HMRC Umbrella Mini-Company Crackdown on Fraud Seeks Similar Approach to IR35
Companies are urged to better manage their supply chain by following guidelines issued by HMRC on mini-compartment company fraud, but market participants have criticized the organization’s approach.
“HMRC pushes back the moral imperative by asserting that large corporations have a moral obligation to ensure that everything below is fair and transparent,” said Matthew Sharp, director of tax litigation at Fieldfisher.
“It’s very interesting how the HMRC press team has positioned this as an issue with the umbrella companies,” he says. “There are many very reputable umbrella companies out there that do exactly what they want to do. The problem isn’t with the umbrella companies, it’s with the rogue operators who abuse things like employment allowances for national insurance purposes.
Earlier this month, the organization released new advice following a series of reports from The Guardian and the BBC on fraudulent mini-umbrella companies which revealed that many workers employed by the NHS Test and Traceability service were paid through small business networks.
Fraudulent mini-umbrella companies are often created to abuse employment allowances and flat-rate VAT incentives, resulting in non-payment of PAYE, national insurance and other taxes. The new guidelines encourage companies to perform due diligence checks to determine who is involved in the supply chain.
“Advice in principle is good, but in practice it is very difficult to manage,” says Matt Jennings, Head of Client Solutions at My Digital.
While HMRC’s approach is “strong enough,” the impact on those who abuse 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 strength of the companies that are involved in this stuff is not going to take any notice of the legislation that HMRC is putting in place. So the normal blocks HMRC might put in place to prevent companies from abusing taxes have no effect. “
Under these guidelines, companies must “more than ever” have detailed control of their supply chain, adds Sharp.
“They should do it anyway as part of the preparations for IR35 and face the rules that have just arrived.” More than ever, they need to understand every level of their supply chain. If they are dealing with employment agencies, make sure their contracts with the agencies require the agencies to disclose any umbrella companies involved in downstream engagements. “
Businesses should also be aware of the risks and potential liabilities that move up the supply chain due to the presence of fraudulent mini-apex companies, Walsh adds.
This direction is in line with the IR35 reforms, which took effect in April, which held end users accountable for what was happening below the supply chain, according to Sharp.
Last week, Rebecca Seeley Harris, former senior policy advisor at the Office of Tax Simplification, submitted a draft policy document the Department of Business, Energy and Industrial Strategy (BEIS) and the Public Treasury to accelerate government market regulation plans.
However, additional regulation will not move us forward in resolving fraud cases, according to John Whelan, CEO of My Digital.
“If you look at the intent of the HMRC legislation, it actually tends not to have the intended effect, because what happens is that another kind of business model is going to emerge, which often thwarts the intention of HMRC. “
“To regulate an industry you have to define the type of business and the minute you define the type of business, a new model will emerge that does not meet the definition. We have learned over the past 20 years that legislation is often a hammer to crack a nut. “