How to spot mini umbrella company fraud

Every business using temporary labour should be aware of the potential for mini umbrella company fraud in their supply chain, which is why HMRC
recently released updated guidance on this issue.

No matter which industry you work in, a fraudulent mini umbrella company (MUC) could pose serious risks to your business. Not only will you be participating in criminal activity if you get caught up in a tax fraud scheme, but the financial and reputational damage could destroy your business.

Not to mention that MUCs abusing the VAT Flat Rate Scheme and National Insurance contribution allowances will result in your workers not receiving the money and tax benefits they’re entitled to.

This blog explains everything you need to know about mini umbrella company fraud, including how to look out for it and what you should do if you need to report a mini umbrella company to HMRC.

What are mini umbrella companies?

Many people will never have heard of mini umbrella company fraud before. While HMRC uses this term, there’s no standard model for MUC fraud. The criminals behind it are constantly developing new ways to try to hide their schemes from HMRC.

The way it generally works is that the criminals set up multiple limited companies, which only employ a small number of temporary workers each. They use one ‘promoter’ outsourcing business to facilitate this, creating complex layers within a supply chain.

This structure allows the criminals to abuse government incentives for small businesses, and can also lead to other taxes not being paid (including PAYE, National Insurance, and VAT). This significantly reduces the funding gathered for public services in the UK.

By contrast, a proper umbrella company arrangement would involve just one umbrella company employing temporary workers, not a series of smaller ones, and they would also pay taxes normally.

Mini umbrella company fraud happens across a variety of trade sectors, wherever temporary labour is used in supply chains. The workers themselves, who are typically contractors, are usually unaware that they are being moved between mini umbrella companies for fraud purposes.

This often results in the loss of employee rights, wages, and benefits. It’s crucial to ensure that any umbrella company you engage with is compliant with HMRC tax rules from the start, to avoid investigations and penalties if it turns out that they aren’t.

Though the umbrella company sector technically isn’t regulated, businesses and temporary workers can still get into serious trouble if they get mixed up with non-compliant umbrella companies.

Warning signs of mini umbrella company fraud

Since fraudulent mini umbrella companies are low in the supply chain, it’s not always easy to notice them. You should be vigilant and carry out due diligence checks regularly to look out for them. They will usually demonstrate most, if not all, of the following warning signs.

Unusual company names – multiple companies set up at the same time with similar names or unusual names (often registered at an unsuitable address for their business activities).
Unrelated business activity – the nature of activities listed on the Companies House register may not be compatible with the services that the workers actually provide.
Foreign national directors – company directors are often foreign nationals who have no experience in the industry or labour supply chains in the UK.
Movement of workers – one of the biggest red flags is when workers are frequently moved around between different MUC ‘employers’.
Short-lived businesses – these transient mini companies tend to have a short lifespan of less than 18 months, before being disbanded or dissolved.

The way that the criminals behind these schemes keep their activities concealed is by creating and dissolving companies within a short amount of time, allowing them to set up new companies to replace the ones shut down after failing to meet their Companies House filing obligations.

Warning signs of MUC fraud for temporary workers

Temporary workers should also be vigilant about their employers, no matter how briefly they work for them. Warning signs for workers employed by a fraudulent mini umbrella company include:

Signing multiple documents – you should only have to sign one contract of employment.
‘Enhanced’ arrangements – they might offer higher pay retention (via paying less or no tax) in exchange for a fee, which is a sure sign of a tax evasion scheme.
Problems with pay – your pay might be higher than what’s on your pay slips, and they might use unusual payment methods (such as providers based outside the UK).

A legitimate umbrella company will pay you the correct amount through PAYE, also registering and paying the correct amount of tax this way. You should not be passed along between other MUCs and made to sign various contracts during your employment.

You should also be wary of anyone claiming to be an HMRC-approved umbrella company, as this lie is an immediate sign of shady business – HMRC never
endorses or promotes umbrella companies.

What is HMRC doing to stop mini umbrella company fraud?

The HMRC Fraud Investigation Service uses both civil and criminal powers to investigate individuals and businesses involved in mini umbrella company fraud. Tens of thousands of MUCs have been caught and deregistered for exploiting the VAT Flat Rate and/or the Employment Allowance.

When any other business in the same supply chain is found to have known that fraud was happening, or failed to identify that they were facilitating fraud, HMRC can prevent them from recovering VAT input tax. This is the VAT added to the cost of goods or services with VAT
liability.

HMRC also collaborates with other government departments and trade bodies to continue raising awareness of mini umbrella company fraud. They have issued multiple public information campaigns to draw attention to umbrella companies and tax avoidance schemes, including:

If you’re concerned that a supplier, labour hirer, or associate may be involved with a fraudulent MUC – or is actively committing tax evasion – you can report tax fraud to HMRC anonymously.

HMRC has also published a regularly updated list to name and shame known
tax avoidance schemes and their promoters, enablers, and suppliers. You should check the latest version of the list before committing to a payroll provider or umbrella company to make sure they aren’t on it.

If you’re looking for a reputable payroll and tax management service that you can trust, why not speak to us at GBAC? Our accountants in Barnsley can help with anything from bookkeeping and VAT to cloud accounting and audits – and we’re always completely transparent with our clients.