What is Mini Umbrella Fraud?
Mini umbrella fraud is a form of tax evasion and is where a business's workforce is divided into multiple small limited companies, or "mini umbrellas." These mini umbrellas exploit tax breaks and National Insurance (NI) thresholds intended for small businesses. By keeping each mini umbrella under the threshold for NI contributions, they reduce the amount of tax and NI that is paid to HMRC, and are committing several tax offences including, income tax, NI and VAT tax fraud. This leads to significant tax losses for the government and results in workers missing out on employment rights, such as holiday pay and pensions.
What is Tax Evasion?
Tax evasion is illegal and involves a business deliberately avoiding paying taxes owed to the government. Business tax evasion examples include underreporting income, inflating deductions, creating false invoices and hiding assets or income in foreign accounts to avoid taxes.
In the UK, tax evasion law such as the Criminal Finances Act 2017 classifies tax evasion as a serious criminal tax offence with severe financial and legal consequences for individuals and businesses involved.
Read our short blog on the Criminal Finances Act 2017.
Mini Umbrella Company risk to recruitment agencies
As an industry associated closely with temporary labour, you must be aware of the dangers that mini umbrella companies pose to your supply chain.
Involving a mini umbrella company in your supply chain could be considered criminal tax evasion under the General Anti-Abuse Rule and could contain several financial and legal impacts for both you and your clients.
Mini umbrella companies are facilitated by a ‘promoter business’ and will often work alongside other linked businesses that support the operation. This can make identifying these fraudulent activities difficult as they typically sit low down within the supply chain, between complex layers of operation.
8 Mini Umbrella Company warning signs
Spotting a Mini Umbrella Company can be tricky, as they become more unconventional in their ways of hiding from HMRC.
Some common warning signs of Mini Umbrella Companies include:
Lower fees
Mini Umbrella Companies may offer services at a noticeably lower fee in comparison to compliant umbrella companies on the market.
Lack of transparency
Mini Umbrella Companies may hold a lack of transparency in financial transactions. For example, when it comes to payment structures or fee breakdowns. Compliant umbrella companies provide clear and transparent financial information.
No offering of employee benefits
Often, non-compliant schemes fail to offer employment benefits such as holiday pay, sick pay, maternity pay and pension contributions.
An unusual company name
Multiple companies are often set up around the same time and hold an unusual name which is not suitable for their aimed business activities.
Unrelated business activity
The businesses activity provided by the workers does not match those described on Companies House. Mini Umbrella Companies may have limited or no trading history, an absence of business assets, and a lack of business operations.
Foreign national directors
Foreign nationals with no previous experience in the UK labour supply industry are often listed as a Mini Umbrella Company as a Director. These can replace a temporary UK resident director after a short period of time.
The business structure of Mini Umbrella Companies may also appear unusual or overly complex, involving multiple layers or entities to hide their non-compliant operations.
Noticeably high movement of workers
You may notice that employees of Mini Umbrella Companies may be moved frequently between different companies. Companies that are small and handle an unusually high volume of contractors, could also indicate a scheme designed to take advantage of tax benefits.
Short-lived businesses
You will notice that Mini Umbrella Companies have a relatively short lifespan, often less than 18 months before being dissolved by Companies House due to them not meeting filing obligations.
For further guidance you can visit the GOV.UK website.
Consequences of Tax Evasion and Mini Umbrella Fraud
1. Financial damage
Regulatory bodies, such as Her Majesty's Revenue and Customs (HMRC), actively investigate non-compliance. Should your business be caught using a Mini Umbrella Company you could be liable to pay penalties from HMRC, alongside paying any unpaid taxes or National Insurance Contributions (NICs) associated with contractors engaged through a Mini Umbrella Company. This includes both your own tax liabilities and those of the contractors and could have a significant impact on the financial stability of your agency.
2. Reputational damage
Associating your business with such non-compliant tax schemes could leave you at risk of huge reputational damage and may affect your current relationships and ability to win any future contracts.
3. Operational disruptions
HMRC investigations or legal actions resulting from involvement with a Mini Umbrella Company can heavily impact the operations and contracts held by your agency. Impacts may include increased administrative burden, legal defence costs and contractual disputes.
4. Lower contractor satisfaction and retention rates
Contractors engaged through a Mini Umbrella Company may become dissatisfied or unhappy with your service due to lack of employment benefits, financial risk and non-compliance. This could result in a loss of contractor loyalty and trust and severely impact your contractor retention rate.
5. Difficulty in securing insurance
Involvement with non-compliant umbrella companies can make it challenging for your agency to secure or maintain professional indemnity insurance. Insurance providers may view such engagements as high-risk activities.
6. Loss of competitive advantage
Involvement with non-compliant tax schemes can have a huge impact on your agency's competitive advantage. Clients are increasingly prioritising compliance therefore, agencies demonstrating a commitment to legal and ethical practices have a competitive edge.
The legal implications of engaging in Mini Umbrella Fraud are severe. The UK government has made it clear that it will pursue and prosecute those involved in these schemes.
Individuals found guilty may face disqualification from acting as Directors and could face imprisonment and financial liability, to name a few.
Named HMRC Mini Umbrella Companies
Recruitment agencies and payroll service providers listed by HMRC as involved in tax avoidance schemes are stark examples of businesses facing serious consequences for tax offences. These companies have been heavily fined, and in some instances, individuals associated with them have been imprisoned. These cases underscore the severe penalties for engaging in illegal activities, serving as a critical warning to other businesses and individuals about the risks of tax evasion and non-compliance with tax laws.
How to protect your business against Mini Umbrella Fraud
To protect your business from tax evasion, it’s essential to conduct rigorous supply chain due diligence when partnering with payroll providers. You must ensure that partners comply with tax regulations and are not involved in fraudulent activities.
How? Follow HMRC’s simple Supply Chain Due Diligence principles of Check, Act and Review when conducting checks on your supply chain.
FAQs
Mini umbrella fraud involves the misuse of small intermediary companies to exploit tax loopholes and avoid National Insurance contributions. In this scheme, these companies falsely claim to operate as independent entities while actually being controlled by a larger organisation. This allows them to underreport income and evade taxes.
Mini umbrella companies operate as intermediaries, employing workers and contracting them to end clients. They exploit tax advantages by positioning themselves as small businesses and often hide within supply chains.
Engaging with a mini umbrella company can pose significant legal and financial risks for businesses, such as being implicated in tax evasion schemes or facing penalties for non-compliance with employment laws. Additionally, workers may experience uncertainties regarding their employment rights, benefits, and tax obligations, potentially leading to financial and reputational harm.
Mini umbrella companies themselves are not inherently illegal. However, they can be associated with illegal activities, such as tax evasion or fraudulent employment practices.
There isn't a specific ruling applicable to all mini umbrella companies. However, there have been legal actions and investigations related to the use of mini umbrella companies in the UK, particularly concerning tax evasion and employment law compliance. Authorities have been scrutinising these entities to ensure they operate within the bounds of the law.
To report a business for tax evasion, contact HMRC online or via the phone on 0800 788 887.