Stooge directors cost HMRC £Millions

Mini-Umbrella Companies’ Tax Deficit

The use of mini-umbrella companies (MUC) to employ contractors or temporary workers has been a well-used scheme over the years and has resulted in the individuals concerned, avoiding considerable amounts of Income Tax and NIC.

This is a subject that I’ve covered in the past, most recently in May 2021, following the publication of a BBC Radio 4’s File on 4 report https://www.morganjones.co.uk/2021/05/mini-umbrella-employers-nic-fraud/  and today, I am revisiting the subject, to report on what success, if any, HMRC has had in tacking the issue.

MUC Tax Deficit: Background

The basics of a MUC are that, rather than a contractor being employed by a single umbrella company, multiple MUCs are created, with each employing just one or two workers. Then each MUC applies for the employment allowance saving the company thousands in employer’s NIC per year.

As a result of their investigation, File on Four estimated that tens of thousands of companies were involved, costing the exchequer millions of pounds. The programme concluded that MUC schemes, were nothing more than carefully orchestrated frauds.

So, what has happened in the two years’ since?

MUC Tax Deficit: Ongoing investigation

Because each MUC is individually registered at Companies House, each one with a different director, it is difficult to work out how many MUCs are involved. However, investigative journalist, Richard Smith, and a fraud investigator, Gillian Schonrock, have now identified 10,360 MUCs associated with just one scheme promoter: the Anderson Group.

Dan Neidle, the tax lawyer turned tax campaigner, who I’ve reported on multiple times in the past, has estimated that each MUC in the scheme saved around £5,000 in tax, meaning that just the Anderson Group MUCs alone have cost the exchequer £50m+ per year. The total tax lost is likely to be nearer £300m as Messrs Schonrock & Smith have estimated a whopping 55,000 MUCs to be currently operating.

MUC Tax Deficit: Why use stooge directors living abroad?

Most scheme promoters, such as The Anderson Group, use non-resident individuals as stooge directors and shareholders for their MUCs, as long as they speak English, have access to email and have a mobile phone. So, if HMRC wants to come after those directors for tax and penalties in the future it will find it difficult to collect from directors officially resident abroad, most commonly in the Philippines.

Once recruited as a director into the MUC scheme, the individuals are required to use an online portal to authorise transactions undertaken by their individual MUC. These individuals are totally controlled by the designers of the scheme and receive a flat fee.

It is therefore very difficult for HMRC to track down these individuals and almost impossible to prosecute them and/or recover the Income Tax and NIC involved.

MUC Tax Deficit: ’Get-out-of-jail’ legal card

The various scheme organisers, who are all based in the UK, have tried to cover their backs by obtaining an opinion from a senior tax barrister or KC. They did so for three reasons:

• To use it as a stamp of quality and assurance that the scheme works and encourage outside investors to buy into the scheme.
• To provide a shield for users of the scheme to show they were not negligent or careless as they have taken tax advice by having a favourable KC opinion.
• As a defence for the taxpayers, or the promoters, to show they were acting in good faith and were not presenting a dishonest scheme which was designed to commit tax fraud.

Dan Neidle has now named the senior tax barrister who gave a favourable opinion on the Anderson Group MUC tax scheme, taking the calculated risk that this scheme had no chance of standing up in court. However, Dan Neidle is not alone in holding this view, as over a dozen senior tax professionals agree with him after reading the KC’s opinion for themselves.

MUC Tax Deficit: What action has HMRC taken?

HMRC have mounted a number of test prosecutions, which are currently ongoing, and have also managed to compulsorily strike-off 18,017 different MUCs. But what they have not been able to do so far, is mount a successful prosecution of any individual director (good luck with trying to drag a resident of Manilla into court) nor have they been able to take action against any of the scheme promoters, such as The Anderson Group

They have tinkered with the law and official guidance, in an attempt discourage employers getting drawn into MUC fraud and have specifically warned against MUC schemes. Unfortunately, thusfar it does not appear to have worked, with only a fraction of the millions of pounds defrauded, recovered.Tax

Tax Accountant’s view

HMRC has effectively been playing a game of whack-a-mole, but as in the arcade game, as soon as one is knocked down another pops up in its place.

As I see it, the real problem is a basic lack of resources and willingness to tackle even the known cases. It’s a bit like seeing your car stolen, getting it all on CCTV and clearly identifying the thief, but then giving the evidence to the Police who proceed to do nothing, except wring their hands and very little else!