Businesses, agencies and contractors must beware umbrella company fraud

Robert Salter, Tax Director said:

The use of umbrella companies to legally employee freelance contract labour from a PAYE and NIC withholding perspective has become increasingly popular over the past 4+ years for both staffing agencies and their end clients.

However, while the umbrella company approach can provide end clients and agencies with many advantages, the reality is that there are a number of umbrella companies out there which are acting illegally, creating real fraud risks for businesses, agencies and contractors.

These shady umbrella companies do not transfer PAYE and NIC to HMRC, instead they pocket it for themselves. Although the PAYE and NIC risk with these arrangements typically sits with the umbrella company rather than the staffing agency or end client, there is still a risk of public image damage for businesses and agencies.

If a fraud investigation becomes public and reaches the press, then this can damage the agency or businesses reputation, leading to a loss of profits. More so if this is one of the cases where the PAYE and NIC risk does sit with the agency or end client, as in that scenario they will have to pay for the financial and legal cost of the fraud.

For contractors, if the fraudulent umbrella company pockets their PAYE and NIC instead of transferring it over to HMRC, they will have to pick up the pieces when this behaviour is discovered by the revenue. As HMRCs services have got increasingly worse, this will not be an easy task.

Robert said:

It is vital that staffing agencies, businesses using staffing agencies and the actual freelance contractors themselves fully understand the whole labour supply chain they are part of, to ensure that PAYE and NIC is being accounted for correctly to avoid becoming an inadvertent victim of tax fraud.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Robert Salter using the form below.