What is ‘mini umbrella company fraud’ and what are the dangers?
Every business that uses temporary labour needs to be aware of the potential dangers of mini umbrella company fraud in their labour supply chain.
The use of umbrella companies has been popular for a long time and has recently increased due to the IR35 changes which came into effect in the private sector in April. As these new rules restrict the ability of contractors to work off payroll through Personal Service Companies, registering with an umbrella company to take care of PAYE responsibilities has been regarded as the next best option by many.
However, businesses engaging temporary workers through an umbrella company should be aware that there is still a need to ensure that they are not facilitating pay arrangements which undermine the requirement that appropriate deductions should be made from the wages paid.
This was highlighted when last month HMRC published a guidance note on “mini umbrella company fraud” to help businesses identify fraud in their supply chain.
What is mini umbrella company fraud?
Many will have never heard of mini umbrella company fraud and whilst that is the term used in the guidance there is no standard mini umbrella company fraud model. It is recognised that arrangements change in an attempt to hide fraudulent activities from HMRC. Typically multiple limited companies will have been created with only a small number of temporary workers employed by each one. The structuring of the mini umbrella companies is facilitated by an outsourcing business which then uses further intermediaries to create complex layers of businesses within the supply chain in order to facilitate the fraud.
This contrasts with the normal and perfectly proper umbrella arrangement by which the temporary workers are employed by the one umbrella company (rather than a series of mini umbrellas) and taxed in the usual way.
The client using temporary labour in circumstances where there has been fraudulent activity in the supply chain may suffer reputational damage and increased costs. The workers may be owed money and might have claims in respect of outstanding benefits.
These concerns have also led to calls by the Recruitment and Employment Confederation for more regulation on umbrella companies. It is asking for the provision of a legal definition of “umbrella companies” which would then enable comprehensive regulation by the government.
Spotting and avoiding mini umbrella company fraud
A business using temporary staff should conduct regular due diligence checks into their labour supply chain. This should be directed at identifying who pays the workers and how they are paid. An important part of the process will be to assess that the supply chain is credible.
Some of the most common warning signs that not all is right include:
- Unusual company names
- A registered address may not seem suitable for their types of business activities
- Unrelated business activity listed on Companies House entries
- Foreign national directors who have no previous experience in the UK labour supply industry
- Movement of workers between different mini umbrella companies
- Short-lived or transient businesses that are dissolved when they do not meet filing obligations
- Requests for new key information for existing workers for new mini umbrella companies
Concerns relating to the tax situation of anyone in the supply chain should be reported to HMRC without delay.
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