMRC has had clarified it’s rules on when tax relief is available on travel expenses for employees who work from home. With the growth of flexible…


    Read more >

    1 May 2024

    Check your State Pension forecast with new online tool

    by

    Anyone with gaps in their national insurance payments dating back to 2006 can now check online to see if they need to make additional contributions. The…


    Read more >

    YOUR CHALLENGES

    No matter what your challenge is, we’ve probably dealt with it before.



    Need an Accountant?

    Get in touch >


    Need an Accountant?

    Get in touch >


    Tax issues?

    Find out more >


    Tax issues?

    Find out more >


    Trying to grow your business?

    We can help >


    Trying to grow your business?

    We can help >


    Managing cashflow?

    We can help >


    Managing cashflow?

    We can help >


    Starting a business?

    We can help >


    Starting a business?

    We can help >


    Looking for funding?

    Need help with funding? >


    Looking for funding?

    Need help with funding? >


    Buying or selling a business?

    We can help >


    Buying or selling a business?

    We can help >


    Adopt the cloud?

    We can help >


    Adopt the cloud?

    We can help >


    What else can we do for you?

    We can help >


    What else can we do for you?

    We can help >
    CONTACT US

    Get in touch, no hard sell, just a brew, a biscuit and a chat.