Mini umbrella company (MUC) fraud awareness
HMRC has issued new guidance on how to spot fraudulent activities of so-called ‘mini-umbrella companies’ (MUC) which are created to avoid making tax payments including PAYE, National Insurance and VAT.
According to a recent BBC investigation, around 48,000 ‘mini umbrella’ companies have been created in the UK in the past five years in a bid to reduce recruitment agencies’ tax and national insurance liabilities. This investigation discovered that more than 40,000 people in the Philippines had been recruited to front British companies that would then employ staff as subcontractors for employers including G4S. The companies were able to claim the government’s Employment Allowance of £4,000 for each company as well as qualify for NI relief because they only employed a small number of workers.
The BBC found that the companies tended to incorporate in the UK with a British director, who would then resign after a short period of time with a Filipino director appointed in their place. These directors would be recruited through Facebook and word of mouth.
Mini Umbrella Company Fraud is primarily based around the abuse of two government incentives aimed at small businesses – the VAT Flat Rate Scheme and the Employment Allowance. It can also result on non-payment of other taxes such as PAYE, National Insurance and VAT.
HMRC has also updated its advice on applying supply chain due diligence principles to labour supply chains, highlighting the risks should HMRC find non-compliance or fraud in the chain. These risks include liability for unpaid taxes and national insurance contributions including employment allowance over claimed, criminal offences relating to national minimum wage, national living wage and tax evasion as well as reputational damage. In addition, there are potential risks associated with Modern Slavery.
Accountants are encouraged to become familiar with HMRC’s guidance and warning signs for spotting fraudulent MUC as part of their due diligence. The red flags include:
- Unusual company name - Often multiple companies are set up around the same time which have a similar or unusual name. These companies will often be registered at an address which does not seem suitable for the types of business activities.
- Unrelated business activity description - Do the nature of the business activities described in the Companies House entries seem compatible with the services provided by the workers?
- Directors being foreign nationals – Often foreign nationals are appointed as directors when an MUC is formed or they can replace a temporary UK resident director after a short period of time. Usually the directors will have no prior experience in the UK labour supply industry.
- Unusually high movement of workers - Are workers moved between different employers who meet the above criteria for being MUCs on a fairly frequent basis?
- Very short-lived businesses - The individual MUCs have a fairly short lifespan (often less than 18 months) before being allowed to be dissolved by Companies House as a result of their failure to meet their filing obligations. New MUCs will then take their place in the supply chain. You should notice this as you may find that you need to issue a new Key Information Document to workers on a fairly regular basis.