Are you certain your Payroll solution is compliant? Can you spot the warning signs?September 26, 2022
Categorised in: Payroll
HIVE360’s CEO David McCormack takes a deeper look into the new HMRC guidance on Mini Umbrella Fraud and what to look out for in your supply chain.
A welcome guidance for an industry in need of transparency and change.
I welcome the new HMRC guidelines, and support their drive to encourage Recruitment businesses to look in detail at their supply chain and do their due diligence to know for sure if their payroll provider is fully compliant and ethical.
So why am I discussing this topic some may ask?
HIVE360 provides a completely different alternative solution to outsourcing Recruitment agency payroll, but we often get compared to other established models in the industry. HIVE360 is NOT an umbrella payroll business or any derivative of it, we are very different. The core driving principles behind our business are;
- Compliance and transparency
- Risk reduction
- Cost reduction
- Enhanced Employee/temp worker experience
We are a business focused on changing the shape of recruitment agency payroll, to deliver value to all parties but not at the expense of compliance and best practise. So, in our pursuit of that I feel it’s important to highlight what Mini Umbrellas are, how to spot the signs that you are maybe unknowingly putting your business at risk by utilising one of these schemes in your supply chain, and why HIVE360 is a trusted and compliant alternative.
I also want to give you some guidelines to provide a due diligence format in order to keep your business safe from unnecessary tax liabilities.
The warning signs
HMRC urges businesses to conduct regular due diligence checks to identify risks of Mini Umbrella practise, here are the key warning signs to look out for which most mini umbrella companies will display most, if not all.
1. Who pays the worker?
- Mini Umbrella warning signs: Typically via this model of payroll payments are made via randomly named companies – that frequently change, with no transparency of pay deductions provided, and requiring the Recruitment Agency to often submit multiple Key Information Documents for the same worker. There is little or no employers NI paid on the workers’ pay (Now being deemed by HMRC as tax fraud). Neither the agency or the end client can evidence the taxes paid as there are multiple suppliers.
- How HIVE360 works: All payrolled workers of HIVE360 clients are paid directly from the relevant HIVE360 clients’ nominated Ltd company, via standard PAYE payrolling with all NI and tax deductions taken at source and clearly communicated via the workers’ digital payslips access via their client branded pay portal. Our clients get a copy of the P32 payroll reports along with other payroll reports which allows them to verify that no avoidance of tax is occurring. (Including Employers NI payments).
2. Unusual Company Names
- Mini Umbrella warning signs: Typically workers are paid and contracted through multiple limited companies with random and unusual names. This is because the mini umbrella model needs payroll companies to have limited payroll payments that allow the use of the Employers NI allowance and little more above this.
- How HIVE360 works: Our companies’ size and names are wholly dictated by our clients’ needs. We therefore create a trading company for each client that has a name that allows us to identify it as being dedicated to them and their brand and to create protection for risk and GDPR compliance. That company is used exclusively for that client regardless of size.
3. Trading address, location and type of business activities
- Mini Umbrella warning signs: Many are run from serviced offices, bulk mailbox offices or even offshore. The individual business type registered at Companies House frequently mismatches to the actual trading group that the workers belong to. Visits need to be “arranged”.
- How HIVE360 works: All our business trading categories at Companies House reflect the true nature of the supply and the relationship. The registered office of all of our businesses is in one place and is at a professional business location in Birmingham UK. Anyone is welcome to visit at any time.
4. Foreign Directors
- Mini Umbrella warning signs: Frequently the Directors/Shareholders are non-UK nationals, are non-resident and non-tax resident. The workers have no way of interacting with them with some not able to speak English.
- How HIVE360 works: All the business, the directors and the shareholders are UK residents and more importantly UK tax resident and can be contacted at our UK head office.
5. Flat Rate VAT
- Mini Umbrella warning signs: Many mini umbrella companies utilise flat rate VAT accounting to gain additional income without the need for proper accounting records and systems. There are various flat rate schemes which are based on business type and effectively increase the mini umbrella access to “created” VAT savings. This is why many of them have the wrong business classification at Companies House as this gives them a bigger saving. Incorrect flat rate VAT claims are a type of VAT fraud.
Note: The turnover registration for flat rate VAT is limited at £150,000 Per annum (which under labour-based supplies typically equates to around 6 workers per company – again another factor as to why workers frequently change company).
- How HIVE360 works: HIVE360 only registers and invoices under the standard VAT rates. As the company’s turnover is defined by the client and not by ourselves we actually don’t have any operations with a turnover of £150,000 or less.
6. How does Flat Rate VAT actually work?
Firstly, your business must have less than £150,000 annual turnover.
Subject to the above a company registers with HMRC for Flat Rate Vat and identifies the rates band that applies.
HMRC considers that labour only supply businesses fall into a new category called “Limited costs business” which has a flat rate % of 16.5%.
Most people assume that this means the company pockets 3.5% of the vat charged to the client. This is NOT true.
Under flat rate vat you remove the need to account for input vat as the agreed percentage is set to replace VAT recovery for input tax.
Your output tax (charged to clients) remains at 20%.
Your input tax is not calculated – only by default.
Your Tax due is based upon 16.5% multiplied by your invoice value (Which includes VAT)
- You invoice the client £1,000 + vat = £1,200.
- You are therefore holding £200 of VAT.
- You then have to pay HMRC 16.5% of £1,200 = £198
- By default your VAT saving is £2 or 1.6%.
However, if you register the business under a Non-limited Costs Company the VAT flat rate % can vary from as little as 4%. So, if the company is registered with the wrong classification, for example one where the flat rate percentage is say 11% it can significantly impact on the VAT recovery – this would equate to £68 on the same example above. (But is at high risk of challenge by HMRC)
This is very difficult to identify without directly asking your supplier if they are applying FRV.
However, you could ask to see a copy of their VAT return or VAT portal which would then allow you to identify firstly turnover and then asking what FRV % they are working too if turnover is below £150,000 per annum.
Hive 360 – only registers for standard VAT and will share VAT quarterly data if required.
7. Abuse of Employers Allowance (Ers NI)
Genuine independent companies have access to a £5,000 employers NI discount on their annual ERS NI bill subject to their not being part of a group, operated by connected parties or having an annual NI bill of under £100,000.
It should however also be noted that the allowance should not be claimed:
- Where more than 50% of the workers are working for the public sector;
Education and healthcare sector providers should be very vigilant here as this could be hiding a significant liability if your workers are provided under a mini umbrella solution
- Where the worker is caught by the IR35 legislation
- Mini Umbrella warning signs: Mini Umbrella schemes are structured to achieve multiple Employment Allowance opportunities by use of multiple Limited companies.
- How HIVE360 works: Due to our payroll structures all the companies under the HIVE360 structure are deemed as connected parties by HMRC and therefore no employers’ allowances are allowable.
Take action now – to protect your business
The costs of not doing your due diligence is very high, and the industry really needs to grasp the nettle on this issue to eradicate the malpractice and abuse of tax legislation that threatens the reputation and long-term survival of many businesses, and the industry as a whole. If you are uncertain and need help evaluating your current supply chain, I am happy to offer my help and guidance on what to look out for and how to evidence your compliance.
Drop me a line at David.email@example.com or call me on 0121 661 4851 to book an initial meeting.