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?