Umbrella companies have become increasingly common in the UK in recent years with the number now standing at over 500.
These businesses operate in tandem with recruitment agencies, taking responsibility for paying wages to the individual worker, and tax and National Insurance to HMRC.
Whilst all of the worker’s dealings may be with a recruitment agency, it is actually the umbrella company that employs them.
Many umbrella companies operate within the law in an ethical way and provide benefits to both the recruitment agency and the worker.
The umbrella company relieves the agency of responsibility for day-to-day financial administration including salary, expenses, tax and National Insurance. This enables the recruitment agency to focus on its core role of using its expertise to find suitable workers for its clients.
Likewise, the agency ensures that a worker is paid on time and is fully compliant with HMRC regulations for tax and National Insurance, allowing an individual to give their full attention to the role they are carrying out for the recruitment agency’s client.
Whilst it is legal to set up an umbrella company, it must comply with all HMRC requirements. However, some companies choice not to, instead operating as what they may believe to be tax avoidance schemes, while also depriving their own employees of payments to which they are entitled.
Common ways of defrauding HMRC concern two schemes – the VAT Flat Rate Scheme and Employment Allowance. In both cases it can be financially advantageous to operate a number of small umbrella companies (often referred to as mini umbrella companies) rather than one larger business.
This type of activity can damage the reputation of all the umbrella companies that are operating in a legitimate manner. In addition, a recruitment agency involved in one of these tax schemes (even unknowingly) could be at risk of major financial penalties.
In many cases the relationship between umbrella company and employer runs smoothly with the individual having the peace of mind of knowing that they will be paid the appropriate amount on time and with tax and National Insurance liabilities already deducted – without the need to devote time to what they may view as onerous administrative tasks.
Some umbrella companies, however, unfairly withhold certain payments from employees to boost their own profits.
Throughout the course of the year, the umbrella company will deduct funds from an employee’s salary to be used as holiday pay. Should an employee not use all of their leave entitlement, any outstanding money should be returned to them. Some umbrella companies, however, keep the holiday pay.
In a similar way, an employee who leaves the umbrella company should be reimbursed with any holiday pay that has not been used; again, the umbrella company may choose to retain that money.
An umbrella company is entitled to make a deduction from an employee’s salary to cover administration costs. Some exploit this, by retaining an unreasonable amount and displaying a lack of transparency in respect of the charge.
Whilst HMRC is often the target of umbrella company fraud, the true victims are members of the public; loss of revenue for HMRC can result in higher taxes and cuts to public services to compensate.
HMRC, therefore, takes tax schemes such as these seriously and, in recent years, has stepped up its efforts to combat the issue.
Some of its activities involve preventative measures – working with businesses, trade bodies and other government departments to raise awareness of umbrella company fraud.
A significant number of umbrella companies – and the businesses operating them – have also been deregistered by HMRC in recent years where wrongdoing has been identified.
HMRC has and continue to use a variety of methods to recover monies including criminal investigations and subsequent Proceeds of Crime proceedings, insolvency litigation, and other forms of civil litigation remedies. On some occasions, those who are accused of being involved in the tax schemes can find themselves the subject of a Restraint Order or Account Freezing Order.
All businesses involved in tax scams (even unknowingly) can also face severe financial penalties. These include:
Umbrella company fraud is a complex area of law. It is essential to obtain expert legal advice if you have any concerns – please call Richardson Lissack on 020 3753 5352 / 0161 834 7284 or email email@example.com