A new report from the BBC has again put the spotlight on schemes that create sham ‘umbrella companies’ that UK temporary workers are employed through, costing the UK “hundreds of millions of pounds” in lost taxes.
BBC Radio 4's File on 4 discovered more than 48,000 of these companies have been created in the past five years.
Umbrella companies are typically set up as a standard limited company that acts as an "employer" on behalf of its contractor employees.
How does it work?
It works by exploiting the government's Employment Allowance - an annual discount of £4,000 per company on National Insurance contributions. The allowance was meant to encourage companies to take on more workers.
However, some recruitment agencies exploit the allowance by employing temporary workers through a series of mini umbrella companies.
Each individual umbrella company has only a small number of workers and therefore qualifies for the tax relief. These kind of arrangements can cost the taxpayer hundreds of millions in lost tax revenue a year.
Companies using this model can run the risk of potential liability for unpaid national insurance contributions as well as a number of other financial penalties.
HMRC warned against them as early as 2015, saying schemes designed to exploit the Employment Allowance were "too good to be true" and "simply did not work".
Our stance on umbrella companies
Brian Stahelin, Managing Director at Stafflex commented: “In our 20 year history we have never used an umbrella company and we never will.
“Stafflex has been approached by a number of umbrella companies over the years and explored the possibility, but we have never been convinced that the umbrella company model has approval from HMRC and neither have we trusted what we’ve been told. Essentially we don’t believe it is an ethical way to do business.”
“As a result of this, we have always decided not to go down that route even though it would have saved the business a lot of money.”
“We welcome the government’s recent guidance on umbrella company fraud. Putting a stop to this type of practice would certainly create a more level playing field for ourselves and other businesses still using the recommended PAYE scheme.
Industrial scale tax abuse
Jo Maugham, a tax QC and the founder of the campaigning group the Good Law Project, said the number of companies File on 4 discovered were set up in this way was "staggering".
"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," he said.
"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."
You can read the full article on BBC News. Further coverage can also be found on Recruiter and Daily Express.
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