HMRC increases activity against tax fraud in labour supply chains

Guest blog by Liquid Friday

Leading law firm Osborne Clarke has reported that HMRC is ramping up its enforcement activity to prevent tax evasion in labour supply chains.

The move was confirmed in a webinar hosted by Osborne Clarke, with Stacey Mills-Kelly from HMRC’s Fraud Investigation Service.

A particular consideration was how HMRC can use the Criminal Finances Act 20217 to investigate and potentially prosecute organisations involved in tax evasion.

Exposure for agencies and end-hirers

Recruitment agencies and hiring businesses have particular exposure when they rely on third parties to pay workers including umbrella companies or other payroll partners.

If those companies are involved in tax evasion, the end-hirer or recruitment agency may face prosecution and unlimited fines unless they have reasonable steps in place to prevent the facilitation of tax evasion.

One example highlighted as tax fraud by HMRC is the use of Mini Umbrella Company schemes. (aka MUCs)

These work by splitting up a temporary workforce into lots of small limited companies, which are set up to facilitate tax fraud, including VAT evasion.

HMRC has warned that end-hirers and agencies are expected to have procedures in place to identify the likes of MUCs in their supply chains, and to stop using them.

Liquid Friday’s blog, “Mini Umbrella Company fraud - don’t get dragged through the MUC” has several useful pointers on how to spot an MUC arrangement during Due Diligence.

Increased HMRC activity

HMRC confirmed it is now visiting large businesses (the top 2000 in the UK) as a matter of course, to review what prevention measures they have in place to police their supply chains.

It is expected that they will require evidence of appropriate checks on companies in their supply chains. If they can’t show this, then businesses may go on to be treated as high risk by HMRC.

HMRC has also been flexing its enforcement muscle in terms of the Criminal Finances Act, with 14 live investigations and 40 more “opportunities” to use the legislation. Although it’s not clear what sectors these are in, it is known that HMRC sees temporary labour supply chains as a high risk area.

What does this mean for REC members?

The reports of increased enforcement activity by HMRC means that agencies need to be scrupulous in the checks they do on the companies they use to pay their workers, further adding to the heavy burden of compliance.

Liquid Friday can provide support to all REC members with bespoke services including supply-chain health-checks. They have also produced a Recruiter’s Guide to the Criminal Finance Act, which is free to download here.

Bolstering the case for umbrella regulation

Anything which helps mitigate tax fraud in supply chains is a good thing, and further strengthens the case for the regulation of umbrella companies, particularly in regards to transparency around how workers are paid.

Regulation will level the playing field and allow contractors, agencies and end hirers to engage with umbrella companies with increased confidence.

But the wheels of government turn slowly and we may not see regulatory change for another couple of years. In the meantime REC members should fully understand the arrangements they enter into with companies on their umbrella company PSL, with a robust Due Diligence checklist and requirement for transparent Key Information Documents.

This is a guest blog contribution for the REC website. The views expressed by guest writers reflect the individual's personal opinions.