A Huddersfield recruitment firm has welcomed Government warnings about “umbrella company” fraud which is costing the UK Treasury hundreds of millions of pounds in lost taxes.

The Government has warned businesses what to look out for when employing temporary workers.

An investigation by BBC Radio 4’s File on 4 discovered more than 48,000 of these umbrella companies have been created in the past five years.

Huddersfield-based Stafflex said that so-called “umbrella companies” are typically set up as a standard limited company that acts as an “employer” on behalf of its contractor employees.

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, some recruitment agencies exploit the allowance by employing temporary workers through a series of mini umbrella companies.

Each individual umbrella company has only a small number of workers and therefore qualifies for the tax relief. This kind of arrangement can cost the taxpayer hundreds of millions in lost tax revenue a year.

Companies using this model can run the risk of potential liability for unpaid national insurance contributions as well as a number of other financial penalties.

HMRC warned against them as early as 2015, saying schemes designed to exploit the Employment Allowance were “too good to be true” and “simply did not work.”

Brian Stahelin

Brian Stahelin, managing director at Stafflex, said: “In our 20-year history we have never used an umbrella company and we never will.

“Stafflex has been approached by a number of umbrella companies over the years and explored the possibility but we have never been convinced that the umbrella company model has approval from HMRC and neither have we trusted what we’ve been told.

“Essentially we don’t believe it is an ethical way to do business. As a result of this, we have always decided not to go down that route even though it would have saved the business a lot of money.

“We welcome the Government’s recent guidance on umbrella companies. Putting a stop to this type of practice would certainly create a more level playing field for ourselves and other businesses still using the recommended PAYE scheme.”

Jo Maugham, a tax QC and founder of the campaigning group the Good Law Project, described the use of umbrella companies as “industrial scale tax abuse.”

The Government said umbrella company fraud was often linked to organised crime and HMRC fraud investigators were now using civil and criminal powers to track down those involved. A number of arrests had been made.

Warning signs include: unusual company names; unrelated business activity; foreign national directors; movement of workers; and short-lived companies which are quickly dissolved.

Businesses are being advised to carry out regular due diligence checks on their supply chains.