What is Mini-Umbrella Company fraud?

There is no official Mini Umbrella Company fraud definition, as perpetrators constantly evolve their methods to hide their fraudulent activities from HMRC. However, it can be broadly explained as using multiple limited companies, each with only a small number of temporary workers, set up to enable fraud. The fraud works by abusing the VAT flat rate scheme, which can only be used if a business’s turnover is no more than £150,000, and the national insurance contribution (NIC) employment allowance, which covers the first £5,000 of employer NIC liability, each tax year.

As with VAT fraud in the supply chain, Directors of recruitment agencies bear the responsibility for ensuring that they can show that they have taken reasonable steps to prevent people in their supply chain from facilitating tax evasion. If you are a business that uses temporary labour, you should be aware of ways to detect Mini-Umbrella Company fraud in your chain.

HMRC Red Flags

HMRC suggests the following red flags but adds, “these … signs … should not be taken in isolation”.

Unusual company names

Multiple companies are often set up around the same time and given a similar or unusual name. The registered address may not seem suitable for their types of business activities.

Unrelated business activity

The business activities listed on Companies House entries will often not relate to the services provided by the workers.

Foreign national directors

Foreign nationals without previous experience in the UK labour supply industry are often listed as directors. They can replace a temporary UK resident director after a short period of time.

Movement of workers

Employees may be moved frequently between different mini umbrella companies.

Short-lived businesses (also known as transient businesses)

These individual mini umbrella companies have a relatively short lifespan (often less than 18 months) before being allowed to be dissolved by Companies House as they do not meet filing obligations. New mini-umbrella companies will then take their place in the supply chain. Find more information here.

HMRC suggest that further red flags might include that you are having to issue new key information documents to workers regularly and that they should use information from sources such as the Companies House register to help spot the warning signs when completing your quarterly employment intermediary reports.

HMRC’s Fraud Investigation Service has so far deregistered tens of thousands of mini umbrella companies identified as involved in the fraud. They have also taken steps to deny other businesses in the same labour supply chain the right to recover VAT input tax where they judge that the business knew or should have known about the fraud.

Please feel free to contact us if you need further information, help, or advice on how to spot the warning signs or wish to discuss any of these points raised.