Mini umbrella company’s (MUC) are the latest type of tax avoidance schemes to target the temporary labour market. MUC’s, like other avoidance schemes, reduce the amount of tax you pay to HMRC and can pose a severe financial risk to anyone engaging with them.
How does a mini umbrella company (MUC) operate?
A mini umbrella company is an employment intermediary model which divides a temporary workforce into small limited companies. Employees of these companies will regularly be moved between employers – usually when one company gets shut down. The sole purpose of a MUC is to abuse two government incentives aimed at small businesses – the Employment Allowance and the VAT flat rate scheme. MUC fraud can also result in non-payment of other taxes such as National Insurance Contributions (NICs), PAYE and VAT, and this has led to individuals owing HMRC substantial amounts of money in underpaid taxes.
How to spot a mini umbrella company
Thankfully, just like other forms of tax avoidance schemes, there are some telltale signs that a PAYE solution is a MUC:
Unique or unusual company name – Multiple companies will be set up around the same time and will often have variations of the same unusual name.
The registered address doesn’t match the type of business – The registered address could be wholly unrelated or unsuitable for the kind of business.
The business activity description doesn’t match the type of business – There is often no correlation between the business activities listed on Companies House and the services provided to the workers.
The directors are not from the UK – The directors are often foreign nationals who have no previous experience in the industry.
High turnover of workers – There is often an unusually high turnover of workers as they are regularly moved from employer to employer.
MUC’s are usually only around for no more than 18 months – MUC’s do not last long and are often dissolved by Companies House for failing to meet their filing obligations.
What happens if you use a mini umbrella company?
While the promise of higher take home pay rates may seem enticing, it is not worth the risk. The only way these schemes can enable higher take home pay rates is by not paying the correct amount of tax to HMRC. Even if HMRC is not currently aware of the scheme, they can retrospectively investigate tax avoidance as part of the Loan Charge. Engaging with a MUC could result in you owing thousands of pounds of underpaid tax to HMRC, and you will be required to pay back every penny, plus interest and a possible penalty. Using these types of companies can also result in a loss of employment rights – which, unsurprisingly, promoters fail to tell you.
Does a mini umbrella company only affect contractors?
No – MUC’s can affect the whole supply chain and can lead to reputational and financial damage to recruitment agencies and end clients, as well as contractors and freelancers. Engaging with a non-compliant provider can have devastating long-term effects for agencies and end clients, because in a saturated marketplace, a damaged reputation can have unresolvable consequences.
How is HMRC combatting mini umbrella company fraud?
The government is working hard to stamp out criminal practices like MUC’s and has recently made numerous arrests in relation to MUC fraud. HMRC is working closely with trade bodies and Government Departments to increase awareness of the risks involved with engaging with a MUC model. And, they’re working to ensure businesses are conducting the proper due diligence to protect themselves and their workers.
Are you looking for a compliant Umbrella Company?
Umbrella Company UK has a range of compliant, FCSA accredited payroll services for contractors and freelancers in the UK (traditional umbrella PAYE, and umbrella for drivers). Our expert team will support you throughout your contracting journey and will be on hand to offer advice and guidance throughout your time with us.