PAYE Umbrella Scheme Fraud

PAYE umbrella scheme fraud is a sophisticated and organised way of defrauding HMRC and individual workers out of money. In some instances, these schemes have led to tax being underpaid to the value of 100s of millions of pounds.

Due to the complexities of such arrangements, it is possible for legitimate companies to become unwitting parties to illegal activities and face severe reputational, financial, legal, and operational consequences as a result.

This article will look in detail at:

• how PAYE umbrella scheme fraud is carried out
• who its potential victims are and how they are affected
• the warning signs
• the potential punishments applied to those responsible for it

PAYE umbrella scheme fraud is a complex area of law and it is important for any organisation accused of involvement in such an operation to seek expert legal advice as soon as possible.

What is an umbrella company?

Many umbrella companies operate in a legitimate way, employing agency workers who work in temporary roles across a wide range of sectors.

The umbrella company takes responsibility for areas like payroll services (including PAYE), enabling the agency to focus on its core area of expertise – finding suitable workers for its clients.

In an arrangement such as this, the umbrella company will invoice the agency for the work carried out by their employees.

The agency will in turn invoice their client.

What is PAYE umbrella scheme fraud?

PAYE umbrella scheme fraud is a term used to refer to a range of scams that seek to exploit the use of umbrella companies for profit.

The types of fraud perpetrated change frequently as those organisations responsible attempt to evade detection by HMRC.

While there is no standard model for PAYE umbrella scheme fraud, however, it is possible to identify general characteristics.

Criminals engaged in this kind of activity will often set up multiple umbrella companies with each one only employing a small number of people, to create a complex supply chain of workers.

Employees operate on fixed-term contracts and may also be switched to different companies each time a new one is issued, making it harder for HMRC to keep track of the companies’ activities.

Each umbrella company that is set up requires a director.  These persons may be recruited via various means, including social media, to front the operation in return for a fee.

Once the business has been registered at Companies House, the director will often resign and be replaced by someone from overseas, again making the arrangement less transparent.

In addition, the businesses will often be registered in tax havens like Jersey, Guernsey and the Cayman Islands to construct a further barrier to investigation.

We look below at how some fraudulent schemes operate:

Underpaying workers

A PAYE umbrella scheme fraud may see the umbrella companies paying their employees below the going rate, while issuing the recruitment agency with an invoice for the full amount.

They then pocket the difference as profit.

Such a scam may be easier to pull off in low-skilled, poorly unionised jobs where workers lack the knowledge and confidence to complain about low pay.

Multiple claims for HMRC allowances

Many scams involve two HMRC incentives for small businesses – the VAT Flat Rate Scheme and Employment Allowance.

The VAT Flat Rate Scheme allows companies to retain the difference between the VAT they charge customers and the VAT they pay on their own purchases. In return, they pay a fixed rate of VAT to HMRC.

To be eligible, a business must have a turnover of £150,000 or less (excluding VAT); some operators attempt to get round this limit by running a number of small umbrella companies rather than one larger one.

Employment Allowance can enable small businesses to reduce their annual National Insurance payments by £5,000.

To be eligible, a company must have had a turnover of below £100,000 in the previous tax year.

Setting up multiple small umbrella companies, each below this threshold, allows the owner to claim the £5,000 allowance more than once.

Misappropriating holiday pay

An umbrella company will retain some of a worker’s wages in order to provide them with holiday pay when required.

Should an employee not use their full holiday entitlement during the year, an unscrupulous umbrella company may retain the funds.

Likewise, when an employer leaves an umbrella company, it may illegally keep hold of any unused holiday pay which has been accrued.

Bogus expenses

An umbrella company may arrange to pay part of an employee’s earnings as expenses which have not actually been incurred (mileage is a common choice as receipts are not required).

Because income tax and National Insurance are not payable on expenses, this practice has the potential to generate a profit for the company.

A complex supply chain involving multiple umbrella companies will make it harder for HMRC to determine whether the expenses claims are genuine.

Pay slip discrepancies

Workers employed by umbrella companies may find that money has been mysteriously deducted from their pay slips under a generic heading such as “employment costs”.

While the umbrella company may claim that this is to pay for things such as admin, in reality it may be pure profit.

We can see that a common feature of such fraud is the opaqueness which makes it more difficult for HMRC and workers to tell that they are the victims of a scam.

Who does PAYE umbrella scheme fraud impact, and how?

PAYE umbrella scheme fraud impacts upon:

The client

As has been seen, the complex nature of a fraud may mean that there are several layers between the recruitment agency that sources staff and the organisation (client) where they work; in some cases, the client may not even know who employs the workers.

