In May, a BBC File on 4 investigation revealed that 48,000 mini umbrella companies (MUCs) had been created in the past five years, with 40,000 people from the Philippines recruited to front them in a scheme costing the UK "hundreds of millions of pounds" in lost taxes.
At the beginning of June, another story, this time from The Times, stated around 600 MUCs based in Scotland, with directors in the Philippines, were reported to the police over concerns about alleged tax fraud schemes. What makes this report more galling is that proposals to further regulate umbrella companies were rejected by the government last month, despite party-wide MP support.
These MUCs, designed to take advantage of the Employment Allowance and VAT Flat Rate Scheme, need to be tackled before the government ends up with another ‘pandemic’ on its hands.
The role of recruitment agencies
The IR35 regulation extension to the private sector has meant that some MUCs are targeting contractors directly with the incentive of unrealistically high take-home pay. However, recruitment agencies remain the main access point for these schemes and whilst most recruitment companies are vigilant a minority are allowing these to enter the market, often for large financial rewards.
The message to recruitment companies is the same as that to contractors: If something seems too good to be true, it probably is. Any recruiter operating in the temporary labour market will tell you that their reputation with contractors is the key driver for success. Getting caught engaged in dubious practices will see workers exit in their droves, leaving you with zero business and a bad name to boot.
It means that a compliant supply chain is essential to ensure you’re not putting your contractors or business at risk.
What you can do
In May, HMRC released guidance for businesses and contractors on MUC fraud and what to look out for. Recruitment agencies need to understand how these schemes work and take action to avoid them at all costs. Due diligence checks should be conducted on all payroll companies to ensure they are sending the right amount of tax to HMRC.
It’s not always easy, though. The fraudulent nature of MUCs means they know how to present themselves in a way that appears to be compliant, meaning many agencies only learn of their true nature once it’s too late.
So, how can you identify a fraudulent MUC? Here are some of the key warning signs:
Unusual company names and addresses. MUCs usually set up multiple companies around the same time that are given a similar or unusual name. Also, pay attention to the registered business address to gauge whether it aligns with the company's business activity.
Unrelated business activity. Companies House is your friend when it comes to identifying suspicious businesses. Check the activities listed there to make sure they relate to the services provided by the workers.
Foreign national directors. Be wary of directors who are foreign nationals with no previous experience in the UK labour supply industry. MUCs often replace a temporary UK resident director with an overseas one after a short period of time.
Movement of workers. These businesses will have moved workers between different MUCs regularly.
Short-lived businesses. MUCs have a short lifespan, usually less than 18 months before they are allowed to be dissolved by Companies House due to not meeting their filing obligations. New MUCs will then restart as a new company, taking the place of the dissolved business. Be suspicious if you’re issuing new Key Information Documents on a regular basis.
If you need further guidance on conducting effective due diligence on your supply chain, take a look at the principles outlined by HMRC.
What next?
If you spot a problem, it’s crucial you flag it as quickly as possible. There are two main ways to report a non-compliant umbrella company - through Professional Passport or by reporting directly to the HMRC hotline on 0800 788 887. Find out more about reporting fraud on the HMRC website.
Listen to CEO and founder of Professional Passport Crawford Temple discuss disguised remuneration with ContractorCalculator’s Dave Chaplin on video podcast “The Compliance Files: Have I got a good idea for you!”
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