HMRC warn of potential dangers to businesses of Mini Umbrella Company fraud

04 November 2020

MUC fraud also significantly reduces tax payments to HMRC including PAYE, National Insurance and VAT, but not only that, a fraudulent supply chain lead to reputational and financial damage to a business and workers may not receive all they’re entitled to.

End users or providers of temporary labour have the responsibility to be clear about who ultimately pays the workers and how they are paid. Ensuring this, is the only way to protect a business from becoming ensnared in MUC or other supply chain frauds.

Most MUC arrangements are believed to be fraudulent, therefore, it would be prudent to ensure that the warning signs are noticed to protect businesses.

What is Mini Umbrella Company Fraud?

The MUC model is an employment intermediary model which presents an organised crime risk to the UK Exchequer. The fraud is principally based around the abuse of two Government incentives which are aimed at small businesses – the VAT Flat Rate Scheme and the Employment Allowance. However, this type of fraud can also result in the non-payment of other taxes such as PAYE, National Insurance and VAT, reducing vital funding for the public services that are relied heavy on. MUC fraud is not restricted to specific trade sectors and can be found in supply chains wherever temporary labour is used. 

In its plainest form, the MUC fraud model involves splitting up a workforce into hundreds or thousands of small, limited companies which are set up solely to enable the fraud.  The workforce is mostly a temporary workforce who previously in the past, would have been paid by an employment agency or an umbrella company. The structuring of the MUCs is enabled by a promoter business, which is sometimes also known as an outsourcing business, that may have other linked businesses to aid the operation.  The creation of the MUCs and the intricate layers of businesses within the supply chain, help to enable the fraud.

For employees, who are often unaware to these arrangements, the use of this model can result in the loss of some employment rights. Workers in MUCs are usually unaware of who their employer actually is, and they can be moved frequently between MUCs to help maximise profits from the fraud.

How you can spot Mini Umbrella Company fraud and protect your business?

There is not a benchmark MUC fraud model and arrangements are continually evolving as organised criminals are attempting to hide their fraudulent activities from HMRC, however, there are some common characteristics which businesses might come across during regular due diligence checks. Information from sources such as the Companies House register might aid to spot warning signs when completing quarterly Employment Intermediary Reports or the Key Information Document for Workers.

Signs to look out for include:

  • An unusual company name – Quite often, multiple companies are set up around the same time which tend to have a similar or unusual name. These companies will also often be registered at an address which does not seem appropriate for the types of business activities.
  • Unrelated business activity description – Compare the nature of the business activities described in Companies House to the services provided by the workers – are they compatible?
  • Directors being foreign nationals – Frequently 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 previous experience in the UK labour supply industry.
  • An unusually high movement of workers – Take note of how often workers are moved between different employers who meet the above criteria for being MUCs. Is this on a frequent basis?  
  • Very short-lived businesses - The individual MUCs have a relatively short lifespan (often less than 18 months) before being allowed to be disbanded by Companies House because of their failure to meet their filing obligations. New MUCs will then take their place in the supply chain. This would be noticed as you may find that you need to issue a new Key Information Document to workers on a regular basis.

As the MUCs sit low down in the supply chain it may be tricky to spot them. HMRCs advice to businesses is to remain watchful, especially where the employer of the worker is not the Umbrella Company that they may have a contract with.

It is important for businesses to consider the integrity of the supply, payment arrangements and other surrounding circumstances to help safeguard themselves from financial, operational, and reputational risks. Guidance on undertaking robust due diligence can be found here.

MUC fraud creates an unequal playing field for those employment agencies and businesses who do follow the rules. HMRC’s Fraud Investigation Service is using both its civil and criminal powers to confront those who are involved and who are facilitating this type of fraud. HMRC has recently made a number of arrests in relation to MUC fraud and has also taken steps to deny the right to recover input tax in cases where it has proven that a business in the supply chain knew, or should have known, that there was fraud. 

HMRC is working with trade bodies and other Government Departments to increase awareness of the MUC fraud model and its risks more extensively.  HMRC is also currently undertaking a programme of activity to establish the levels of due diligence that are being carried out by employment agencies and end users who use temporary labour. As part of this programme HMRC plans to issue advice on the levels of due diligence expected by a business to help them to avoid becoming a victim of the fraud.

If you have concerns about a supplier or engager of labour, or associated activities, please contact the HMRC hotline on 0800 788 887 (open 8am to 8pm every day). For more information, please see how to report fraud to HMRC.

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