HMRC facing calls to do more to tackle mini umbrella fraud in wake of BBC investigation

Mini umbrellas pose ‘an organised crime threat’

According to the UK government’s Gangmasters & Labour Abuse Authority (GLAA), the mini umbrella company model presents “an organised crime threat” to the UK Exchequer due to how much tax is lost through these systems.

“For employees [contractors], who are often unaware of these arrangements, the use of this model can result in the loss of some employment rights,” the GLAA said. “Workers are usually unaware of who their employer is, and they can be moved regularly between [mini umbrella companies] to help maximise profits from the fraud.”

A Radio 4’s File on 4 programme is set to lay bare the scale of the problem in a broadcast scheduled for 11 May 2021. According to its findings, more than 48,000 mini umbrellas have been created and registered with Companies House over the past five years.

The programme claims the setups all followed a similar pattern, whereby each company was initially headed up by a British director, who would invariably be recruited via a private group on Facebook and would be paid to head-up the company for a short period.  

This individual would then resign, before being replaced by an individual based in the Philippines, who would also either be recruited via Facebook or word of mouth, and would also receive payment for agreeing to be listed as the company’s director.

The reason for the shift in directorship is because having an overseas director in place makes it harder for HMRC to pursue an investigation into the companies involved.

Crawford Temple, CEO of umbrella compliance assurance specialist Professional Passport, said the roll-out of the IR35 tax-avoidance reforms in both the public and private sector has led to a surge in the number of mini umbrella firms in operation, and HMRC is not doing enough to prevent their continued proliferation.

“HMRC has issued specific ‘spotlight’ [online guidance] updates on mini umbrellas so is fully aware of the schemes, but we have seen no visible enforcemen,t and the explosion of these schemes has been fuelled by the introduction of the Off-Payroll working rules,” said Temple. “A proactive approach to visible enforcement needs to happen.”

Computer Weekly contacted HMRC for a response to the claims that it should be doing more to tackle the issue of mini umbrella fraud, and was directed to some guidance the organisation published earlier today.

“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,” the guidance stated.

“HMRC has recently made a number of arrests in relation to mini umbrella company fraud. We have also taken steps to deny the right to recover input tax in cases where we have established that a business in the supply chain knew, or should have known, that there was fraud,” it added.

The guidance is directed at “every business that places or uses temporary labour” and seeks to warn them of the “potential dangers” posed by mini umbrella company fraud.

“If you are a business that uses temporary labour, you should be aware of the potential dangers of mini umbrella company fraud in your labour supply chain,” the guidance stated.

“If you do not take reasonable care, a fraudulent supply chain can lead to reputational and financial damage to your business, and your workers may not receive all they are entitled to. Mini umbrella company fraud also significantly reduces tax payments to HMRC including Pay-As-You-Earn, National Insurance and VAT.”