Mini Umbrella Company Fraud – Warning Signs28/05/2022 - 9 minutes read
Mini umbrella company fraud significantly reduces tax payments to HMRC including PAYE, National Insurance and VAT and HMRC is ramping up its activity against mini umbrella companies using both its civil and criminal powers to challenge the use and curb abuse.
HMRC’s Fraud Investigation Service has deregistered tens of thousands of mini umbrella companies which they believed were involved in exploiting the VAT Flat Rate scheme and the Employment Allowance.
Every business that either places or uses temporary labour should be aware of the potential dangers posed to their business by mini umbrella company fraud in their supply chain.
Not only can a fraudulent supply chain lead to reputational and financial damage to your business, but your workers may not receive all they’re entitled to.
As an end user or provider of temporary labour, it’s your responsibility to be clear about:
- – who pays the workers
- – how they are paid
This is the only way to protect your business from becoming involved in mini umbrella company fraud or other supply chain fraud.
If you are an agency worker or contractor and work through an umbrella company find out about how and what you’ll be paid.
What mini umbrella company fraud is
There is no standard mini umbrella company fraud model. Arrangements are constantly evolving as organised criminals try to hide their fraudulent activities from HMRC.
These criminals create multiple limited companies and only a small number of temporary workers are employed by each one. These are set up to enable fraud.
A promoter business facilitates the structuring of the mini umbrella companies. It’s sometimes known as an outsourcing business and may have other linked businesses to support the operation.
The creation of the mini umbrella companies and the complex layers of businesses within the supply chain help to facilitate the fraud.
If you are a business that uses temporary labour, you should be aware of the potential dangers of mini umbrella company fraud in your labour supply chain.
If you do not take reasonable care, a fraudulent supply chain can lead to reputational and financial damage to your business, and your workers may not receive all they are entitled to.
The impact of mini umbrella company fraud
Mini umbrella company fraud creates an uneven playing field for those employment agencies and businesses who follow the rules and presents an organised crime threat to the UK Exchequer.
The fraud is primarily based on the abuse of 2 government incentives aimed at small businesses:
- – VAT Flat Rate Scheme
- – Employment Allowance
But this type of fraud can also result in the non-payment of other taxes such as PAYE, National Insurance and VAT. This is reducing vital funding for the public services we all rely on.
Mini umbrella company fraud is not limited to specific trade sectors and can be found in supply chains whenever temporary labour is used.
For employees, who are often not aware of these arrangements, the use of this model can result in the loss of some employment rights. Workers in mini umbrella companies usually do not know who their employer is and they can be moved regularly between mini umbrella companies to help maximise profits from the fraud.
As mini umbrella companies are low down in the supply chain it may be challenging to spot them. You must be vigilant, especially where the employer of the worker is not the umbrella company you have a contract with.
A good starting point is to complete regular due diligence checks. These are some of the signs to look out for.
Unusual company names
Multiple companies are often set up around the same time and given a similar or unusual name. The registered address may not seem suitable for their types of business activities.
The business activities listed on Companies House entries will often not relate to the services provided by the workers.
Foreign national directors
Foreign nationals who have no previous experience in the UK labour supply industry, are often listed as directors. They can replace a temporary UK resident director after a short period of time.
Movement of workers
Employees may be moved frequently between different mini umbrella companies.
Short-lived businesses (also known as transient businesses)
These individual mini umbrella companies have a relatively short lifespan (often less than 18 months) before being allowed to be dissolved by Companies House as they do not meet filing obligations. New mini umbrella companies will then take their place in the supply chain.
You should notice this as you may find that you need to issue a new key information document to workers on a regular basis.
Information from sources such as the Companies House register might help you to spot warning signs when completing your quarterly employment intermediary reports.
What HMRC is doing about mini umbrella fraud
HMRC’s Fraud Investigation Service is using both its civil and criminal powers to challenge those involved in mini umbrella company fraud and those facilitating it.
HMRC has deregistered tens of thousands of mini umbrella companies that they believed were involved in one or both of the following:
- – exploiting the VAT Flat Rate scheme
- – exploiting Employment Allowance
Where investigations established that a business in the supply chain knew, or should have known, that there was a fraud, HMRC has taken steps to deny other businesses in the same labour supply chain the right to recover VAT input tax. Input tax is the VAT added to the cost when a person or business buys goods or services that have a VAT liability.
In 2017, HMRC introduced the Trader of Limited Cost Legislation after seeing a surge in the number of mini umbrella companies. This helped to remove a number of businesses setting up mini umbrella companies. This reduced the number of mini umbrella companies.
HMRC has been working with and continues to collaborate with trade bodies and other government departments to raise awareness of the mini umbrella company fraud model.
Checks you can carry out to protect your supply chain
If your business is using or providing temporary labour it is your responsibility to:
- – undertake necessary and proportionate due diligence checks by checking warning signs, for example
- – be clear about who pays your workers and how they are paid
- – check the credibility of the supply chain
Completing these checks will help safeguard your business from financial, operational and reputational risks.
For more information read:
Report potential fraud or tax evasion
Contact HMRC if you have concerns about a supplier, hirer of labour or associated activities.
You can report someone if you think they’re evading tax.
How can MCL Accountants help?
Contact MCL Accountants on 01702 593 029 if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.