HMRC’s mini-umbrella company fraud crackdown sees similar approach to IR35

HMRC’s mini-umbrella company fraud crackdown sees similar approach to IR35

Possible legislation would be like “trying to close a paper door against a herd of wild elephants”

HMRC’s mini-umbrella company fraud crackdown sees similar approach to IR35

Companies are being urged to get a better handle on their supply chain following guidance issued by HMRC on mini-umbrella company fraud, however market participants have criticised the body’s approach.

“HMRC is pushing out the moral imperative saying big companies have a moral obligation to make sure that everything that sits below is fair and transparent,” says Matthew Sharp, tax disputes director at Fieldfisher.

“It’s very interesting the way that HMRC’s press team have positioned this as a problem with umbrella companies,” he says. “There are a lot of very reputable umbrella companies out there, who are doing exactly what they mean to be doing. The problem isn’t with umbrella companies, it’s with the rogue operators who are abusing things like employment allowance for national insurance purposes.”

Earlier this month, the body published new guidance following a string of reports from The Guardian and the BBC over fraudulent mini-umbrella companies which revealed many workers employed by the NHS test-and-trace service were paid through networks of smaller companies.

Fraudulent mini-umbrella companies are often created to abuse employment allowance and the VAT flat rate scheme incentives which result in the non-payment of PAYE, national insurance, and other taxes. The new guidance encourages businesses to complete due diligence checks of who’s involved in the supply chain.

“The guidance in principle is good but in practice is very difficult to manage”, says Matt Jennings, client solution manager at My Digital.

Despite HMRC’s approach being “quite strong”, the impact on those abusing the system will be futile, according to Carolyn Walsh, founder of CWC Accounting Solutions.

“It’s almost like trying to close a paper door against a herd of wild elephants,” says Walsh. “The force of companies that are involved in this kind of thing are not going to take any notice of any of the legislation that HMRC puts in place. So, the normal blocks that HMRC could put in place to stop companies from abusing taxes have got no effect.”

Following the guidance, corporates “more than ever” need to have a detailed grip on their supply chain, adds Sharp.

“They should be doing this anyway as part of IR35 preparations and dealing with those rules that have just come in. More than ever, they need to understand each and every level of their supply chain. If they’re dealing with employment agencies, making sure that their contracts with the agencies require the agencies to disclose any umbrella companies involved in downstream engagements.”

Companies should also be aware of the risks and potential liabilities passing up the supply chain as a result of the presence of fraudulent mini-umbrella companies, adds Walsh.

The guidance is a move in the same direction of the IR35 reforms, which came into effect in April, which held end users accountable for what was going on below in the supply chain, according to Sharp.

Last week, 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 to speed up the government’s umbrella market regulation plans.

However, additional regulation will not take us forward in solving cases of fraud, according to John Whelan, CEO of My Digital.

“If you look at the intention of HMRC legislation, it actually tends not to have the intended effect because what happens is another type of business model will emerge, that often thwarts the intention of HMRC.”

“To regulate an industry, you need to define the type of company and the minute you define the type of company, some new model will emerge that falls outside the definition. The learning over the last 20 years is that legislation is often a sledgehammer to crack a nut.”

 

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