The First Tier Tribunal (FTT) has heard details of a VAT and NICs tax appeal test case featuring 'Mini-Umbrella Companies (MUCs)' run by Filipino directors. The scheme, created by UK advisers, after taking the opinion of a KC, was promoted on Facebook and facilitated the making of fraudulent claims for agency workers after setting up VAT and PAYE records and taking advantage of HMRC's systems.

Directors with coloured clouds

In Elphysic Limited & Ors v HMRC [2024] UKFTT TC 09126, there were four companies involved (the appellants) as the lead cases in the appeal. The judge directed that the many thousands of related cases should be stayed until 60 days after the release of the tribunal's decision.

  • MUCs are being used extensively as a result of the growth in the temporary labour market in the UK and the use of recruitment agencies. These agencies are being asked to administer the payroll of those temporary workers by the end user.
  • Many recruitment agencies have outsourced this payroll work giving rise to many thousands of employment intermediaries acting as umbrella employers.
  • The umbrella is responsible for accounting for PAYE and National Insurance Contributions (NICs) to HMRC.
  • There was a significant shift over to the MUC model following the blocking of claims for workers' travel and subsistence expenses in Finance Act 2016.

The scenario for all parties was the same:

  • A company was incorporated with an individual, Alpha, as the director and shareholder.
  • Alpha resigned as a director and was replaced by Beta when a VAT registration was submitted for the company in the name of Alpha including their address.
  • Some months later the company was de-registered by HMRC, told it was not permitted to account for VAT under the Flat Rate Scheme (FRS) and informed it was not entitled to the Employers Allowance (EA) and assessed to VAT.
  • Most of the individuals acting as 'Alpha' seem to have been recruited through Facebook pages and had complete trust in the recruiters despite knowing nothing about them.

In a 74-page long decision, the FTT outlined the taking of evidence from 10 HMRC officers, six individuals for the appellants and the admission into evidence the statements from 16 other individuals from both sides.

  • The formal investigation, called Operation Bakewell, began in 2020.
  • In 2019 an HMRC officer was completing a piece of work on Non-resident directors and identified large numbers of Filipino directors with the same UK-registered offices.
  • His Fraud Investigation Service unit (FIS) colleagues advised these directors/companies were of interest in relation to suspected abuse of the EA and FRS.
  • The MUCs of interest shared common attributes such as their location, postcodes, naming pattern and ownership. The companies invariably moved their registered office after Incorporation to an address in groups of 30 or more companies. The directors and Persons with significant control for these companies were originally UK nationals who resigned and were replaced as directors and shareholders by individual Filipino nationals resident in the Philippines.
  • Using these attributes, the first officer produced a list of 42,678 companies which were located at 203 different addresses.  He passed this information to the FIS team as he gathered it on a monthly basis, 
  • By forensic examination of cookies stored by users logging into the HMRC website, FIS found 17 persistent cookies used in the registration of 28,493 companies.
  • On 30 April 2021, HMRC issued 22,000 letters to MUCs that both de-registered them from VAT, removed them from the FRS and EA and issued assessments for under-declared output tax. Thousands of similar letters were issued on 31 January 2022.

The 'common or related issues of fact and law' examined by the FTT were:

  1. Whether HMRC had the power to de-register for VAT where they concluded the person is or will use its VAT registration for fraudulent or abusive purposes.
  2. Whether the structure being used was organised and contrived to enable the Lead Appellants (the parties) to wrongly register for VAT, use the VAT Flat Rate Scheme, and claim Employment Allowance (EA) for NIC.
  3. Did the parties use their VAT registrations for fraudulent or abusive purposes, or did they allow them to be so used, or were they likely to do so in the future and as such were liable to be de-registered for VAT?
  4. Were the parties entitled to use the FRS?
  5. Did the parties register in false trade classes to benefit from a more advantageous FRS rate?
  6. Were the parties liable to HMRC for the assessed VAT?
  7. Were they entitled to claim EA?

 With regard to points one and three from the Ablessio judgement, the FTT concluded that:

  • The principle in Ablessio applies both to a party that has fraudulently defaulted on its VAT obligations and to a party that has facilitated the VAT fraud of another party.
  • Simple facilitation by a party to the VAT fraud of another is not sufficient. It is not necessary to prove that the facilitating party was itself dishonest, but it must be shown the facilitating party knew or should have known it was facilitating the VAT fraud of another party. The appellants succeeded on this matter.
  • The original directors did not know they were enabling fraud.  HMRC failed to plead this and to cross-examine the individuals on the point but the FTT observed that if it had, the decision may have been different.

Concerning both the other two issues, the FTT found HMRC:

  • Was entitled to terminate the appellants' use of the FRS. 
  • Additionally, having established the MUC scheme as a whole was fraudulent, HMRC were right to deny entitlement to EA.

The appeals were allowed only in part in relation to the Ablessio issue.

Editorial comment
The question we all want to see answered is whether HMRC will now use its immense powers against the architects and promoters of these schemes. A quick search of the internet shows that the go-to-adviser in this case has been specialising in tax planning designed to avoid various rules for employment agencies for well over 12 years.

Useful guides on this topic

How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Flat Rate Scheme 
What is the VAT Flat Rate Scheme (FRS)? Who can apply? How do you apply? What are the rules? What are the rules for capital expenditure and pre-registration VAT?

Employers' NIC allowance 
The Employers' National Insurance Contributions (NICs) allowance is an allowance given to small and medium-sized employers (SMEs) to offset against their annual Employers' National Insurance liabilities.

External links

Elphysic Limited & Ors v HMRC [2024] UKFTT (TC)