By law, however, the client is responsible for ensuring that the supply chain by which it obtains its workers is fully compliant with all employment and tax regulations. Should an organisation (even unwittingly) be using workers who are part of a PAYE umbrella scheme fraud it could face severe consequences.

Where a scam is uncovered, the client could be held liable for payments (including income tax, National Insurance and VAT) that have been withheld from HMRC. The client will also have to pay interest on such debts and may also incur an additional financial penalty.

A client found to have been part of a PAYE umbrella scheme fraud is likely to suffer damage to its reputation. Most organisations aim to project an image of honesty and integrity to customers, business partners and their own workforce – something that will be severely compromised by its involvement with financial irregularities and illegal behaviour.

This in turn can lead to operational problems. Reputable organisations that the client relies on to supply goods and services may be reluctant to continue their association with it for fear of tarnishing their own image.

Should the scam have seen workers being defrauded out of part of their income, the client may also find it more difficult to obtain staff in the future. Any such shortages could affect its ability to meet customers’ requirements – causing further damage to its reputation.

HMRC

PAYE umbrella scheme fraud is estimated to cost HMRC a considerable amount each year in lost revenue.

It is important to remember that the ultimate victims in this instance are honest taxpayers (who will have to contribute more as a result) and the general public (who may see cuts to public services).

Workers

In some cases, workers themselves may be unwitting victims of PAYE umbrella scheme fraud. We have discussed earlier in this article how scams can involve deliberately underpaying workers or withholding holiday pay from them.

How is PAYE umbrella scheme fraud detected?

HMRC’s Fraud Investigation Service works proactively to identify scams and hold those responsible to account.

Tens of thousands of umbrella companies have been deregistered over alleged involvement in fraud, and in many cases there have been further financial and legal consequences for those responsible.

An important part of HMRC’s efforts to combat PAYE umbrella scheme fraud involves working with trade bodies and other government departments to raise awareness of the issue.

HMRC has highlighted a number of warning signs that should alert individuals and organisations to a potential scam:

Similar or unusual company names

A common feature of PAYE umbrella scheme fraud is that multiple companies are set up around the same time – these will often have similar or unusual names.

Suspicious registered address

It is also important to check a company’s registered address. Should it not seem suitable for the business activities the company carries out, this could be an indication that fraud is taking place.

Discrepancies over business activities

Another warning sign to look out for is if the business activities listed on its Companies House entry are unrelated to those which its workers are providing.

Overseas directors

Umbrella companies involved in fraud will often have directors who are foreign nationals with no prior experience of the UK recruitment industry. Such individuals have often replaced a UK national (possibly recruited via social media) who acted as a front for the company while it was being set up.

Frequent movement of workers

A strategy sometimes used in scams is to move workers between different umbrella companies at regular intervals. Whilst done in an effort to make the fraud harder to detect, it can serve as a warning that illegal activity is taking place.

Transient companies

Many umbrella companies involved in fraud have a short life span. They often allow themselves to be dissolved after a period of 18 months or less by not meeting filing obligations. Such a business will then be replaced by a new umbrella company to make it harder to detect their activities.

What is the punishment for PAYE umbrella scheme fraud?

Any organisation involved in PAYE umbrella scheme fraud (knowingly or unknowingly) could face a full investigation of its tax affairs by HMRC.

The organisation may also be required to pay on demand any tax that is owed.

In such instances HMRC may issue an accelerated payment notice – obliging the organisation to pay all the tax or National Insurance owed within 90 days.

Should the organisation not make the required payment it could face legal action from HMRC.

An organisation which loses its case will be liable for legal costs on top of paying all money owed to HMRC with interest and also face financial penalties. The consequences of this can be life-changing for the individuals involved.

A company that has been part of a fraud, even unknowingly, may also lose its right to reclaim VAT input tax – the payment on any goods or services the company buys that are eligible for VAT.

There will be additional long-term consequences for the organisation as HMRC will from then on treat it as a high-risk tax payer – with their affairs subject to close scrutiny.

Where can I get help if my company is accused of PAYE umbrella scheme fraud?

The potential consequences for an organisation alleged to be part of a PAYE umbrella scheme fraud are extremely serious ­– legally, financially, and operationally.

The law regarding such schemes is complex and the investigative process can be stressful. It is crucial that you obtain expert legal advice as soon as possible in order to plan an effective response.

Jeremy Gordon has a wealth of experience of dealing with all issues relating to PAYE umbrella scheme fraud whether you or your business are being investigated on a criminal or civil basis.

We have offices in London and Manchester and will work with the highest standards of professionalism and integrity to support you and help you to make the right decisions for your organisation.

For more information on how we can help you, please get in touch:

Call +44 7700 158304 / +44 7700 164107 or complete our online contact form.