The recruitment industry is responding to a news report from the BBC’s File on Four programme in which it has been found that the use of mini umbrella firms by recruiters has been costing the taxpayer millions of pounds. The story found here: https://www.bbc.co.uk/news/uk-57021128 cites HR GO as using this structure and to cut their National Insurance bill by exploiting the government’s Employment Allowance. The report also suggests many of the mini umbrella companies have their directors stationed in the Philippines.
HR GO have been asked for a comment but have yet to respond, although in the article they are reported to be satisfied that the way they have managed their supply chain is “legal and in harmony with the guidance on supply chain management issued by HMRC Threat Response Unit”.
Commenting on this story Dave Chaplin, CEO of contracting authority ContractorCalculator, said: “These types of dodgy umbrella schemes have been running for years, yet HMRC has been unable to shut them down.
“Skimming by umbrella companies who deal in volume is one way they rake in millions, whether they are skimming from the taxman or from the contractor, by leveraging a lack of transparency, withholding holiday pay, or by various other mechanisms,” he added. “Recently we have seen malpractice by umbrellas and agencies who ask contractors to indemnify the entire supply chain against tax loss before using their umbrella in conjunction with a non-disclosure agreement. They might as well say ‘if we don’t pay the taxman properly, you will owe them the money, and by the way, you can’t tell anyone what happened.’ And these firms are supposedly their employers.
Chaplin notes that a ‘skim’ of £20 per week can go unnoticed by contractors, and HMRC’s mantra of warning people to avoid ‘too good to be true’ schemes does not apply. “A better slogan might be ‘if something looks dodgy, then it probably is’,” he says.
“HMRC has issued specific ‘Spotlight’ updates on Mini Umbrellas so is fully aware of the schemes but we have seen no visible enforcement and the explosion of these schemes has been fuelled by the introduction of the Off-Payroll working rules,” notes Crawford Temple, CEO of Professional Passport. “In the latest update to the rules, HMRC has amended the debt transfer rules so that these fee payer debts can now be passed up the supply chain. I believe that this change was made because of the challenges HMRC was facing in securing tax shortfalls from the fee payers. However, relying on legislation updates simply will not work. A proactive approach to visible enforcement needs to happen.
“When Off-Payroll working was introduced to the public sector in 2017, HMRC was warned that limiting the recovery of tax from the fee payer would lead to many forms of abuse,” he continues, “and so it is playing out as predicted. The likely reason why the Philippines is being used in this instance is because there is no double taxation treaty between the UK and the Philippines which makes it harder for HMRC to recover any unpaid taxes.”
Dave Chaplin concludes: “The simplest option if operating ‘inside IR35’ is to go on the company or agency payroll. I would urge anyone who uses an umbrella scheme to make sure you understand how they are supposed to work, and don’t work for one unless you do.”