Fraudulent ‘Mini Umbrellas Companies’

Fraudulent ‘Mini Umbrellas Companies’ hit the headlines recently. I decided to lift the lid so you don’t get caught out.

HMRC have issued warnings to contractors enticed into mini umbrella companies. I’d wager it’s the first time you’ve heard of an ‘MUC’. Same here.

The concept is devious and bottom line is it’s organised crime. You need to avoid this like a virus.

It works by creating small umbrella of two to three people under a limited company, so in principle you can take a workforce of hundreds of contractors and create lots of mini umbrellas. That’s step one. The next step is where things become a little less clear cut for the contractor or temporary employee.  

The fraud is geared around exploiting the VAT Flat Rate Scheme and the Employment Allowance. But, because of the way the schemes are structured, often with complex supply chains, the mini umbrella company can hide fraud, and claim employment allowances, reducing the NI contribution to little or nothing. That money is then paid to the provider with fees.

Operating on a small scale means income comes under the VAT threshold. The knock on is that going rates can come down and people are suddenly more competitively priced compared to those using other more traditional umbrellas. It tends to happen in sectors like health care where there is a high turnover of lower paid temporary workers.

So, what’s happening to stop it? HMRC has now got dedicated teams investigating MUCs to find the missing income, because it’s much harder to spot the avoidance compared to usual. Contractors are often moved between MUCs to maximise fraud and it can be hard to see who the end client using the umbrella is.

It therefore goes without saying, that it’s much harder for an individual worker to know precisely who they are working for, spot they are a victim of fraud, and realise they are missing out on employment rights. It’s also a wake-up call to end clients to ensure they know exactly who they are dealing with when it comes to employing temporary staff in this way.

HMRC has provided a check list to help you spot an unscrupulous model:

  • An unusual company name – Quite often, multiple companies are set up around the same time which tend to have a similar or unusual name. These companies will also often be registered at an address which does not seem appropriate for the types of business activities.
  • Unrelated business activity description – Compare the nature of the business activities described in Companies House to the services provided by the workers – are they compatible?
  • Directors being foreign nationals – Frequently foreign nationals are appointed as directors when an MUC is formed or they can replace a temporary UK resident director after a short period of time. Usually the directors will have no previous experience in the UK labour supply industry.
  • An unusually high movement of workers – Take note of how often workers are moved between different employers who meet the above criteria for being MUCs. Is this on a frequent basis?
  • Very short-lived businesses – The individual MUCs have a relatively short lifespan (often less than 18 months) before being allowed to be disbanded by Companies House because of their failure to meet their filing obligations. New MUCs will then take their place in the supply chain. This would be noticed as you may find that you need to issue a new Key Information Document to workers on a regular basis.

You can also verify your payslips by getting a key information document from the agency and a pay illustration from the umbrella. If things are above board a salary calculator should come out with the same number your umbrella provides.

It’s also worth getting a tax account from HMRC and checking the tax on your payslip marries up with that on the HMRC account.

We considered setting up an umbrella once. You can listen to why we didn’t here. It’s a murky world and generally umbrellas just don’t sit well with us at all.

It’s this ideological challenge that makes me think umbrellas are not sustainable in their current form. I predict agencies that trade on their reputation will look at alternatives to avoid the risk of rogue operators tarnishing the sector. Agency PAYE could see a resurgence and more close working in partnership with the end client and the contractor. In fact, there is already an example and it was able to furlough without quibble. A big tick for change and an example of how regulation could play a role in stabilising a market.

As it turns out, the last year has proven that we don’t need to run an umbrella to grow. Clients stayed with us and didn’t move to umbrellas because they have been able to show clearly they are outside IR35. And new ones came to us for that reason, and in some cases due to poor service from their existing accountancy as well.

Thinking of using an umbrella and want to check out if they’re kosher? Find out how clients rate their umbrellas at offpayroll.org.uk here.