Recruitment Agencies Need to Avoid Mini Umbrella Companies at All Cost
No matter the size of your recruitment agency or the industry you operate in, it is crucial for you to know what a Mini Umbrella Company (MUC) is and how dangerous mini umbrella company fraud is to your business. Mini Umbrella Companies (MUC's) commit fraud by reducing PAYE, National Insurance, and VAT paid to HMRC when paying temporary workers. Having a MUC in your supply chain causes legal, reputational, and financial damage to your recruitment business and your candidates.
As a recruitment agency in the temporary labour industry, your reputation amongst candidates impacts your bottom line, so it is vital to avoid using MUC's to ensure you have a compliant supply chain. A compliant supply chain ensures there are no risks to your candidates or your business.
HMRC recently shared their concerns about the dangers of MUC fraud to all businesses in the temporary worker industry. As a recruitment agency, it is your responsibility to know who is paying your candidates and ensure that they are compliant. By doing the correct due diligence checks, you can make sure you have chosen a compliant payroll company that pays all workers and sends the correct tax to HMRC. Due to the fraudulent nature of MUCs agencies and end-user companies may not always tell they are using a MUC until it is too late, it is essential to know the signs of a MUC to identify and avoid them.
What Is a Mini Umbrella Company?
The MUC model is a fraudulent employment intermediary model which presents an organised crime threat to the UK Exchequer and the temporary employment industry. A MUC fraudulently uses the VAT flat rate scheme and employment allowance schemes intended for legitimate small businesses, to illicitly pay temporary workers while avoiding taxes such as PAYE, National insurance and VAT. Revenue raised from these taxes allows the government to have the funds to run the country and provide state benefits.
MUC fraud is not limited to a specific trade sector and can be found in any supply chain whenever temporary labour is used, so agencies must always be vigilant. In some versions of MUC fraud, a MUC will convince temporary workers that they can receive tax-free bonuses or repayments. Tax-free bonuses or repayments to contractors is tax avoidance and will ultimately leave temporary workers with large unpaid tax bills once HMRC investigate.
How Does a MUC Operate?
MUC's (Mini Umbrella Companies) operate by splitting up temporary employment workers into hundreds or even thousands of small, limited companies set up with the sole purpose of carrying out tax avoidance. The workforce paid by MUC's are usually contractors who were previously paid by an employment agency or umbrella company in the past. Temporary workers do not typically know they are using a MUC while being frequently moved between MUCs to help maximise profits from the fraud.
MUC's are usually structured to hide their fraudulent nature by having many promoter or outsource businesses to appear as a legitimate business. These promoter or outsourcing businesses will then have links to other businesses where they operate their fraudulent scheme. By creating complex layers of businesses within supply chains, MUC's regularly move candidates between their different layers to carry out tax fraud. All of this happens covertly without the recruitment business or contractor, knowing what is going on.
What Are the Signs of Mini Umbrella Company Fraud?
MUC's are continually evolving to hide who they are from HMRC. There is no one size fits all model, but there are some common signs you can come across while doing due diligence checks that can alert you to a MUC (Mini Umbrella Company). Information from the Companies House register might help you to spot the signs of a MUC while completing quarterly intermediary reports or Key information documents for workers.
Warning signs of a MUC include:
- An unusual company name or business address – MUC's often set up multiple companies around the same time which tend to have a similar or unusual name. As well as unusual company names MUC's are usually registered at an address which does not seem appropriate for the types of business activities they offer.
- Unrelated business activity description – When doing your due diligence checks on the Companies House register you should always ask the question, does the nature of the business activities described on Companies House seem compatible with the services provided by the workers?
- Directors being foreign nationals – MUC's will frequently have foreign nationals appointed as company directors or regularly replace a temporary UK resident director after a short period of time. Company directors for MUC's usually have no previous experience in the UK labour supply industry.
- An unusually high movement of workers – As well as the points shown above, a MUC will have workers moved between different employers on a regular basis.
- Very short-lived businesses – MUCs have a short lifespan usually less than 18 months before being allowed to be disbanded by Companies House because they failed to meet their filing obligations. MUC's will then restart their fraudulent scheme by setting up a new company to take the place of the previously dissolved business in the supply chain. As a recruitment agency, you would notice this in cases where you need to issue a new Key Information Document to workers on a regular basis.
HMRC advises that all businesses in the temporary labour industry should pay close attention to the above MUC signs, especially where the employer of a temporary worker is not the Umbrella Company that a temporary worker has a contract with. In order to protect your recruitment business against MUC fraud, you should follow HMRC's guidance on robust due diligence checks laid out in: The supply chain due diligence principles.
What Is HMRC Doing About MUC's?
MUC's not only cause legal, financial, and reputational damage to the temporary employment supply chain; they also create an unfair marketplace for compliant payroll businesses who follow the law. HMRC's Fraud Investigation Service is using both their civil and criminal powers to challenge those who carry out and contribute to MUC fraud.
HMRC has recently made a number of arrests in relation to MUC fraud and has also taken steps to deny the right to recover input tax in cases where it has established that a business in the supply chain knew, or should have known that there was fraud taking place.
HMRC is working with trade bodies and other Government Departments to raise awareness of MUC fraud to all businesses operating in the temporary labour market. HMRC is also carrying out a programme of work to establish the levels of due diligence being done by employment agencies and end-users who use temporary labour. As part of the programme, HMRC will be issuing advice on the expected levels of due diligence needed by businesses to help prevent them from becoming victims of MUC fraud.
How Do I Report a Mini Umbrella Company Fraud to HMRC?
If you have concerns about a potential MUC, then the best course of action is to contact the HMRC hotline on 0800 788 887 (open 8 am to 8 pm every day). For more details, see how to report fraud to HMRC. You can also report someone if you think they are evading tax.
Using Our Payroll Service Is the Safest Option For Agencies
If you are looking for a compliant and trusted umbrella payroll company to include in your supply chain, then Unified Payroll is the umbrella payroll company for you. With Unified Payroll, you can rest assured that your candidates will always be paid compliantly and on time. Our website is a good source of information for everything agencies need to know about compliant payroll so always check our website so you are informed on the latest legislative developments. As you will find when doing your due diligence checks our track record proves that we are a compliant umbrella payroll company that continually provides a superb payroll service for recruitment agencies. You can also see our recruitment agency and contractor reviews on Trustpilot and Feefo to see how we always deliver an excellent payroll service to agencies. To find out more about using our umbrella company you can contact our sales team.
Our sales team are available Monday to Friday from 9 am to 5 pm.
Call us: 01268 669979 Option 1
Email us: firstname.lastname@example.org
Speak to our agency support team about saving time and money
with our umbrella payroll service.
Takes 30 seconds