What is the mini umbrella company fraud?

Every business that employs temporary workers must be aware of the risks associated with mini umbrella company fraud in their labour supply chain. Due to the fact that these new restrictions restrict contractors ability to work off-payroll through Personal Service Companies, many have viewed registration with an umbrella business to handle PAYE responsibilities as the next best alternative.

However, businesses that engage temporary workers under an umbrella company should be aware that they must still verify that they are not facilitating pay arrangements that avoid the necessity for adequate deductions from wages paid. This was highlighted by HMRC 3 months before when they produced a guidance note on "mini umbrella company fraud" to assist businesses in identifying supply chain fraud.

• What is the Mini Umbrella Company fraud?
• What are the risks or most common warning signs?
• What is HMRC doing about it?
• Reporting of Potential fraud or tax evasion
• Checks you can conduct to protect your supply chain

What is the Mini Umbrella Company fraud?

There is no standard model for fraud via mini umbrella companies, and arrangements are continuously evolving as organised criminals attempt to hide their fraudulent activities from HMRC. These criminals establish many limited companies, each employing a small number of temporary workers. These are designed to facilitate fraud.

The structure of the mini umbrella companies is enabled by a promoter business (sometimes referred to as an outsourcing business), which may have other affiliated businesses to help with the operation. The establishment of mini umbrella companies and the complex layers of businesses inside the supply chain all contribute to the facilitation of fraud. If your business relies on temporary labour, you should be aware of the risks associated with mini umbrella company fraud in your labour supply chain.

If reasonable care is not taken, a fraudulent supply chain can result in reputational and financial damage to your business, as well as workers not receiving the benefits to which they are entitled. Mini umbrella company fraud also drastically reduces HMRC's tax payments, which include PAYE, NI, and VAT.

What are the risks or most common warning signs?

Due to the fact that mini umbrella companies operate at the bottom of the supply chain, it may be difficult to identify them. You must exercise caution, even more so when the workers employer is not the umbrella company you have a contract with. An excellent place to start is with routine due diligence checks. Several warning signs to keep a watch out for include the following:

1. Unusual Company names -

   Multiple companies are frequently formed simultaneously and given similar or unusual names. The registered address may not appear to be appropriate for their type of business.

2. Unrelated business activity -

   Often, the business activities mentioned on Companies House records have little to do with the services rendered by the workers.

3. Foreign National directors -

   Foreign nationals with no prior expertise in the labour supply industry in the United Kingdom are frequently identified as directors. After a short period, they can take the role of a temporary UK resident director.

4. Movement of workers -

   Employees may be transferred between multiple small umbrella companies frequently.

5. Short-lived businesses (also known as transient businesses) -

   Individual mini umbrella businesses have a limited existence (typically less than 18 months) before being dissolved by Companies House for failing to comply with filing requirements. Following that, new mini-companies will enter the supply chain.

You should take note of this because you may find yourself distributing new important information documents to workers on a frequent basis. When submitting your quarterly employment intermediary reports, information from sources such as the Companies House registration may assist you in identifying warning indicators.

Also See: What is a PAYE (Pay-as-you-earn) Umbrella Company?

What is HMRC doing about it?

HMRC's Fraud Investigation Service is challenging anyone participating in and facilitating this type of fraud by using both civil and criminal authorities. HMRC is raising awareness through engagement with trade bodies and other government departments.

HMRC made several arrests recently in connection with mini umbrella company fraud. Additionally, they have taken steps to reject input tax recovery in cases where they have demonstrated that a business in the supply chain was aware, or should have been aware, of fraud.

Reporting of Potential fraud or tax evasion

If you have concerns about a supplier, a labour hirer, or associated activities, contact HMRC. You can file a report against someone if you believe they are evading taxes.

Checks you can conduct to protect your supply chain

If your business employs or provides temporary labour, you are responsible for the following:

1. Due diligence checks that are necessary and proportional.
2. Be transparent about who pays your workers and how they are paid;
3. Verify the supply chain's credibility.

Completing these checks will help you eliminate the financial, operational, and reputational risks of your business.

Do you require additional information regarding the dangers associated with mini umbrella company fraud? If you require additional information on the dangers of mini umbrella company fraud, please contact one of our experts or visit our dns page for details on all of the services we offer. Kindly call us on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Also See: Umbrella Company Allowable Expenses

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.