HMRC Activity in the Recruitment and Umbrella Sector

This is a guest blog by Paul Chamberlain, Partner & Head of Employment, at business partner JMW.

Sue Ollerenshaw and the JWM team thought that it would be useful to provide an insight into HMRC’s views and compliance activity on arrangements which are currently being marketed in the sector. These will frequently be backed by “Counsel’s Opinion” or stated as being “HMRC approved”. Many state that they are not tax avoidance when they are. Any which seems too good to be true or commercially unsustainable should be viewed with suspicion.

HMRC’s Fraud Investigation Service (FIS) has successfully prosecuted several businesses for mini umbrella fraud. This involves using hundreds of small businesses to employ temps and then using the VAT Flat rate scheme and the employment allowance. HMRC do not consider this to be tax avoidance, they consider it to be fraud. Directors of businesses using these arrangements have lost their homes and been disqualified as directors: Mini umbrella company fraud - GOV.UK (www.gov.uk).

FIS investigators have now turned their attention to agencies using joint employment models, professional employment organisations and businesses offering access to a range of benefits including insurance, training, shopping discounts, health and wellbeing etc. The common theme being that employees’ or temporary workers’ contracts are assigned to a new “statutory employer” – there is no definition of a statutory employer for either tax or employment law. The reality is the agency continues to act as their employer/ engager including calculating the payments due to and sending payments to the statutory employer to enable it to pay the employees and/or temporary workers and HMRC. In some cases, the agency even calculates the tax and NIC, other deductions and statutory payments etc. The obvious risk is that the statutory employer does not pay these monies over to HMRC leaving the agency liable for any underpayments. The less obvious risk is that HMRC are refusing claims for input VAT charged on the payroll costs. HMRC are also reclaiming input VAT for several years plus interest and penalties. The agency can attempt to recover the over charged VAT from the statutory employer if it is still trading.

HMRC’s decision as to how far back to collect any underpaid taxes will be dependent upon several factors including:

• What due diligence you have carried out on your supply chain
• What advice you took when deciding to implement these arrangements
• When you disengage(d) with the statutory employer and
• What actions you took when you identified there may be a problem

Simple due diligence will identify that these businesses rarely have more than a handful of employees shown in their accounts, are frequently submitting abridged accounts and often have complex ownership structures.

As can be seen by the links below, HMRC’s wider compliance activity, is also firmly focused on the recruitment sector including umbrellas. So, it is important to have a robust due diligence process in place when engaging with umbrellas and to monitor their compliance on a regular basis.

Current list of named tax avoidance schemes, promoters, enablers and suppliers - GOV.UK
(www.gov.uk)
List of tax avoidance schemes subject to a stop notice - GOV.UK (www.gov.uk)
Tax avoidance schemes currently in the spotlight - GOV.UK (www.gov.uk)

We also recommend that, if you do not have a preferred supplier list, you share information below with your temps to make sure that they select carefully who they choose to engage with as they could be personally liable for any underpaid tax and NIC:

 Tax avoidance – don't get caught out – Don't get caught out by tax avoidance – learn what it is and how to spot it (taxavoidanceexplained.campaign.gov.uk)

If you think you may be involved in any of the above or similar arrangements, we can help you mitigate your potential liabilities by acting now. Please get in touch with me or Sue directly – paul.chamberlain@jmw.co.uk; efficientemploymenttaxsolutions@live.co.uk