HMRC has issued a warning to contractors, agencies and end-clients to avoid mini umbrella companies (MUC) due to the serious risks they pose. By engaging with mini umbrella companies, contractors are able to increase their pay retention. However, not only are they non-compliant, they can damage the lives of the people who use them, and damage the reputation of the entire supply chain.
What is mini umbrella company fraud?
The MUC model is an employment intermediary model which is based around the abuse of two government incentives aimed at small businesses – the VAT flat rate scheme and the Employment Allowance. MUC fraud can also result in non-payment of other taxes such as VAT, PAYE and National Insurance Contributions (NICs).
MUCs will split up a temporary workforce into hundreds of small limited companies, with the sole purpose of enabling the fraud. There are usually promoter businesses who facilitate the fraud and will link other companies to the operation to create complex layers.
Sadly, MUC fraud can be found in any sector where temporary labour is used and has historically been paid by an umbrella company or employment agency. Now, more than ever, it is vital businesses conduct thorough due diligence on every company in their supply chain to ensure they do not get entangled with a MUC, or any other non-compliant payroll solutions.
How to spot a Mini Umbrella Company?
There is not a one size fits all model to help you spot a fraudulent MUC, and the arrangements are constantly evolving to try and avoid detection by HMRC. However, five hallmarks can help you to spot MUC fraud:
Unusual company name – Multiple companies will be set up at a similar time and will have a unique or unusual name or variations of the same name. HMRC also warns that the registered address can seem unfitting or unsuitable for the type of business.
Unrelated business activity description – The business activities listed on Companies House will often not relate to the services provided to the workers.
Foreign nationals are listed as directors – Foreign nationals are often listed as directors who often have no previous experience in the UK labour supply industry.
Unusually high turnover of workers – Workers regularly move between the different employers.
MUCs are not around for long – Unsurprisingly, MUCs are very short-lived and are typically only around for 18 months or so before Companies House dissolves them for failing to meet their filing obligations.
As a contractor, a good warning sign to look out for is that your agency may issue you with a new Key Information Document on a reasonably regular basis. If this is the case, and the company satisfies any of the above criteria, we highly recommend you leave the umbrella immediately and report it to HMRC.
Consequences of using a Mini Umbrella Company
Promoters of MUCs can offer cheap payroll services and entice individuals with the promise of higher take home pay rates. Ultimately, this is a result of non-payment of taxes such as PAYE, NICs and VAT to HMRC. Anyone engaging with these schemes (whether knowingly or not), will be liable for any underpaid tax and NICs, and could face a substantial penalty from HMRC. Using these types of companies can also result in a loss of employment rights – which are often mis-sold from the outset.
How is HMRC addressing Mini Umbrella Company fraud?
HMRC take tax avoidance schemes very seriously and are continually finding new ways to identify businesses that are facilitating fraud and close them down as quickly as possible. HMRC has recently made several arrests concerning MUC fraud and has taken steps to deny the right to recover tax in cases where businesses have known that fraud was taking place.
HMRC is also working closely with Government Departments and trade bodies to increase awareness of the risks involved with engaging with a MUC fraud model. They are issuing advice on the due diligence businesses are expected to carry out to avoid themselves and their workers becoming victims of fraud.
It is vital you only use compliant umbrella companies for your payroll
In recent years, the number of umbrella companies appearing on the market has grown significantly – a quick Google search shows how many there are! With so many providers to choose from, how do you know who is compliant and who to avoid?
It’s simple – look for the FCSA accreditation! The FCSA is the leading professional body in the temporary labour market and is a symbol of compliance for contractors and freelancers, recruitment agencies and end clients. Using an FCSA accredited umbrella company ensures your pay will be processed as per UK tax law, and the correct tax deductions will be paid to HMRC on your behalf.
Churchill Knight is FCSA accredited
Churchill Knight & Associates Ltd and Churchill Knight Umbrella are proudly accredited by the FCSA and are committed to providing our clients with compliant accountancy and umbrella services. If you are interested in finding out more about how we can support you, please give us a call on 01707 871622 or request a call back for a time that suits you.
Founded by an IT Contractor in 1998, Churchill Knight has become one of the most respected contractor accountants in the UK. We’ve helped over 20,000 contractors with their accountancy requirements. As well as our accountancy services, we also have an industry-leading PAYE umbrella company and dedicated in-house personal tax department. Whichever service you choose, you can move forward with complete peace of mind. We are proud of the reputation we’ve built over the years, and our FCSA accreditation proves how committed we are to compliance within our sector. Keep reading…