HMRC Launches New Guidance on Mini Umbrella Company Fraud

Every organisation that hires or uses temporary labour should be aware of the possible risks posed by small umbrella company fraud in their supply chain. Not only may a fraudulent supply chain harm your company's brand and finances, but your workers may not receive all of the benefits to which they are entitled. Mini umbrella company fraud also drastically decreases HMRC tax payments, including PAYE, NI, and VAT.

As an end user or provider of temporary labour, it’s your responsibility to be clear about:

• who pays the workers
• how they are paid

This is the only way to protect your business from becoming involved in mini umbrella company fraud or other supply chain fraud.

If you are working or considering working with an umbrella company, HRMC's Guidance urges you to be alert for warning signs, such as:

1. Unusual Company Names

There are often multiple corporations formed at the same time with similar or unusual names. Their business activity may not be appropriate for the registration address.

2. Unrelated Business Activity

The business activities indicated on Companies House registrations may not always correspond to the services supplied by the employees.

3. Foreign National Directors

Directors are frequently foreign nationals with no prior expertise in the UK labour supply industry. They can quickly take the position of a temporary UK resident director.

4. Movement of Workers

Employees may be transferred between small umbrella firms on a regular basis.

5. Short term businesses

Because they do not meet filing requirements, these individual tiny umbrella businesses have a relatively brief lifespan (typically less than 18 months) before being allowed to be dissolved by Companies House. The supply chain will subsequently be filled by new small umbrella firms.

What HMRC is doing about mini umbrella fraud?

HMRC’s Fraud Investigation Service is using both its civil and criminal powers to challenge those involved in mini umbrella company fraud and those facilitating it.

HMRC has deregistered tens of thousands of mini umbrella companies who they believed were involved in one or both of the following:

• exploiting the VAT Flat Rate scheme
• exploiting Employment Allowance

Where investigations established that a business in the supply chain knew, or should have known, that there was fraud, HMRC has taken steps to deny other businesses in the same labour supply chain the right to recover VAT input tax. Input tax is the VAT added to the cost when a person or business buys goods or services that have a VAT liability.

In 2017, HMRC introduced the Trader of Limited Cost Legislation after seeing a surge in the number of mini umbrella companies. This helped to remove a number of businesses setting up mini umbrella companies. This reduced the number of mini umbrella companies.

HMRC has been working with and continues to collaborate with trade bodies and other government departments to raise awareness of the mini umbrella company fraud model.

Checks you can carry out to protect your supply chain

If your business is using or providing temporary labour it is your responsibility to:

• undertake necessary and proportionate due diligence checks by checking warning signs, for example
• be clear who pays your workers and how they are paid
• check the credibility of the supply chain

Completing these checks will help safeguard your business from financial, operational, and reputational risks.

Read more on the full ‘Mini Umbrella Company Fraud Guidance’.

If you are worried about legal compliance in your supply chain Datum can help with independent audits, please get in touch.

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