Test case on mini umbrella fraud heard at FTT
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
3 June 2024
We look at HMRC’s successful case against mini-umbrella companies.
No shelter for mini umbrella companies at the First Tier Tribunal
On 27 March 2024, a test-case decision was issued by the First-Tier Tribunal (FTT) in respect of Elphysic Limited & Ors v HMRC [2024] UKFTT TC 09126. Four so-called “mini-umbrella” companies (MUCs) were appealing to the FTT resulting from an investigation carried out by HMRC’s Fraud Investigation Service (FIS) known as Operation Bakewell, which commenced in 2020. HMRC had curtailed the appellants’ entitlement use of the Flat Rate Scheme (FRS) and claim of the Employment Allowance (EA).
The investigation
In 2019 an HMRC officer carried out a review of non-resident directors, and they became aware of a large number of Filipino directors listed as belonging to the same group of UK-registered offices. FIS determined that the individuals were the same as those suspected of widescale abuse of the Employment Allowance and the Flat Rate Scheme for VAT.
The investigation revealed that many thousands (28,493 in 203 registered offices to be precise) of MUCs had been set up in this way after some advisers based in the UK and a KC supported the notion that the scheme would work, and it was brazenly advertised on Facebook. There were many common procedural threads running through all the companies – the setup, change of initial director following a VAT registration, and a sequence of other actions including clustering companies together under a group post-incorporation all mirrored each other.
The people recruited through Facebook to act as directors appear to have had total trust in the scheme without knowing anything but a few basic pieces of information. Initially, UK directors were registered, and this was followed by their resignations and appointments of Philippines-resident Filipino nationals.
How did this all come about?
In Section 14, Part 1 FA2016, the treatment of tax-free travel and subsistence expenses to people working through intermediary companies was stopped. This appears to have prompted a shift in behaviours and gave rise to the MUC, which had come into existence to facilitate a more flexible temporary labour market in the UK. Recruitment agencies were acting as a go-between not just in terms of finding and placing workers, but also by operating a payroll for them. However, the sheer volume of temporary labour available meant that recruitment agencies could not resource the amount of payroll work which had to be done, and they contracted that work out to other bespoke “umbrella” businesses who carried out payrolls for thousands of workers instead, sending invoices to the agency and taking responsibility for the PAYE and NICs payments to HMRC.
What was the FTT asked to consider?
1. The FTT had to look at why HMRC had curtailed both the use of the FRS by de-registering the entities and the EA claims and decide if this curtailment was lawful. Had HMRC the right to do this if they considered the use of the schemes was unlawful?
2. Had the MUCs been structured in such a way as to gain unlawful financial advantage deliberately?
3. Having structured the MUCs as they were, did they then go on to use them for unlawful purposes?
4. How had the companies been registered for the FRS?
5. Was HMRC entitled to claim any VAT it had assessed, and were the MUCs entitled to any of the EA?
The FTT referred back to a 2013 CJEU case decision referred from Latvia known as Ablessio which had established a principle in relation to VAT fraud: That it is not sufficient to simply facilitate the fraud – it must also be established that the facilitator knew that they were facilitating a fraudulent act or acts. The FTT concluded that HMRC did not attempt to prove to the FTT that the directors were aware they were facilitating fraud and thus, allowed the appeals in relation to points two and three above.
However, the FTT did find that HMRC was right to curtail the use of FRS and EA claims and denied the appeals in terms of points one, four and five.
Final thoughts
Thousands of other cases are now also waiting to be heard It remains to be seen whether HMRC will now pursue the thousands of other similarly structured MUCs. No doubt if this happens, HMRC will have learned from Ablessio and may seek to put different arguments forward on the facilitation and knowledge of fraud points.
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