Mini Umbrella Company Fraud and The Dangers It Could Pose to Companies
HMRC has issued a notice about the rise of mini umbrella company fraud and the dangers it could pose to companies who use temporary labour anywhere in their supply chain.
If you are a business that uses temporary workers or places them with other organisations, you need to be aware of this as it has the potential to cause your business serious reputational and financial damage.
You have a responsibility to be clear about who pays the workers, and the way in which they are paid. Diligent and careful checks on this represent the only way in which your business can protect itself from inadvertently becoming involved in mini umbrella company fraud or other forms of fraud that affect or involve the labour supply chain.
What is mini umbrella company fraud?
It is not always easy to spot this kind of fraud as there is no one standard model, and arrangements are evolving all the time as operators try to stay one step ahead of HMRC. There is no one specific sector that is affected by this kind of fraud – it appears in supply chains wherever temporary labour is used.
Multiple limited companies are set up and each one only employs a small number of temporary workers. These companies are established to facilitate fraudulent activity.
The way mini umbrella companies are structured is facilitated by organisations known as promoter businesses or outsourcing businesses. They may have other businesses linked to them, whose role is to support the operation and facilitate the fraud.
This type of fraud is aimed at abusing two government incentives that are intended to help small businesses – the VAT Flat Rate scheme and the Employment Allowance, which is an annual discount of £4,000 per company on National Insurance contributions. However, as this fraud also results in non-payment of other taxes, such as PAYE, National Insurance and VAT, it has the potential to increase the tax burden on businesses who comply with the law and follow the rules.
Mini umbrella company fraud can also affect the employees – their employment rights can end up being lost and - as they do not often know who their ultimate employer is - they can be moved from company to company, thereby increasing profits made from the fraud.
What HMRC is doing
The HMRC Fraud Investigation Service uses both its civil and criminal powers to challenge those who are involved in this type of fraud and those who facilitate it.
They have recently made a number of arrests and steps have been taken to deny the right to recover input tax (the VAT added to the cost when a person or business buys goods or services that have a VAT liability) in cases where it has been established that a business in the supply chain knew, or should have known, that there was fraud.
What you need to do
As mentioned above, it can be quite hard to identify mini umbrella companies, so businesses need to exercise vigilance, particularly if the employee or worker is employed by a company other than the one with whom the business has a contract.
If your business is using or providing temporary labour, then you need to protect the integrity of the supply chain by:
Carrying out necessary and proportionate due diligence checks
Clarifying who pays your workers and how they are paid
Carrying out checks on the credibility of the supply chain
When carrying out due diligence checks, there are several things that you will need to watch 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 the type of business activities.
Unrelated business activity
The business activities listed on Companies House entries will often not relate to the services provided by the workers.
Foreign national directors
Foreign nationals with no previous experience in the UK labour supply industry are often listed as directors, replacing temporary UK resident directors after a short period of time.
Movement of workers
Employees may move frequently between different mini umbrella companies.
Many of the mini umbrella companies tend to have relatively short lifespans, in most cases less than 18 months. After this, Companies House allows them to be dissolved. The gap in the labour supply chain is then filled by another mini umbrella company.
You may find that you need to issue a new key information document to workers on a regular basis and this should be a signal that something is not right.
When you complete your quarterly employment intermediary reports, you may find that information from sources such as the Companies House register might help to identify warning signs.
Completing these checks will help to ensure that your business is safeguarded from financial, operational and reputational risks.
This can be a particularly complex area to navigate on your own and it would probably be a good idea to enlist the help of a legal expert who is knowledgeable in tax and employment matters.
rradar tax advisor Caroline Lamyman said:
“This announcement by HMRC follows a BBC Radio File on 4 programme which revealed that as many as 48,000 companies had been created in the last five years under such arrangements, at a cost of potentially millions in lost tax revenue. HMRC will be using both its criminal and civil powers to challenge this type of fraud and recently deregistered more than 22,000 mini umbrella companies thought to be involved in such schemes. Business must be aware of these types of schemes and carry out strict due diligence checks on any company that they use in its supply chain ascertaining how the workers are paid and who is paying them.”