High court ruling raises concerns for contractors: “Umbrella workers cannot be self-employed”
The latest umbrella company fraud case in the UK serves as a stark reminder for contractors to exercise greater diligence when selecting an umbrella company. In this report, we detail the latest case and outline essential questions contractors should ask to protect their interests.
In a complex and ongoing legal battle Payroll & Pensions Services (PPS Umbrella Company) Ltd (PPS) led by its director David-Ajibola Adeola Olabode, has found itself entangled in a high-profile dispute with HMRC. The case, which has passed through multiple high court hearings and is now under the scrutiny of the Court of Appeal, revolves around allegations of labour supply fraud, involving a staggering £7.3 million in unpaid National Insurance Contributions (NICs). The outcome of this case could have significant implications for contractors, locum workers, and the broader umbrella company sector.
“I don’t think I have ever been more disappointed in a judgment in my 25 years of reading case law,” writes Rebecca Seeley Harris, an Employment Status & IR35 expert at Re Legal Consulting.
“As the judge said on more than one occasion, there was a strong prima facie case of fraud and yet so far Ajibola appears to be winning,” she states in her article published by Accounting Web, which highlighted the case.
She continued:
I hope there is eventually a satisfactory conclusion to this case because otherwise it provides a very good case study of umbrella fraud for dummies. There is now more than ever a need for regulation of the industry including that umbrella companies workers cannot be self-employed.
The Background: Payroll Practices Under Scrutiny
PPS has provided payroll services to employed and self-employed workers, including over 3,000 locums engaged through recruitment agencies to work within NHS Trusts. Initially, workers registering with PPS were treated as employed, allowing HMRC to maintain a record. During the first month of employment, PPS deducted PAYE and NICs, after which 98% of workers elected to switch to self-employment, at which point PPS ceased tax deductions.
Allegations of Fraud
In November 2023, the High Court case HMRC vs Payroll & Pensions Services (PPS Umbrella Company) Ltd [2023] EWHC 3308 (Ch) revealed troubling details. HMRC, represented by Matthew Parfitt, argued that PPS had engaged in a “labour supply fraud.” According to HMRC, PPS charged its clients for wages and employment taxes but failed to remit the corresponding taxes to HMRC. With discrepancies in PPS’s financial records and substantial unexplained transactions, HMRC suggested that PPS was financially incapable of paying its £7.3 million debt.
Financial Irregularities and Asset Discrepancies
The court was presented with evidence of significant financial discrepancies. For example, while the company’s net assets were reported as £682,662 at Companies House, its corporation tax return showed a reported £1,321,791. Moreover, HMRC’s investigation into PPS’s bank accounts revealed questionable transactions, including payments exceeding £48 million to Tarfs, the company’s accountants, and substantial sums to other entities and individuals, including Ajibola himself.
The court also uncovered evidence suggesting that funds received by Ajibola were used for personal expenses, including property purchases and investments in the UK and Lagos, as well as payments for school fees and home renovations.
Legal Maneuvers and Court Rulings
In June 2024, during a final hearing for the winding-up order, HMRC sought to have PPS liquidated based on allegations that the company had fraudulently misrepresented the employment status of its workers. HMRC’s primary argument was that PPS had falsely claimed that workers were self-employed when they were, in fact, employed. However, the court found that there was a bona fide dispute regarding the employment status, preventing HMRC from securing a winding-up order.
The High Court judge was reluctant to make a final finding of dishonesty without oral evidence from Ajibola, despite acknowledging a strong prima facie case of fraud. Prima facie means appearing to be true based on evidence, yet to be confirmed.
Implications for Contractors and the Industry
The ongoing case has raised alarm within the contracting community. The court’s decision to dismiss HMRC’s winding-up petition has been met with frustration, particularly given the substantial evidence suggesting fraud. For fixed-term contractors, locum workers, and other temporary workers, the case underscores the potential risks associated with umbrella companies and highlights the need for more robust industry regulation.
As the case moves to the Court of Appeal, where HMRC has sought a stay pending further appeal, the industry watches closely. The final outcome could set a significant precedent for how umbrella companies are regulated and how disputes over employment status and tax liabilities are resolved.
What next?
The PPS case serves as a cautionary tale for contractors and temporary workers about the complexities and potential pitfalls of using umbrella companies. With millions of pounds at stake and the reputations of multiple parties on the line, the need for clear regulations and greater transparency in the umbrella company sector has never been more apparent. As the legal proceedings continue, many hope that a satisfactory resolution will be reached, bringing clarity and justice to this convoluted case.
HMRC’s crackdown has already uncovered multiple cases where workers were misled into believing they were fully employed, only to later find out that their employment status had been misrepresented. This not only undermines workers’ rights but also creates potential legal and financial pitfalls for those affected.
Tips for Workers: what questions to ask before signing
Before accepting a job, especially if it involves working through an umbrella company, it’s crucial to ask the right questions to safeguard your interests:
- Questions to Ask a Recruitment Agency:
- What is the nature of my employment status? Clarify if you’ll be employed directly by the company or through an umbrella company.
- Who is responsible for paying taxes and national insurance contributions? Ensure you understand your tax obligations and who will manage them.
- What are the fees or deductions involved? Ask for a clear breakdown of any fees charged by the umbrella company and how they will impact your take-home pay.
- Questions to Ask an Employer:
- Can you provide a direct contract? This can help avoid the need for an intermediary and potential complications with employment status.
- What are the terms of employment? Ensure all terms, including job responsibilities, salary, and benefits, are clearly outlined.
- Who is responsible for compliance with employment law? Understand who will be managing your statutory rights, such as holiday pay and sick leave.
- Questions to Ask the Umbrella Company:
- How will my pay be calculated? Get a clear explanation of how your salary will be processed, including any deductions or fees.
- Are you compliant with HMRC regulations? Ensure the umbrella company adheres to all relevant tax and employment laws to avoid future liabilities.
- Can you provide references or testimonials? This can help verify the legitimacy and reputation of the umbrella company.
Taking these steps can help protect against the risks of misclassification and help ensure you fully understand your employment status and rights.