Yves here. It’s not hard to imagine that the Brexit-booster future fantasy of Singapore on Thames was appealing because it was not all that different than the UK’s current status as banking buccaneer. Even though the UK and US compete for leadership in “offshore,” which is a polite word for “tax havens,” the UK is particularly shady-dealing-friendly via the ease of setting up shell companies and hiding their owners.
Richard Murphy discusses a particularly seedy incident, in which the government was bilked out of hundreds of millions and potentially billions via…I kid you not…outsourced Covid contact tracing companies, where low-wage worker were paid paltry amounts by looting standards to serve as the initial directors of companies, who were quickly replaced by directors in the Philippines.
NC has a connection to this story, since our bank/capital markets IT expert turned international fraud chaser Richard Smith had worked with the BBC on this story (Murphy oddly does not credit BBC for having done the considerable original reporting). From Richard:
Our tax inspectors leap on the bandwagon, nice explainer https://www.gov.uk/guidance/mini-umbrella-company-fraud
Was working on this off and on for two years until Morag fell ill, the last of my projects that she knew about.
Key bits from the BBC account. Forgive the long-ish extract, but Murphy skips over the details of how the scheme worked, which Richard Smith helped ferret out:
More than 40,000 people from the Philippines have been recruited to front British companies as part of schemes costing the UK “hundreds of millions of pounds” in lost taxes.
BBC Radio 4’s File on 4 discovered more than 48,000 of these companies have been created in the past five years.
Some staff at Covid test centres run by G4S have been employed by subcontractors in this kind of scheme.
G4S said that, when this came to its attention, HMRC was notified.
The company said it was taking steps to ensure that all agency workers were employed directly and not via a subcontractor.
At the start of the pandemic, “John” – not his real name – was looking for employment.
As the pandemic grew, he saw an advert for staff at his local Covid testing site run by G4S.
He rang an employment agency called HR GO, got the job, and – as the second wave of infections hit – started to work. The job was stressful, he says, but the money wasn’t bad – £10 an hour.
It wasn’t until his payslip arrived that he noticed something odd was happening.
He had not been paid by G4S or HR GO, the agency that recruited him. Instead, he had been paid by a company he had never heard of.
He looked it up on Companies House and found it had been only set up a month before he had started his job – and its director was from the Philippines.
He started to think something “sketchy was happening”. So why was John employed in such a convoluted way?
Employers pay 13.8% in National Insurance contributions on most of their employees’ earnings, if the employee earns more than £170 a week.
But File on 4 discovered the way in which John is employed is used by recruitment agencies to cut their National Insurance bill.
It works by exploiting the government’s Employment Allowance – an annual discount of £4,000 per company on National Insurance contributions. The allowance was meant to encourage companies to take on more workers.
However, recruitment agencies exploit the allowance by employing temporary workers through a series of mini umbrella companies – or “MUCs”.
Each individual MUC has only a small number of workers and qualifies for the tax relief. These kind of arrangements can cost the taxpayer hundreds of millions in lost tax revenue a year.
File on 4 found that more than 48,000 “mini umbrellas” have been created in the UK in the past five years, each following a particular pattern.
The companies are originally incorporated with a British director recruited via private groups on Facebook. They resign as directors after a short period of time and a Filipino director is appointed in their place.
“Emma”, who did not want to use her real name, lives in south-east England and says she was at her lowest ebb when she took part.
“At the time, I had broken up with my son’s dad. And he left me in the flat with all the bills to pay. And I only had a part-time job because I had a six-month-old baby,” she said.
“I started doing it just purely to sort of pay the bills.”
Emma signed up to the scheme four times, each time being paid £150 for “fronting” six companies.
Her only job was to upload letters she received by post from HMRC and Companies House to an online portal run by a company called WRS Formations.
Now to Richard Murphy’s reaction:
By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK
The Guardian ran an excellent article yesterday on the likely tax abuse inherent in the outsourced Covid track and trace contracts. As they recounted:
Many workers employed across the £37bn NHS test-and-trace service are being paid through networks of opaque small companies that experts fear could be defrauding the Treasury via a notorious tax scheme.
Tax experts and unions fear weak controls by outsourcers and government agencies, and a complex chain of companies supplying labour for the service, which was created from scratch a year ago, have raised questions over the transparency of the system and left it wide open to abuse.
The scheme – which involves what are known as mini umbrella companies (MUC), often fronted by directors in the Philippines – allows employers to dodge their national insurance contributions, and is estimated to cost the taxpayer hundreds of millions a year.
Creating such systems of abuse is probably easier in the UK than it is anywhere else in the world because in this country companies can be bought for less than £20 with no proof of identity required; there is no effective monitoring of shadow directors, and HMRC are exceptionally lax when it comes to regulating new companies. A company has to only declare that it has never traded and the chance that HMRC will ever investigate that claim is near enough zero. The claim is simply accepted at face value.
