How to spot mini umbrella company fraud

02 June 2021

There are a variety of different models and arrangements relating to MUC fraud, which are continually evolving and changing, but the activity that came under public scrutiny this month related specifically to the practice of abusing the employment allowance.

The employment allowance is offered to certain eligible organisations and allows them to offset a figure of £4,000 (2021-22) against their annual national insurance (NI) liability. It has been highlighted that certain recruitment agencies exploit the employment allowance by employing temporary workers through a variety of MUCs. Each MUC only hires very few workers and so each single company is entitled to the NI relief.

As a result, every business which places or uses temporary labour has been advised to be vigilant to fraudulent activity carried out by MUCs within their supply chain.

A fraudulent supply chain could ultimately result in financial and reputational damage to a company but will also mean that their workers do not receive the pay that they are entitled to. There are additional consequences for HMRC as fraudulent activity carried out by MUCs results in lower PAYE, NI and VAT payments.

Be vigilant

There are several warning signs to watch out for in relation to MUCs. It can sometimes be difficult to spot these warning signs as MUCs are often low down in the supply chain. This is why those who engage with MUCs are encouraged to carry out frequent due diligence checks to ensure that they can spot these red flags and act accordingly.

Unusual company names could indicate fraudulent activity as often in these situations, multiple companies are set up around the same time, and given strange names. Additionally, the registered address may seem inappropriate when the business’s activities are considered. Similarly, the business activities noted on Companies House entries could be entirely different to the services that are actually carried out by workers. Workers may find that they are shifted between different MUCs on a regular basis.

Foreign nationals with no previous experience in the UK labour supply industry may be listed as directors by fraudulent MUCs. A common practice within these scenarios sees the foreign national replacing a temporary UK resident director after they have only been in post for a short space of time.

Businesses are reminded that, where they are using or providing temporary labour, it is actually their responsibility to undertake sufficient due diligence checks, to have clarity regarding who pays their workers and how they are paid, and also to check the credibility of the supply chain they use.

Due diligence checks

There are three key areas of activity in relation to due diligence checks. They are to check, act and to review.

Check: The checking process involves being aware of the risk posed by a company’s suppliers – this can be done by performing risk assessments.

Act: Where risks are identified, it is essential for companies to act upon them to remove them and not simply to ignore them. To identify risks, companies must know their suppliers, their suppliers’ workforce and have an awareness of how long their supply chain is.

Review: Due diligence checks need to be repeated and require continuous monitoring and review. Businesses should, for example, ensure that their due diligence processes are relevant and up-to-date.

HMRC has published the ten things about due dilligence guidance, which provides key information about performing due diligence checks on supply chains for businesses to be aware of. It has been noted that the list is not exhaustive, and that appropriate due diligence checks will vary based on how a business operates.

Act now

The fundamental message here is not to bury your head in the sand, and to pay sufficient notice to how the supply chains your company use operate (if you engage with MUCs, in particular). If something appears too good to be true, then it probably is, so always trust your gut instinct and check where things just do not seem right.

This article was originally written for Accounting Web.