Could your supply chain cost your business a six figure tax bill?

Recruitment agencies across the UK regularly rely on umbrella companies to handle payments for their temporary workers. Unfortunately, very few business owners are aware of how this can potentially lead to corporate insolvency or even personal bankruptcy.

Quite frighteningly, HMRC can issue a huge bill to recruitment agencies if an umbrella company in their supply chain fails to comply with VAT legislation.

If an umbrella company disappears without paying its VAT liability or under-declares the VAT it owes, HMRC can investigate the supply chain and hold others accountable if it suspects fraud has occurred. This is known as ‘The Kittel principle intervention’ and it has cost several recruitment agencies upwards of £100k.

The Kittel principle allows HMRC to recover lost VAT by retrospectively preventing the recruitment agency from claiming back any VAT they declared on their payments to the Umbrella company. HMRC will typically hold the recruitment agency accountable. Not because they knowingly supported VAT fraud by the umbrella company, but because they ignored red flags and failed to ask the right questions.

How much is at risk? As an example, if you paid an Umbrella company £10,000 per week, that’s £520,000 in a single year. You would have recovered input VAT of £104,000 on your payments to the Umbrella company. Imagine that being reversed and then being hit with a further tax penalty of £31,200 i.e. 30% of the VAT involved.

What can recruitment business owners do to protect themselves?

• Know who is in your supply chain
• carry out extensive due diligence on your supply chain
• document your due diligence
• Stay informed on employment and tax law
• Only choose payroll schemes or umbrella companies that independent organizations have vetted and accredited. Or which offer schemes such as ‘higher net pay’ etc.
• Always check out HMRC’s spotlight page

If a QUBA-funded agency intends to pay a temporary worker through an Umbrella company, we advise them to check that the company is FCSA-accredited. These accreditations don’t completely remove the requirement for agencies to carry out their own due diligence. They provide an excellent starting point for minimising the risk of a business-ending tax bill down the line.