Government blames ‘umbrella companies’ for FTT case surge

The Ministry of Justice talking of “umbrella companies employing potentially fraudulent VAT schemes” is irritating bonafide brollies -- who say the department is confusing them with Mini-Umbrellas.

Published online, the MoJ’s wording appearing to lump genuine umbrellas in with ‘MUCs’ -- which are fraudulent -- came in a quarterly stats update on First-tier Tax Tribunal cases.

The June 2023 update starts by saying that disposals and open case load both fell in the last two quarters, despite the backlog of unresolved FTT cases now standing at a hefty 50,000.

'Umbrella companies employing potentially fraudulent VAT schemes'

But the MoJ then credits the decreases to a “possible winding down of the trend started in Q2 2021/22 when Treasury and HMRC increased action against umbrella companies employing potentially fraudulent VAT schemes.”  

The department used the same imprecise language in June 2022, when it warned that the-then 38,000 unresolved FTT cases could surge due to “umbrella companies” acting “potentially” fraudulently on Value Added Tax.

“[The MoJ’s following statement] ‘action against umbrella companies employing potentially fraudulent VAT schemes’…is a broad statement which requires clarification,” says The Freelancer & Contractor Services Association (FCSA).

“We find it highly likely that the…[real culprits are] tax avoidance schemes dressed up as legitimate umbrella companies.

“A likely factor is the prevalence of so-called Mini Umbrella Company fraud -- a model that is based around the abuse of two government schemes -- the VAT Flat Rate Scheme and the Employment Allowance.”

'Muddies the waters'

An FCSA spokesperson told ContractorUK that it would have been “useful” for the difference between such schemes, including MUCs, and legitimate umbrella companies to have been specified in the tribunal stats update.

“[The corresponding FTT case data for each] would provide a more accurate picture to stakeholders,” the association’s spokesperson said. “For them, it further muddies the waters.”

BDO, an accountancy and business advisory firm, says FTT cases concerning “umbrella companies” (as the stats update calls them) account for what the advisory firm described as a “significant proportion” of all outstanding appeals.

The firm said the cases were now subject to group management.

'Schemes dressing themselves up as umbrella companies'

But the detail from the government needs to be more granular according to Payepass chief executive Julia Kermode.

“The proliferation of non-compliant tax avoidance schemes…dressing themselves up as umbrella companies are driving this trend [even if the trend is relaxing, but they’re not ‘umbrella companies’],” Ms Kermode told ContractorUK.

“Tarring fair, transparent and compliant umbrella companies with the same brush as tax avoidance schemes unfairly gives the entire umbrella industry a bad name. The vast majority of umbrellas do not tamper with VAT rules and any suggestion that they do is simply unfair.”

'Significant scale'

ContractorUK asked HMRC and HM Treasury about the FTT’s latest figures and the accompanying narrative on “umbrella companies,” including about the action against them which both have apparently taken.

Despite no official comment from either in response, the Revenue signalled that the recent case surge at the FTT has been mostly driven by mini-umbrellas.

And at Payepass, Ms Kermode implied it’s HMRC’s action predominantly, not HMT’s.

“Given that mini-umbrella companies are often associated with VAT fraud, and operate at a significant scale, this seems likely to be the reason for the surge in cases.

“We know that HMRC’s fraud investigation service has been active in this space for some time. In May 2021 for example, the tax office announced that they had deregistered tens of thousands of mini-umbrella companies believed to be involved in either VAT fraud or exploiting the employment allowance."

'MUCs, not umbrella companies, are to blame'

But Kermode emphasised that those peddling the fraudulent schemes which got shut down by HMRC were MUCs, not “genuine umbrella companies” which she said, pointing to the FTT’s 50,000-strong backlog, “aren’t to blame here.”

According to the MoJ, there has been an increase in all case-types in the FTT chamber in Q4 2022/23, with receipts increasing by 179%, to 7,800, compared to the same quarter in the previous year.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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