Mini umbrellas get a soaking in the UK courts; a stark warning to businesses using temporary labour

03 May 2024

Umbrella companies act as employment and payroll service providers in the temporary labour market. Many are legitimate and operate compliantly with the regulations, supporting their workers. In recent years, the use of mini umbrella companies, ie micro companies providing such employment and payroll services, has become prevalent. This is, in part, due to 2016 changes that precluded temporary workers and their employment intermediaries from continuing to claim tax relief for most travel and subsistence expenses, which in turn prompted recruitment agencies to adopt the mini umbrella company model with a view to obtaining alternative tax benefits. The providers’ mantra has been to give workers a commercial return in a competitive marketplace by achieving a lower overall tax cost, but they have been beset by accusations of widespread tax fraud.

Following a number of preliminary hearings, the lead appellants for a First-tier Tribunal case concerning mini umbrella companies were confirmed as Elphysic Limited, Phyarreidon Limited, Rosscana Limited and Zraytumbiax Limited. The judgment confirms there are ‘many thousands’ of related cases stayed behind the decision in this litigation and the tribunal was asked to rule on seven tax issues common to the four chosen lead appellants.

In short, the mini umbrella companies were accused by HMRC of contrived disaggregation. In effect, HMRC argued that the organisers of the mini umbrella company arrangements sought to create the false impression that the companies, ‘were independent, each being directed by their own director for their own benefit, whereas the reality was that [they] were simply pawns being controlled for the purposes of [a] scheme [designed to defraud HMRC].’ They sought to benefit from the VAT flat rate scheme, a specific relief designed to offer simplified VAT accounting for very small businesses which can, in some instances, provide a tax rebate. They also sought to benefit from claims to the employment allowance which offers eligible employers the ability to reduce National Insurance contributions, currently by up to £5,000 per tax year. By creating micro businesses, the scheme providers were alleged to have artificially created thousands of businesses in order to benefit multiple times from these small business tax reliefs.

In a highly detailed decision, the tribunal agreed with HMRC that the mini umbrella company scheme the appellants were engaged in was fraudulent as a whole, and that the companies were not permitted to use the VAT flat rate scheme or benefit from the employment allowance. However, the decision didn’t go all HMRC’s way. The tribunal also ruled that HMRC could not forcibly deregister the companies for VAT purposes, as their directors, often innocent people recruited through social media, were completely unaware they were participating in a tax fraud.

With HMRC’s increasing focus on tax governance, it is recommended that any organisation using temporary labour be extra mindful of the pitfalls of these sorts of arrangements. Whilst not explicitly discussed in the case report, it is worth noting the offences and HMRC’s powers under the Criminal Finances Act 2017, which require businesses to take active steps to prevent tax fraud in their supply chains by having reasonable procedures in place to prevent the facilitation of tax evasion. HMRC can seek to levy unlimited financial penalties and criminal sanctions for such offences, thus it is extremely important for potentially affected organisations to review their processes in the light of this case.