HMRC guidance published to crack down on umbrella company fraud

HMRC published new guidance last month to combat “mini umbrella company fraud” which sets out steps businesses should be taking to prevent fraud in their supply chain. If you are a business using or providing temporary labour and concerned about what action you need to take, our specialist tax team can assist you.

What is a mini umbrella company?

Self-employed contractors can choose to work through an IR35 umbrella company rather than setting up their own limited company. When an individual joins a company, they become an employee and the umbrella acts as an intermediary between the individual and end employer. The umbrella company will then deal with all the administrative duties and payroll.

What is umbrella company fraud?

HMRC are investigating criminal conduct whereby several limited companies are set up to employ temporary workers to enable and hide fraudulent activities i.e. abuse employment allowances and the VAT flat rate scheme incentives which result in non payment of PAYE, national insurance and other taxes.

Supply chain connected with fraud?

Case law such as Kittel (C-439/04) and Mecsek (C-273/11) establishes the principle that community law cannot be relied on for fraudulent ends and the right to input tax recovery can be denied in circumstances where a transaction chain is connected with VAT fraud and the trader is found to have the requisite level of knowledge.

Therefore, we have seen cases where HMRC cancel a VAT registration where the Commissioners conclude that a trader is using its VAT registration for fraudulent purposes (or will do so in the future).

What steps do I need to take in relation to umbrella company fraud?

If you are a business that uses temporary labour, you should be aware of the potential dangers of mini umbrella company fraud in your labour supply chain.If you do not take reasonable care a fraudulent supply chain can lead to reputational and financial damage to your business, and your workers may not receive all they are entitled to.

You should be carrying out due diligence checks of all of the businesses involved in your supply chain.

Expert London IR35, Supply Chain & MTIC Disputes Lawyers

A large number of contractors and companies can get implicated in IR35, supply chain and MTIC carousel fraud. We have the experience and knowledge to assist and defend allegations against our clients in either the civil regime before the courts and the tax tribunals or before the criminal courts. We can also advise our clients on how best to avoid being affixed with constructive notice (the legal concept that a trader should have known) of fraud in the supply chain by having stringent due diligence procedures in place.

We have a wealth of experience and are able to provide clear advice to assist you in managing HMRC’s investigation and in improving your Due Diligence process. Our Tax Disputes Solicitors and Barristers are here to help you.

To contact one of our specialist VAT Lawyers please email [email protected] or call 02071830529.

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