Mini umbrellas are a major problem for HMRC, but it’s agencies and workers who carry the can

Anybody who tuned in to last night’s ‘File on 4’ should realise that this BBC probe into mini umbrella companies will likely be a precursor to HMRC proposing or pushing for potentially new powers so it can publish the names of tax avoidance scheme providers and dodgy tax agents, writes former tax inspector Carolyn Walsh, managing director of CWC Solutions.

We heard on ‘Britain’s Ghost Companies’ that it was two independent sleuths who gifted the BBC its headline that the last five years have seen some 48,000 fraudulent mini-umbrellas pop up (all with Filipino directors).

A BBC broadside, and hopefully a HMRC harbinger

The Radio 4 investigation will hopefully represent a broadside to all the criminally-minded individuals who attack the UK tax system. I believe it’s also a harbinger of what’s to come from HMRC which, pre-broadcast, was already under pressure to act on umbrella companies due to urgent appeals by MPs on the Loan Charge APPG.

But how does the quite separate yet related ‘mini umbrella company’ fraud actually start? Given it must be the biggest scam and abuse of the exchequer to hit the temporary labour and contractor market, we all ought to know.

In a MUC recruit’s own words

A post on an employment-related internet forum from someone innocently wanting to see if their job offer is worth it or worrying reveals all. Please note, the post has been amended here to protect the original poster.

“I’ve been offered some easy money. I’ll be awarded £150 but I must sign 5 new companies’ paperwork as I will be named as a company director – that is, until the company is further formed even though I’m told it’ll never be properly formed.

"Then, someone else apparently takes over from me as a director, but that person is overseas. Anyway, for my part, I’m acting as a formation agent, correct? Anyone know if this is legit? It’s only a few signatures after all and apparently I’m going to be in the ‘nominee director’ business.”

From what I established before last night’s BBC probe, I know that from a business park in Walsall, people looking for this same ‘easy money’ are fronting new companies that are being set up in the UK. Literally in their thousands. These people remain listed as directors until another pawn (based in Manila, the Philippines, as was the case in the BBC programme) is installed as the director, just a few weeks later after sham director number one is removed.

How to spot MUCs in the wild

What does this all look like? Well, the following are based on real live entries on Companies House showing just a few of the many people who have taken up the ‘£150 per company form filling activities’ offer. Also known as ‘being in the nominee director business!’

Remember, the following people have willingly or unwittingly helped criminals to extract millions from the UK, by abusing Her Majesty’s Revenue & Customs’ PAYE and VAT regulations. Their real names are not used and some identifiers have been altered.

Nonetheless, if this whole problem of Mini Umbrella Companies is new to you, this is how you spot something is awry and probably, that you unfortunately are staring at a MUC.

  1. Kim is from Croydon and she is listed on Companies House as a ‘consultant.’ Currently she has some 18 appointments in different companies, mainly operating in Events. The company names have clearly been created by a name-generator as ‘her’ companies all begin with the letter ‘F.’
  2. Val from Brighton is listed as an ‘administrator’ and she has 12 appointments -- all somehow at companies specialising in Logistics. Val must be a very busy person! All Val’s companies start with the letter ‘A.’
  3. Pete, a consultant from Cardiff is even busier. He has 18 appointments. He seems to like the letter ‘P’ as he has numerous companies set up in his name or beginning with ‘P’, mainly in Facilities Management.

So how does Mini Umbrella Company fraud work? And where do Kim, Val and Pete fit in to this fraud?

MUC fraud explainer

Well, the way the scam works is the fraudsters (the parties who recruit Kim, Val and Pete)  use the companies to pose as umbrella companies, in order to reap in the pay of temporary workers. Sometimes the workers’ income is split between basic pay and expenses which reduces the amount that is subject to tax and NI, and therefore provides a higher than normal take-home pay.

These fake ‘umbrella companies’ appear to be attractive compared to legitimate umbrella companies, because they allow workers to access “immediate tax relief” on work-related expenses, even though such an offering has been unlawful since 2016.

In fact, this method serves to artificially extend the company pay bill to keep it under the limit to allow the fake umbrella company to access the Employment Allowance, which is effectively £4,000 of NI contributions that should be going to HM Treasury.

New HMRC guidance, same old liabilities for agencies and workers

HMRC on Monday issued a warning about using one of these MUCs -- debt traps -- in new guidance. But according to HMRC, this pernicious fraud often goes further than just the abuse of the Employment Allowance and VAT fraud, as it sometimes results in no PAYE being paid over whatsoever.

It’s not just a mare for HMRC. This presents a huge problem for both agencies and workers who use these companies.

This is because agencies are liable for PAYE deductions under the Agency legislation (Chapter 7 Part 2 ITEPA 2003), unless the income is already subject to deduction of PAYE, i.e. another employer is involved. But if that employer turns out to be fake (as MUCs are, because they are not bonafide umbrellas or employers), this removes the exemption and leaves the agency saddled with the PAYE debt.

Unfortunately, the worker isn’t off the hook either, because HMRC has the power to recover the unpaid tax and NI from the worker if it is suspected that the worker knew, or should have known, that the employer wasn’t deducting the right amount of tax or was operating a tax avoidance scheme.

To avoid being complicit, engage in the most sensible form of avoidance

The extra rub is agencies and workers would be treated as complicit in the scam by HMRC, when the worker is regularly switched from one company to another to allow the repetitive access to the Employment Allowance (where it’s clear that nothing is being done to prevent this).

So what should contractors or other workers do, to have no truck with MUCs? The best advice when checking out an umbrella company is to look on the Companies House register for tell-tale signs that it’s a Mini Umbrella Company, like it having a director overseas; a director who has no professional footprint or, as in the case of Kim, Val and Pete, has multiple appointments and/or the same starting-letter company names. If you can’t remember all that, then just remember this: ‘Mini Umbrella Company? Major Problem. AVOID.’

Profile picture for user Carolyn Walsh

Written by Carolyn Walsh

With over twenty years’ experience in the sector, Carolyn assists freelancers, contractors, agency and umbrella company workers, interpreting tax legislation and guidance with a no-nonsense approach.
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