What is “Mini Umbrella Company Fraud” and how can you avoid it?
Any business that places or uses temporary labour must be wary of any potential problems that may be posed to their business by a mini umbrella company fraud in their supply chain. A fraudulent supply chain can lead to reputational and financial damage to your business and the workers may not receive everything they are entitled to. Mini umbrella company fraud will significantly reduce tax payments to HMRC and PAYE, National Insurance and VAT.
What is a mini umbrella company fraud?
It is (yet another…) fraud primarily on HMRC, wrongly exploiting certain VAT employment allowance schemes intended for smaller businesses. It again has a broader spread of victims than just HMRC: the end individual workers are sold short on contributions not being made, and small businesses who follow the rules are not competing on a level playing field.
There is no “standard” mini umbrella company fraud model. The structure is constantly evolving as organised criminals try to conceal their fraudulent activities from HMRC. In short, it involves multiple limited companies being created that employ a small number of temporary workers. These companies are primarily set up to enable fraud. The structure of mini umbrella companies is facilitated by a promoter business (or an outsourcing business – the “umbrella”) and they may have other linked businesses to support the operation. It can be found in any trade sectors, for example, construction and manufacturing, where temporary workers are commonplace.
Mini umbrella company fraud creates issues for employment agencies and businesses that follow the rules as well as presenting an organised crime threat to the UK Exchequer. Primarily, the fraud is to avoid two government initiatives: the VAT Flat Rate Scheme and the Employment Allowance. This type of fraud can then result in not paying other taxes such as PAYE, National Insurance and VAT. This of course has a knock-on effect towards vital funding for public services.
Regular due diligence checks should be carried out to try and spot any fraudulent activities.
The following signs:
— Unusual company names – multiple companies are set up around the same time and given similar/unusual names.
— Unrelated business activity – business activities listed on Companies House 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. They often replace a temporary UK resident director after a short period of time.
— Movement of workers – employees can be moved frequently between different mini umbrella companies.
— Short-lived businesses (transient businesses) – mini umbrella companies often have a relatively short lifespan (usually less than 18 months) before they are allowed to be dissolved by Companies House for not meeting filing obligations. A new company will then take their place in the supply chain.
What is HMRC doing?
HMRC’s Fraud Investigation Service is using both civil and criminal powers to challenge anyone that is involved in this type of fraud. They are working with trade bodies and various government departments to raise awareness. HMRC has made several arrests in relation to mini umbrella company fraud and taken steps to prevent the claim of VAT in cases where they have established that a business in the supply chain may have intentionally committed fraud.
How can you protect your supply chain?
If your business provides temporary labour, it is your responsibility to:
— Ensure you undertake necessary and proportionate due diligence checks.
— Be clear as to who pays your workers and how they are paid.
— Check the credibility of your supply chain.
By complying with these checks, you can protect your business from financial, operational, and reputational risks.
Any potential fraud or tax evasion must be reported to HMRC.
We have expertise in complex high-value tax disputes including direct tax litigation, VAT and MTIC fraud disputes and also wrote about Missing Trader Intra-Community Fraud last year. Disputes partner, Euan Palmer, is a board member of the London Fraud Forum. Our Company and Commercial team can help advise you about safeguarding your business and due diligence checks. Please do get in touch.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: email@example.com