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18/06/24

Umbrella Company Fraud | Elphysic Ltd & ORS vs The Commissioners for HMRC

Umbrella Company Fraud | Elphysic Ltd & ORS vs The Commissioners for HMRC
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In a previous article titled ‘Umbrella Company Fraud’, we explained the general operation of ‘umbrella companies’ and highlighted how they have increasingly attracted HMRC attention due to their increasing propensity to be involved in, or facilitation of, supply chain VAT fraud.

Fraudulent exploitation of Employment Allowance (EA) and the VAT Flat Rate Scheme (FRS) enables fraudsters to create and register a series of ‘mini umbrella’ companies (MUCs). This manipulation results in VAT being paid at levels lower than that which would arise from legitimate trading, thereby befitting the fraudsters.

The level of proceedings being conducted against such companies, as well as other companies involved in these supply chains, by HMRC is reported to be running into thousands.

The recent case of Elphysic Ltd & ORS vs The Commissioners for HMRC was recently heard in the First-tier Tribunal (FTT) to consider certain steps taken by HMRC to combat tax evasion.

Naz Maqsoom of KANGS outlines elements of this case.

The Background | Mini Umbrella Company Fraud

Elphysic Ltd, together with other MUCs were deregistered for VAT by HMRC and declared ineligible to use the EA and the FRS.

HMRC maintained that MUCs were registered by organisers of the scheme to create the false impression that they were independent trading entities, not related to one another and controlled by separate directors for their own benefit.

HMRC maintained that, in reality, they were all associated and jointly controlled for the sole purpose of defrauding HMRC by taking advantage of FRS.

By way of justification for its decisions, HMRC, amongst other things highlighted:

  • rapid and consistent changes in the identity and location of directors from being UK based to being based in the Philippines. HMRC did however accept that some registered UK directors, had no control of the day-to-day operation of the MUCs for which they and were registered and were directors in name only.
  • that, in reality, all MUCs in the Scheme were jointly controlled,
  • the income received by the MUCs was paid to the operators of the Scheme.

The Appellants contested HMRC’s findings and sought to:

  • claim their entitlement to use both the EA and the FRS,
  • reverse the decision to deregister MUCs for VAT.

Following various Preliminary Hearings, Elphysic Ltd, Phyarreidon Ltd, Rosscana Ltd and Zraytumbiax Ltd were selected as lead Appellants in the proceedings before the FTT.

The Decision

The FTT found in favour of HMRC that the Scheme was fraudulent in nature and the Appellants were not permitted to use the FRS or EA due to the factors highlighted by HMRC as shown above.

However, it found that HMRC was not entitled to forcibly deregister the MUCs for VAT as some directors were found to be innocent individuals recruited through social media who were not aware they were being used for the purposes of tax fraud.

How Can We Assist?

If you are involved in or anticipate a dispute with HMRC, it is essential that you seek expert advice. Our Team at KANGS provides a wealth of experience and would be delighted to support you throughout the entirety of any investigations or litigation.

If we can be of assistance, please do not hesitate to contact our Team using the contact details below:

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.

Hamraj Kang

Hamraj Kang
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Tim Thompson
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