Umbrella company fraud is growing in sophistication and scale, but so is forensic due diligence

Payroll umbrella companies that provide tens of thousands of temporary workers to the public and private sectors are defrauding the HMRC of hundreds of millions of pounds through evasion of income tax, National Insurance (NI) contributions and VAT.

In some cases, the scale of the fraud is much greater than initial estimates and indicates a more severe risk to public and private sector employers. Criminals masquerading as law-abiding companies are seeking to profit from tight labour markets and skilled worker shortages. Fraudulent recruitment agencies structured through a labyrinth of umbrella companies are capitalising on the tight labour markets and recessionary pressures that are pushing employers to downsize full-time workforces and give preference instead to temporary workers.

How umbrella company schemes work

These schemes work as follows: the payroll umbrella companies offer temporary workers higher wages through structuring pay via zero-hour contracts. Agency workers typically fulfil equivalent frontline roles to regular contracted employees – across the NHS, Royal Mail, railway companies and others – albeit on short-term contracts and higher net salaries.

The higher pay is regularly secured by splitting workers’ pay into a minimum wage salary and a “discretionary bonus”. The minimum wage component is usually legally declared to HMRC and taxes and NI contributions are correctly paid. However, the “discretionary bonus” – the top-up salary workers receive every month – is not declared to HMRC. Under the scheme, the umbrella company withholds an agreed amount of these monthly bonuses in a holding company, roughly equivalent to tax and NI contributions. The money is later siphoned off and laundered through a labyrinth of a dozen or more companies under the pretence of payments for “marketing services” and “staffing services”. In reality, the network of companies is under the same ownership and the people running these fraudulent schemes are simply sending money back and forth between themselves. In some cases, money is redirected offshore too – as well as via registered charitable organisations. Ultimately, these schemes evade payments of hundreds of millions of pounds in HMRC liabilities per annum, including taxes, NI contributions and VAT. 

In recent years, BTG Advisory’s forensic services team has investigated a raft of umbrella company fraud schemes in the UK on behalf of HMRC and the police. Our team has developed significant expertise in gathering evidence on how these schemes operate. For HMRC, our role is to trace the committed fraud. We are tasked with sourcing evidence that suspected companies and individuals are responsible for running the totality of these operations: that they set up all entities, are responsible for all marketing, secure the workers, manage all day-to-day operations, and ultimately steal money owed to HMRC and redirect cash to entities that, despite appearances, they also control. Our work is complex as the methods used by fraudsters and criminals to run the schemes and avoid detection are growing increasingly more sophisticated.

Patterns of deception

In our extensive casework we have identified some recurring trends. When business premises are entered and search warrants served, in order to prevent authorities from catching up with their activities, the scheme operators of these fraudulent enterprises immediately delete swathes of data and documents, destroying the evidence that links umbrella companies to individuals higher up the chain. Usually, company databases and information are stored via cloud-based platforms and offline to allow rapid deletion upon investigation. It makes it harder to reconstruct the evidence trail, but not impossible. The people running these schemes often use a multitude of different email addresses from differently named entities, all branded distinctly, to support the illusion that these are separate businesses. In reality, these individuals and companies usually work within the same office.

Fraudsters and criminals expect to be caught and are well prepared to cover their tracks, delete as much evidence as possible and, eventually, recreate the scheme through an entirely new network of companies and brands. The typical life cycle for these enterprises is around two to three years before the authorities catch up to them and they are shut down. But they often restart rapidly and transfer offline databases containing workers’ details to new entities, having learned the lessons of what tripped them up last time.

The sophistication of these operations can vary. We have seen cases where the umbrella companies have declared workers’ pay below the minimum wage raiding a red flag to HMRC. In some cases, full-time employees become aware that agency workers are paid higher hourly rates for the same work, which has led some full-time employees to take long-term sick leave and then sign up with a fraudulent recruitment agency to work in another department, employer or town. In doing so, while working elsewhere, these workers collect double pay as well as defrauding HMRC and the taxpayer through tax evasion and illegally gained sick pay.

Fraudsters and criminals are becoming more inventive, but our expertise and know-how in reconstructing the audit trail is also increasing.  Money that has been redirected – even to offshore accounts – has been recovered. Overall, our investigations team have accumulated evidence proving HMRC fraud on a much larger scale than initial estimates which were based on incomplete information. It underscores that umbrella company fraud is a bigger problem than HMRC and private companies have realised and that criminal operations are becoming more sophisticated. We must stay ahead of them, and we believe we are.

If you would like to talk to us in confidence about these issues, please do not hesitate to contact our team today.