I have, of course, been pointing this out for more than a decade now, and literally nothing has been done to address the issue. Companies House remains as useless as it has ever been, and as Prem Sikka pointed out in the article, there is no effective company regulation in the UK at all.
So, we will lose hundreds of millions if not billions and yet claim there is no resource to create effective company monitoring. It’s almost as if the government wanted to permit tax abuse and to allow its own revenue to be undermined. Who would have imagined it?
It is clearly a minor scandal that the relief on NI payments, intended to increase employment, is being abused in this way but there are some elements missing from the story that – to my mind, wrongly – give the impression the problem is mainly with UK company formation rather than with HMRC’s enforcement of its NI legislation and, more importantly, the official encouragement of these contractor arrangements as a way to break the power of labour.
– the relief is worth £4k off the NI payments
– it is only available to companies with a national insurance payment bill under £100k
– the eligibility test considers the NI bill of the company and any connected companies, which includes not only subsidiaries etc. and entities under the control of the same owner but also entities in the control of connected persons such as relatives
Joe Bloggs signs up with a mini-umbrella company. Mini-umbrella company pays £4k less tax overall. The £4K excess profit is trapped inside the MUC (where there’s muck, there’s brass!).
To extract the £4k, the MUC has to make either:
– a distribution to shareholders but there are only so many unconnected or anonymous shareholders that you can create / hire without incurring substantial costs, even at Filipino wage rates (but “real” off-shore structures are expensive). Any search of the shareholder database should turn up common ownership
– a payment to another entity for services but, again, there are only so many entities that you can create if you are operating on a £4k scam budget. Any investigation would uncover this fairly quickly.
Moreover, HMRC has the power (although perhaps not the resources) to audit service providers billing the MUC because the legislation, according to the guidance I linked to above, has exemptions to the £100k aggregate limit for connected companies that are under the control of related persons but which can demonstrate there is no economic, financial or operational interdependence, so these aspects must be open to investigation.
There is also a criterion for the relief that the company cannot be conducting more than half its business with the public sector, e.g. the NHS (not sure if Test & Trace managed to define itself as not the public sector, if it did, that is the bigger scandal in itself, given it is entirely public money and billions on it)
In the short term, HMRC should deny the relief to the MUC’s that have serviced test and trace (although they have probably been stripped of the cash) – the cost of contesting it would be more than the relief is worth – and should look for the common actors behind this scam. In the long term, the simple fix would be to exclude umbrella companies from claiming a relief that is designed to encourage businesses to employ people, given the only purpose of the umbrella company is to enable other businesses to *not* employ people, which rather defeats the purpose of the relief.
However, I don’t see this requires restrictions on company formation in the UK – it may be easy for criminals to incorporate here but so what – the legal and officially encouraged employment companies only exist to circumvent employment protections, including in the public sector. Pearl clutching stories about criminals are a distraction from the class politics and wage relations of late-stage capitalism. The best way to rob a bank is to own one, the best way to defraud the government is to run a crony test and trace scheme and the best way to break the bargaining power of labour is to hire it by the day – this scam is a bit-player in the bigger picture.
‘There is also a criterion for the relief that the company cannot be conducting more than half its business with the public sector, e.g. the NHS (not sure if Test & Trace managed to define itself as not the public sector, if it did, that is the bigger scandal in itself, given it is entirely public money and billions on it)’
I believe this is where G4S comes in. It’s not conducting business with the public sector, as the business was privatised.
And the difference between the UK and the USA as far as taxing the rich, and corporations is?
Umm.. The flag ?
Unless I am not mistaken, tax evasion and corporate abuse is sort of the point, much like how nobody incorporates a holding company in the Channel Islands because it’s just so easy to jump on a helicopter and because the locals are so friendly.
Curious — is there no “piercing the corporate veil” doctrine in good old Blighty (emphasize “blight,” these days?) that would let a Crown Prosecutor worth his or her powdered wig roll up these sham transactions? I had some success years ago as a junior assistant attorney general pursuing consumer fraud cases against some rather nasty people who hid behind corporate forms. Basically had to establish evil intent, which could be inferred from behavior.
Here’s a snippet from a Harvard Law Review article on the subject:
Apparently inconsistent with the “limited liability” nature of the corporate enterprise, the list of justifications for piercing the corporate veil is long, imprecise to the point of vagueness and less than reassuring to investors and other participants in the corporate enterprise interested in knowing with certainty what the limitations are on the scope of shareholders’ personal liability for corporate acts. For example, veil piercing may be done where the corporation is the mere “alter-ego” of its shareholders, where the corporation is undercapitalized, where there is a failure to observe corporate formalities, where the corporate form is used to promote fraud, injustice or illegalities. https://corpgov.law.harvard.edu/2014/03/27/the-three-justifications-for-piercing-the-corporate-veil/
HLR is probably trying to find the fine distinctions that would preserve as much as possible the protections of corporate forms against individual liabilities of officers and shareholders. Since so many Harvard Law graduates go on to represent rich corporate funders of Harvard’s endowment and clients of their graduates. In any event, the degree of regulatory and judicial capture and indifference of prosecutors makes it pretty hard to gin up a case to clear away the fog of corporate interconnects and get to imposing liability on the “non-corporate” individuals who design these scams.
