Mini umbrella companies make the headlines again as HMRC lose out on millions of tax

An investigation into mini umbrella companies conducted by BBC Radio 4’s File on 4 found that over 40,000 workers from the Philippines have been sourced to front UK-based umbrella companies to promote tax avoidance. This article looks into mini umbrella companies and explains how they’ve contributed towards millions of lost tax.

What has come to light?

Last year, Churchill Knight published an article on mini umbrella companies – unethical tax avoidance schemes targeting contractors, freelancers and agency workers. However, despite the government being aware of such arrangements, they have made the headlines again.

An investigation run by BBC Radio 4’s File on 4 has identified that over 48,000 mini umbrella companies have been created in the UK in the past five years. What makes this worrying is that honest, hard-working professionals have engaged with them for their payroll, completely unaware that their agency was outsourcing payroll to a third party. This has happened to NHS staff working in Covid test centres which G4s run.

The article published on the BBC’s website explains how John (not his real name) found a role working for a Covid test centre via a recruitment agency. All seemed to be going well until it came to payday, and John noticed he was being paid by another firm he wasn’t familiar with. Wondering what was going on, John searched for the limited company that was processing his salary, and he was shocked to find that they’d only be around for a month.

Why are some recruitment agencies outsourcing payroll to unethical mini umbrella companies?

Usually, employers are responsible for paying 13.8% National Insurance Contributions on their employees’ earnings – assuming they’re earning more than £170.00 per week. However, by outsourcing payroll to unethical mini umbrella companies, money-driven recruitment agencies have been able to reduce their National Insurance bill by taking advantage of the government’s Employment Allowance, “an annual discount of £4,000 per company on National Insurance contributions”.

Tax QC Jo Maugham and the founder of the Good Law Project has described the rapid formation of mini umbrella companies as “staggering”. He said:

“It’s not as though this is some tiny piece of tax avoidance – you know, where your local minicab firm isn’t declaring all of the fares that it receives. This is industrial scale tax abuse.

“I mean it’s really absolutely extraordinary, hundreds of millions of pounds if not billions of pounds is likely to have been lost due to HMRC’s apparent disinclination to tackle this abuse.”

Former shadow chancellor Anneliese Dodds has suggested HMRC need to do more to stop mini umbrella companies and similar tax avoidance schemes. She said:

“We do need to see greater action being taken by HMRC… and the Conservative government really should have been facing up to this, because certainly, the alarm bell has been rung by many over many years.”

How are mini umbrella companies created?

The investigation conducted by BBC’s File on 4 found that the masterminds behind mini umbrella companies were preying on some of the poorest people in the Philippines. By offering a career with good earning potential, Filipinos were electronically signing documents to make them Directors of British-based companies – without understanding the true extent of what they were getting involved in.

HMRC is actively coming after those who engage with tax avoidance schemes

HMRC is working harder than ever before to reclaim unpaid tax and National Insurance Contributions. If they’re unable to identify the people behind a tax avoidance scheme (which is often the case), they’ll look to recuperate outstanding debts from the workers who have engaged with the schemes. In many cases, workers have been pushed down the route of a tax avoidance scheme against their knowledge and maybe wholly unaware they’ve engaged with one at all. This will not stop HMRC from opening a tax investigation into someone’s personal affairs if there is reason to believe they’ve not paid their fair share.

If you believe you’ve engaged with a tax avoidance scheme in the past (even by mistake), HMRC is urging you to contact them to settle your tax affairs.

Use a compliant umbrella company and you have nothing to worry about

While most UK-based umbrella companies are ethically run and provide a service in line with HMRC’s rules and regulations, some are targeting vulnerable contractors, freelancers and agency workers. Engaging with non-compliant payroll providers could result in a severe punishment from HMRC, as well as a life-changing tax bill.

Churchill Knight Umbrella is committed to providing a compliant and efficient payroll service for our employees. We’re proud to be accredited by the FCSA and believe there is no better way to showcase our dedication to compliance within our sector. The FCSA always puts temporary workers first, and the FCSA’s CEO helped journalist Anna Meisel with her research into the article on mini umbrella firms published on the BBC.

To find out more about our compliant PAYE umbrella company and request a free, tailored take-home pay projection, please call 01707 871622 or complete the short form here.