HMRC are cracking down on suspected and potential tax and VAT fraud in the employment sector, with HMRC challenging legitimate, taxpaying businesses that in their view ‘should have known’ about the fraud within their supply chain. Is your business at risk of penalties from HMRC?
What’s the background?
HMRC have been implementing legal measures to put the onus on those higher up the Umbrella supply chain to help the management of the collection of VAT and taxes. In essence, these rules place a joint and several liability on other parties within the supply chain, and recruitment business should ensure they have sufficient controls in place to manage the risk of tax fraud in their supply chain.
What’s an Umbrella company?
Umbrella companies employ temporary workers, often on behalf of an employment agency, and should deal with their accountancy, taxes and payroll. The use of umbrella companies is well established, and due to the IR35 changes last year; their use has recently increased.
Whilst many Umbrella Companies are legitimate, temporary labour supply chains are high risk from a tax perspective, and HMRC are aware of the potential to under-report VAT, employment taxes and construction industry scheme (CIS) deductions.
Mini umbrella companies will have multiple companies with a small number of workers. This layer of businesses creates a complex supply chain, which makes it easier to hide fraudulent activities from HMRC. These may only operate for short periods of time (18 months or so is common), and they promote arrangements where the employee (and the mini umbrella company) pay less tax, as such, supply chains incorporating these practices tend to be extremely high risk.
Tax Fraud – HMRC’s approach
Historically, HMRC has had fairly limited powers within the temporary staff industry. However, the Criminal Finances Act 2017 (Corporate Criminal Offence) introduced the offence of ‘failing to prevent the facilitation of tax evasion’ by third parties or your staff. Furthermore, under the new off-payroll (IR35) rules, any tax liabilities in a supply chain can transfer to the agency.
HMRC’s Fraud Investigation Service has been challenging recruitment businesses and withdrawing VAT claims where the business ‘knew, or should have known’, that it was facilitating the fraud of another party in the supply chain. Further, they have deregistered tens of thousands of mini umbrella companies – it is important for businesses to understand their supply chain and undertake robust checks to ensure they are not unwittingly enabling such schemes.
In the recent case, Impact Contracting Solutions Limited 2022, Tribunal ruled that Ablessio principle (an EU legal principle that persons can be deregistered for VAT if their VAT registration is being used for fraudulent purposes) applies to both persons who are committing VAT fraud, and to persons who are facilitating fraud perpetrated by someone else, if the facilitating party knows, or should have known, it was facilitating fraud. The removal of the VAT registration left the appellant facing insolvency because its reputation with clients was damaged and it could not trade profitably due to the irrecoverable VAT charge.
How can business reduce their risk?
Companies need to have a better understanding of their supply chain to combat this increase in mini-umbrella company fraud.
In tax, if it seems too good to be true, it usually is – HMRC will always challenge tax avoidance schemes.
Businesses must ensure they have robust controls in place to reduce the risk of fraud from within or outside the organisation – this will reassure HMRC that, should fraud occur, it is isolated.
We recommend that you should carry out due diligence checks on umbrella companies you are engaged with, to help safeguard against inadvertently becoming involved with fraudulent schemes.
Your team should be aware of the risks and stay vigilant – by way of example, recruitment companies frequently updating VAT numbers, documentation, contracts and other paperwork is an indicator that the company may be operating as an umbrella company, and other checks should be undertaken to ensure the status of the business.
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.
Get in touch
Cowgills is a leading independent firm of Chartered Accountants and Business Advisors based in the North West of England – from Greater Manchester to Liverpool. We use our sector experience to deliver tailored financial solutions and support for businesses.
If you need help with any of the above, get in touch with your Cowgills contact or visit our website.
Disclaimer
The information was correct at time of publishing but may now be out of date.