And I recall that in bankruptcy, which is a form of equitable relief, there’s a concept called “tracing” which allows tracking funds from ill gotten gains to well-laundered (e.g, “Panama Papers”) upright “investments” and “assets.”
And does Old Blighty not have any remaining criminal laws that could be enforced to achieve the same result? But then the article points out that this just ain’t gonna happen, for all kinds of structural reasons.
Yes, we have a doctrine of “piercing the veil” but the UK Supreme Court has largely deprecated it.
The court’s view is that legal personality is sacrosanct. They have striven to do justice via other means, either in tort (connected parties of the company intermeddling in its affairs assume a duty of care) or trust law (parties dealing with company property other than in an arms length basis are likely to have created a trust of the property for their benefit rather than have vested it absolutely in the company). The other big overriding ground is fraud, which cuts through every legal device (incorporation, marriage, court judgment) if pleaded and proved. Basically, if it looks unjust, you can pin it on the parties by some other device.
The big exception is listed companies, with diffuse control. So, go public before you go bad!
The abuse of the national insurance relief here quite clearly offends against tax law, if the shell companies are connected and the £100k limit exceeded or if the business are mainly supplying the public sector. The law is in place, somebody needs to apply it. The problem is in enforcing any judgment in the Philippines. I suspect the trail leads back to home or expats though so that may be easier than at first sight….
This is a feature, not a bug.
There is a division of labor (no “U”) in finance these days.
Wall Street does the complex instruments designed to separate fools (and CALPERS, but I repeat myself) from their money.
The City of London does tax evasion and currency speculation.
The Tories are in the City of London’s pocket.
UK has a history (at least a recent one) of complicating their tax code “to help”, which in fact creates more and more loopholes.
Oh, and the NIC stuff. This is just so ridiculous. The NIC stands for National Insurance Contribution. So most people believe that it goes to pay for (their future) pensions and healthcare. Well, it did, once upon a time.
But since some time (I can’t remember when), all the money the govt takes out in this are just chucked at the same pile as the rest of the taxes are, and used to fund whatever (a new aircraft carrier with spiffy F35s, for example). Yet, because people believe it “goes to pay NHS” (and politicians of all sides are happy to keep them in this), they don’t complain about NIC contribution rates going up.
NIC is in fact a simple hidden tax on labour (because you do not pay NIC on non-labour income). But again, few politicans (including Labour) are willing to point it out, because “National Insurance” became a holy cow that can’t be even looked at, even though it’s way more hollowed than the other UK’s holy cow, NHS.
So instead, idiotic stuff like IR35 is introduced, when the right way to deal with all this would be to abolish NIC entirely, throw all income on one pile (no matter where it came from) and tax that pile (for employer NIC contribution, just raise company taxes). Do that, and magic, you’d either collect more taxes (yes, I know taxes don’t pay for spending.. ), or could change the bands so that most of the people had more take-home money for the same total tax collection (no special treatment for dividends, capital gains etc. – stuff that doesn’t affect I guess 90% of the population).
Unfortunately, a complex tax system is what so many vested interests need, that I very much doubt it will ever happen.
The law about NI (employment allowance) is a modern classic….
Intended for trickle down for the benefit of people but abused by ‘job-creators’. Companies were given the rebate, workers were intended to maybe get a benefit of a trickle down of possibly higher wages. The outcome is what it is.
I suppose the situation also indicates why salaries for people working for outsourced companies are so low: Every middle-man (is that a sexist term now? my apologies for using it if it is) has to get his cut and that cut comes out of the wages of the people doing the actual work.
Meanwhile I’m screwed with an arrangement to pay £159.00 over 24 monthly instalments, as I lost 2 fairly large commissions due to covid & because of technical issues with the HRMC website when trying to file missed the deadline for self assessment, which means I can’t get a grant to help out, although due to the circumstances that caused the problem I can appeal so fingers crossed.
On Universal Credit since last April & unless something comes up I have not a cat’s hell of a chance of paying it & the longer I go on without work, the more chance of getting sanctioned or forced into some shite job. I have done 2 applications for commissions in the Republic but due to Covid as happened with one of the above that I lost, they might prefer to go with a sculptor south of the border & of course I might need a vaccine passport as well.
I also have another application in for Belfast but as the job is slightly related to the 1798 United Irishmen rebellion the current political situation could well complicate things & in any case local authorities are not known for their speed in getting these balls rolling. I got some way back up the ladder only to slip back down a snake but am still in a much better position than many as no debt with good friends who will if needed provide at least a short term safety net.