Mini Umbrella Companies: Protect Your Agency From Risk

Now more than ever, it’s vital for agencies and end hirers to conduct the relevant checks before adding an Umbrella to their PSL to protect themselves from reputational damage and financial penalties, says Tim Hunt, Strategic Planning and Sales Director at Crest Plus.

Over the last few months, the implementation of the IR35 reforms coupled with the Coronavirus pandemic created a state of flux within the temporary employment industry which is now beginning to ease. Unfortunately, this widespread confusion opened doors for some opportunistic organisations to develop fraudulent Mini Umbrella schemes, taking advantage of the increase in new Umbrella workers by promising them more take-home pay while avoiding paying the correct tax owed to HMRC.

Many agencies have found themselves caught using these schemes unknowingly. So your agency needs to be careful to protect yourself. Working with these unlawful Umbrella companies not only puts your contractors’ earnings at risk, but it can also leave you and your end hirers financially liable for any unpaid contractor wages or tax owed to HMRC, causing massive reputational damage alongside huge repayment debts.

In this article, I explore Mini Umbrella companies (MUCs) in detail, providing instructions on some simple checks you can do to identify them and the measures HMRC is taking to prevent such misbehaviour.

What is a Mini Umbrella Company?

Although organised criminals are continuously developing their methods to hide their fraudulent activities from HMRC, the most-common set-up of a mini-Umbrella company works like this:

• Mini Umbrella companies are set up by a promoter business (sometimes referred to as an outsourcing business), which may have other linked businesses within its operation to help complicate the supply chain and facilitate the fraud. The promoter business typically presents itself to an agency as a larger Umbrella company.
• Each mini Umbrella company is actually a limited company that employs and pays 1-3 workers, enabling the directors of the scheme to make use of HMRC’s National Insurance allowance and reducing their PAYE and VAT payments.
• Often, the promoter business will set up unwitting overseas workers as the directors for these mini Umbrellas, making it extremely difficult for HMRC to track them and chase them for the unpaid tax.

It’s your responsibility as the end-user or provider of temporary labour to do your due diligence to be clear about who pays the worker and how they get paid. This is the only way to protect your business from becoming involved in mini Umbrella company fraud or similar supply chain fraud.

How Do MUCs Work?

Primarily, this fraud is based around the abuse of two government incentives aimed at small businesses: the VAT Flat Rate Scheme and the Employment Allowance. Since these mini Umbrella companies are set up as limited companies with few employees, their promoter businesses can take advantage of these schemes to pay less tax, VAT, and National Insurance to HMRC than if they were operating compliantly.

Many contractors are employed unknowingly by these types of fraudulent companies, resulting in fewer employment rights since workers often don’t know who their true employer is. Plus, individuals are often moved unknowingly between mini Umbrellas hosted by the same promoter business to help the masterminds maximise their profits.

As an agency, you must know how to spot these kinds of schemes. If you can’t prove you’ve taken reasonable care to ensure you’re only working with compliant Umbrellas, such as Crest Plus, a fraudulent supply chain can lead to huge reputational and financial damage to your business.

How to Spot Them?

Mini Umbrellas are low down in the supply chain, meaning it can be difficult to identify them. You must be vigilant with completing your due diligence checks to look out for the following:

• Unusual company names: The promoter company will often set up multiple companies at the same time with unusual names.
• Unrelated business activity: Before agreeing to work with the Umbrella, check their business activities listed on Companies House. Typically, these will be unrelated to the services provided by the workers.
• Foreign national directors: Usually, foreign nationals who have no previous experience in the UK labour supply industry are listed as the directors for the Umbrella companies, replacing a temporary UK resident director.
• Worker movement: Employees are frequently moved between different Umbrella companies – so look out for changing company names on workers’ payslips.
• Transient businesses: These mini Umbrella companies have a relatively short lifespan (often less than 18 months) before being allowed to be dissolved by Companies House for failing to meet filing obligations. New MUCs will then take their place in the supply chain. If you’re doing your due diligence, you should notice if a new mini Umbrella appears in the supply chain while issuing a new key information document.

What is HMRC Doing About Mini Umbrellas?

HMRC’s Fraud Investigation Service is using both its civil and criminal powers to challenge those who are involved in – and facilitating – this type of fraud. Often, when HMRC identifies these mini Umbrellas, the directors are either overseas or don’t have the money to repay HMRC, so HMRC moves up the supply chain, turning to the agency to recover the funds. The only way to protect yourself from financial liability in this scenario is by proving you took reasonable care and conducted the correct checks to ensure your supply chain’s compliance.

HMRC has made it clear that they will claim financial penalties from the agency if they can prove that the agency was facilitating the existence of mini umbrella companies. Essentially, this means there has to be proof that not enough checks were done to determine the legitimacy of the Umbrella company before working with them. Whether the agency knew, before engaging with the Umbrella, that they were acting fraudulently is irrelevant in this scenario. It is the lack of evidence of due diligence that can leave you liable.

An Umbrella Company You Can Trust

Before choosing to work with an Umbrella company or add them to your Preferred Suppliers List, make sure you do your due diligence to check for the trading history and compliance credentials of the companies you’re welcoming into your supply chain to avoid being tricked by mini Umbrella schemes.

If you’re searching for a compliant Umbrella you can trust, Crest Plus Umbrella has been supporting agencies and contractors for over 20 years. As a well-established outsourced payroll provider, we take pride in our history of high standards and customer satisfaction (both with agencies and contractors).

Our FCSA-accreditation means you can feel safe in the knowledge that your supply chain is protected from financial liability or reputational damage, since compliance is always our top priority.

To find out more about working with Crest Plus Umbrella, don’t hesitate to get in touch on 01244 684700 or click here to learn more about how we can help your agency grow compliantly.