WHAT IS FRAUD?

BLOG 221

 

WHAT IS FRAUD?

 

I thought that I knew!  But I have just finished reading an HMRC guidance note on mini umbrella company fraud, and now I am not so sure.

 

HMRC, under the heading “What mini umbrella company fraud is”, tell me that “there is no standard mini umbrella company fraud model and arrangements are constantly evolving as organised criminals try to hide their fraudulent activities from HMRC”.  Perhaps if I knew what a mini umbrella company is, that might mean something to me, but as it is I am none the wiser.  They later tell me that, “The fraud is primarily based around the abuse of 2 government incentives aimed at small businesses – the VAT Flat-Rate Scheme and the Employment Allowance”.

 

The legislation that implements the VAT Flat-Rate Scheme can be found in the VAT Regulations 1995.  Reg 55B states that “the Commissioners may … authorise a taxable person to account for and pay VAT in respect of his relevant supplies …”.  Reg 55C says that relevant supplies are “any supply of goods or services …”.  Reg 55L says “a taxable person shall be eligible to be authorised to account for VAT in accordance with the scheme at any time if (a) there are reasonable grounds for believing that – (i) the value of taxable supplies to be made by him … will not exceed £150,000”.  Regulation 55P allows HMRC to terminate a person’s authorisation to use the scheme if they consider it necessary to do so for the protection of the revenue.

 

Accordingly, to be legally entitled to use the Flat-Rate Scheme, you need

 

a)      to have been authorised to do so by HMRC,

b)      to make supplies (such as hiring out staff or sub-contractors),

c)      for those supplies not to exceed £150,000,

d)      for HMRC not to have withdrawn approval.

 

These are simple conditions.  A person who meets them is legally entitled to use the scheme.  Unless a person only pretends to make supplies – which is not what seems to be worrying HMRC – it is not readily apparent how someone can abuse the scheme and, by doing so, commit fraud in relation to the scheme.  What I think HMRC do not like is a situation where a company satisfies all of the requirements but ceases its business a little before its supplies reach £150,000 and a new company then employs the same staff and itself registers for the scheme.  But it is not illegal to cease one’s business, so again that of itself cannot be fraudulent.

 

The legislation for the Employment Allowance is in s1 of the National Insurance Contributions Act 2014.  This says that “a person qualifies for an employment allowance for a tax year if, in the tax year – (a) the person is the secondary contributor in relation to payments of earnings to … one or more employed earners, and (b) in consequence, the person incurs liabilities to pay secondary Class 1 contributions”.  As both (a) and (b) are questions of fact, it is again hard to see how a person who engages employees can abuse the scheme and fraudulently claim the allowance.

 

A company does not qualify for an allowance if its employer’s National Insurance contributions in the previous tax year exceeded £100,000, or it has connected companies and the combined total contributions of all of them exceeded £100,000.  Again, that is a question of fact which is known to HMRC, so the only way I can see to commit fraud is to lie about which companies are associated.  But, again, that does not seem to be what is worrying HMRC.

 

Of course, to start a business of employing and hiring out staff and shutting it down and starting again before qualifying thresholds are breached is tax avoidance.  But everyone accepts that tax avoidance is not fraud.  It cannot suddenly become fraud if HMRC do not like it or even because it is carried out on a systematic basis, provided that the brief lives of the successive businesses do not breach the relevant thresholds.

 

HMRC also tell people who hire staff from mini umbrella companies that, “As an end-user or provider of temporary labour it is your responsibility to be clear about who pays the workers and how they are paid”.  Unless the umbrella company is offshore (in which case the end-user can be held responsible for the tax and National Insurance), I am not aware of any law that imposes such a responsibility.  Nor can I see any rational reason why an end-user should care who pays its temporary workers, as long as they continue to turn up for work.

 

HMRC tells workers to “find out about how and what you’ll be paid”.  That is obviously a sensible thing to do, but probably pointless advice as I doubt that many people are prepared to carry out work in complete ignorance of how and when they will be paid.

 

HMRC go on to warn employers, “if you do not take reasonable care, a fraudulent supply chain can lead to reputational and financial damage to your business and your workers may not receive all they are entitled to”.  Mini umbrella company fraud also significantly reduces tax payments to HMRC including PAYE, National Insurance and VAT.  Whilst I have no issue with that, most of it would also apply to the same extent if there had been no fraud but straightforward tax avoidance.  HMRC are conflating the use of mini umbrella companies which avoid National Insurance and VAT and fraudulent companies that are set up to engage staff and then disappear before handing over PAYE and NIC to HMRC. 

 

My concern is that HMRC seem to have decided that the dividing line between tax avoidance and tax evasion, which they have always respected in the past, is no longer appropriate and any action that they do not like, however legal it may be, is now considered to be fraudulent and thus criminal conduct.

 

ROBERT MAAS