The Government has published guidance on ‘mini umbrella company fraud’ – the widespread practice of setting up multiple companies to employ temporary workers – with the sole aim of abusing the Flat Rate VAT and Employment Allowance schemes.
The official guidance explains how the fraud is committed, the impact on the Treasury, and how to spot a MUC.
BBC Radio 4’s File on Four estimates that almost 50,000 companies have been formed for this purpose over the past 5 years – many of them fronted by people based in the Philippines.
How does Mini Umbrella Company fraud work?
There are many variants of MUC fraud, but they all share one fundamental characteristic – the use (or misuse) of limited companies to employ temporary workers – in order to fraudulently take advantage of several tax breaks.
According to HMRC, the main targets of MUCs are the Flat Rate VAT scheme and Employment Allowance (EA), both of which would usually be unavailable to one-man-band companies, but are likely to be accessible to larger companies.
As these companies often do not attempt to comply with HMRC and Companies House filing obligations, they will typically defraud the Treasury of VAT, PAYE, and NICs.
The companies are usually set up by a UK resident, but after a short time, they are replaced by a foreign national. This front person would be paid to upload official paperwork to the promoters of such schemes.
Companies are typically shut down after a short time (under 18 months), and new ones opened up in their place. Companies House may dissolve MUCs for failure to file the correct paperwork.
Workers who operate via these companies are typically unaware of the fraudulent activity.
How to spot a MUC – what are the warning signs?
- The umbrella may have an unusual company name. Multiple, similar company names may be registered at the same time.
- The company registered address may seem inappropriate for an employment or payroll business.
- The company’s SIC code (activities) may not match those expected of an employment organisation
- The company will typically have foreign directors listed at Companies House.
- The company will typically be newly formed (typically 18 months or less).
What is HMRC doing about it?
HMRC is often criticised for not taking action against fraudulent umbrella schemes – instead preferring to go after users of these schemes, rather than the promoters (see the Loan Charge).
On this occasion, HMRC says is raising awareness of MUC fraud via trade organisations and the press, and has also made some arrests. The taxman has also sought to recover unpaid tax during their investigations.
Take care when choosing an umbrella company
Our advice is always the same – only use a UK-based PAYE umbrella company. The umbrella market is unregulated, so consider schemes that do have some kind of professional audit in place, from the FCSA and/or Professional Passport.
Seek recommendations from other contractors, and read our umbrella guides for tips and advice.