In recent years, the use of mini umbrellas, ie, micro companies, has become very prevalent. This is, in part, due to the changes in the off-payroll (IR35) rules which do not readily apply when working through an umbrella. Their mantra has been to provide workers with a greater return by offering a lower tax cost, but they have been beset by accusations of widespread tax fraud.

Following a number of preliminary hearings, lead appellants in this case at the First Tier Tribunal (FTT) were confirmed as Elphysic Ltd, Phyarreidon Ltd, Rosscana Ltd and Zraytumbiax Ltd. We understand from the judgment there are 'many thousands' of umbrella cases stayed behind this decision and the tribunal has been asked to rule on seven tax issues common to the four lead appellants chosen as lead cases in the litigation.

The mini umbrella companies are accused by HMRC of contrived disaggregation. In effect, the organisers of the scheme sought to create the false impression the mini umbrellas were independent, each being directed by their own director for their own benefit, whereas the reality was that those umbrella companies were simply pawns being controlled for the purposes of a scheme designed to defraud the Revenue.

They sought to benefit from the VAT flat rate scheme, which is a specific relief designed to offer simplified VAT accounting for very small businesses and can, in some instances, provide a tax rebate.

The employment allowance also offers eligible employers the ability to reduce national insurance liabilities by up to £5,000 (in tax year 2024/25). By creating micro businesses, the schemers were accused of artificially creating thousands of businesses in order to benefit from these small business tax reliefs.

In a highly detailed decision, it would appear the tribunal agreed the scheme was, as a whole, fraudulent and the umbrellas were not permitted to use the flat rate scheme or benefit from the employment allowance. However, the decision didn’t go all HMRC’s way.

The court also ruled HMRC could not forcibly deregister the companies for VAT purposes, as the directors of the umbrella companies, often innocent people recruited through social media, were completely unaware they were participating in a tax fraud.

With HMRC’s increasing focus on tax governance, any organisation using temporary labour should be extra mindful of the pitfalls of these arrangements. Whilst not explicitly discussed in the case report, we highlight HMRC’s powers under Criminal Finance Act 2017, which require businesses to prevent tax fraud in their own supply chains by having reasonable prevention controls in place.

HMRC can seek to levy unlimited financial penalties and criminal sanctions, thus it is extremely important for these organisations to review their processes in light of this case.

About the author

Scott Harwood, partner at RSM