A majority of umbrella companies are compliant, but it only takes one or two non-compliant providers to come to light to give the marketplace a bad name. Well, it’s happened again. And it’s really annoyed us. We’re not going to announce the names of the irresponsible providers that are responsible, but we want to explain the nonsense that is “mini umbrella companies”, and why we’re so frustrated.
What is a mini umbrella company (MUC)?
Mini umbrella companies (MUC) were introduced into the marketplace in 2020 and have already come to the attention of HMRC.
In a stakeholder update recently published by HMRC, they describe mini umbrella companies as “an employment intermediary model which presents an organised crime threat to the UK Exchequer The fraud is primarily based around the abuse of two Government incentives aimed at small businesses – the VAT Flat Rate Scheme and the Employment Allowance. But this type of fraud can also result in the non-payment of other taxes such as PAYE, National Insurance and VAT.”
In the mini umbrella company arrangement, multiple small limited companies are created and only a small number of temporary workers are assigned (employed) to each one. This allows the overall organisation to benefit from the fraud by either not paying, or reducing PAYE, National Insurance and VAT. We’re not talking about three or four small limited companies – not at all. HMRC state that “hundreds or thousands of small limited companies set up solely to enable the fraud.”
One positive about this ridiculous arrangement (MUC) is that it clearly sounds dodgy from the offset. Let’s be honest – does setting up hundreds or thousands of small limited companies to offer a payroll service to temporary workers sound legitimate? Absolutely not. It’s embarrassing.
How to spot a mini umbrella company (MUC)
In the HMRC stakeholder announcement, they list 5 things to look out for that might help you identify a mini umbrella company:
Strange name – Many companies are likely to have been created at the same time, with unusual addresses that may be unsuitable for their operations.
Inaccurate descriptions – Obviously mini umbrella companies won’t describe their business activity as “helping people avoid paying tax”. However, have a look on Companies House if you have any concerns and see what they’re official business description is.
Foreign nationals are captaining the ship – Commonly, the Directors of mini umbrella companies are located abroad.
High worker turnover – Workers are frequently move between different employers.
Not around for long – Mini umbrella companies are unlikely to have been around for long. In fact, they have probably been around for under 18 months and then they’ll allow themselves to be dissolved by Companies House because they haven’t met their professional obligations (filing).
Greedy providers looking to make a quick bit of cash
Why are these draft arrangements bought to market? It’s obvious! By dangling a carrot in front of the eyes of vulnerable contractors and freelancers, payroll providers can easy trick them into believing their new arrangement is compliant and the best option out there. In reality, the payroll provider knows exactly what they’re doing – they’re enticing temporary workers to use their unofficial and unapproved system to boost their take home pay, but they’ll be making a considerable amount of cash for themselves in the process.
Engaging with mini umbrella companies is damaging to the entire supply chain
If a contractor or freelancer uses a mini umbrella company and is later held accountable, they’re going to be subjected to a penalty from HMRC. And, using a mini umbrella company could result workers missing out on comprehensive employee rights, even though these may have been mis-sold to them at the beginning.
However, it’s not just the temporary worker who will suffer. Recruitment agencies and end-clients have their reputations on the line. In an environment where compliance has never been so critical, even accidentally referring workers to a non-compliant payroll arrangement (such as a mini umbrella company) could have devastating consequences for an organisation’s reputation.
And, let’s not forget the good, honest and hardworking umbrella companies out there! The introduction of mini umbrella companies is just another factor that is likely to put temporary workers off the idea of receiving PAYE through an umbrella company. And, we can’t blame them. However, we would like to remind contractors that a huge majority of umbrella companies are compliant with UK tax law and regulations, and we recommend you use one that has obtained a prestigious and well recognised accreditation, such as FCSA membership.
We’re urging you – only use a compliant umbrella company for your payroll
Whether you use an umbrella company that you came across on our website (such as a top 10 umbrella company), or a company that is recommended to you by a friend – we’re not fussed – as long as they’re a compliant umbrella company with your best interests at heart! Never be tempted to use a tax avoidance scheme, or an arrangement that clearly sets off alarm bells.
Remember, umbrellas are there to ensure you pay the correct amount of tax and National Insurance Contributions, and they’re not generating as much revenue as you may think (just their margin). They exist to provide a very transparent and necessary service. Any company looking to exploit gaps in the market, and find ways to help you pay less tax, should clearly be avoided. Traditional PAYE umbrella companies have been around for years and years, and HMRC are more than happy for them to continue operating. However, any company looking to help you avoid tax is almost certainly going to be shut down soon, and those who have used them could face hefty penalties as a consequence.