Umbrella companies are used regularly by recruitment agencies across the UK to pay temporary workers. Unfortunately, very few business owners are aware of how this can potentially lead to corporate insolvency or even personal bankruptcy.
Quite frighteningly, recruitment agencies can be hit with a huge bill from HMRC if an Umbrella company in their supply chain has failed to comply with VAT legislation.
When an Umbrella company disappears without paying its VAT liability or is found to have being under-declaring the VAT which it owes, HMRC has the power to look back through the supply chain if it suspects that a fraud has taken place. 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 input VAT which they declared on their payments to the Umbrella company. HMRC will typically hold the recruitment agency accountable, not necessarily because they knew that the Umbrella company was engaged in VAT fraud, but because they should have known.
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?
If a QUBA-funded agency intends to pay a temporary worker through an Umbrella company, we advise them to check that the Umbrella company is FCSA accredited. These accreditations don’t completely remove the requirement for agencies to carry out their own due diligence, but they provide an excellent starting point for minimising the risk of a business-ending tax bill down the line.