HMRC has issued guidance on mini-umbrella company fraud urging companies that use temporary workers to ensure they are clear about how their labour supply chains operate.
In its guidance, addressed to end users and providers of temporary labour published on 10 May 2021, HMRC said "it is your responsibility to be clear about who pays the workers and how they are paid".
The guidance follows a series of media reports about fraudulent mini-umbrella companies, which had been providing temporary labour for the UK's NHS test-and-trace service as part of government efforts to tackle the Covid-19 pandemic.
Umbrella companies employ (find roles for, pay and deduct tax from) contractors – sometimes classed as 'gig economy workers' – who work on temporary contracts.
Run properly, this system offers contractors flexibility and access to regular work, while sheltering large businesses from the expense of hiring permanent staff.
However, the system is open to abuse, and fraudulent mini-umbrella companies are sometimes created to take advantage of employment allowance and the VAT flat rate scheme incentives, resulting in the non-payment of PAYE, national insurance contributions (NICs) and other taxes.
In its guidance note, HMRC encourages businesses to complete due diligence checks of who is involved in their supply chains, who pays their workers and how, and how "credible" the supply chain is.
Such due diligence can be difficult to manage – particularly for businesses still struggling to deal with the impact of the pandemic, compounded the fresh challenge of labour shortages in many industries as the economy reopens.
On 12 May 2021, Rebecca Seeley Harris, former senior policy advisor to the Office of Tax Simplification, submitted a draft policy document to the Department for Business, Energy and Industrial Strategy (BEIS) and the Treasury calling for government intervention to stop organisations from abusing the use of umbrella companies and protect workers’ rights.
However, there is concern that regulating mini-umbrella companies to prevent rogue operators from abusing the structures will simply lead to the emergence of another type of business model to thwart HMRC's intentions.
What should businesses do?
At present, regulation of umbrella companies is still under consideration. However, HMRC's determination to drive compliance by making end users responsible is clear.
The good news is that the IR35 preparations most companies over a certain size will have made in advance of the new off-payroll working rules that came into force on 6 April 2021 will set most companies in good stead.
IR35 reforms have been criticised by some campaign groups for forcing more contractors into unscrupulous umbrella company structures, as companies try to reduce their exposure by IR35 by refusing to engage people directly on short-term contracts.
However, risk avoidance is not what HMRC had in mind by tightening its rules on off-payroll working.
If any Relevant Contractors you work with are moving to an umbrella company, you need to ensure sufficient tax and employment law protections exist in your contracts with the umbrella company.
Now more than ever, companies need to understand every level of their labour supply chain to avoid being caught out by non-compliant tax practices by their suppliers.
If your business deals with employment agencies, you should make sure your contracts with those agencies require them to disclose any umbrella companies involved in downstream engagements.
Many umbrella companies are responsible operators that comply fully with all relevant tax and employment laws, but companies need to be aware of the risks and potential liabilities passing up the supply chain as a result of the existence of fraudulent mini-umbrella companies.
Campaigners are calling on regulators to “name and shame” employers who use umbrella companies that are known to withhold workers’ benefits, to encourage greater accountability within the supply chain, which could result in reputational damage to end users who fail to perform adequate due diligence.
For more information on how to audit your labour supply chain for tax and employment law compliance, visit our dedicated IR35 page (our IR35 practical checklist is a particularly useful starting point).
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