Mini-umbrella company (MUC) fraud . . . HMRC are on the case
April 14, 2022
Many businesses use temporary labour from specialist labour supply companies, whether they are in agriculture, food processing, construction, healthcare or other sectors. Statistics from the Office for National Statistics published in Q3 2021 showed that the temporary labour market had grown by 5% in the previous twelve months.
The use of umbrella companies as the conduit for filling temporary vacancies is long-standing and due to the IR35 changes which came into effect in 2021 and restrict temporary workers to work off payroll through personal service companies, their use has recently increased.
Unfortunately, this rising demand has also attracted fraudsters, who are operating mini-umbrella companies (MUCs) to exploit certain tax allowances, facilitate the non-payment of payroll deductions such as PAYE and NI and abuse VAT rules.
What is Mini Umbrella Company (MUC) fraud?
Criminals create multiple limited companies, with a small number of temporary workers employed by each one and which are facilitated by a promoter business. This layer of businesses creates a complex supply chain, which makes it easy to hide fraudulent activities from HMRC.
In the simplest example, the MUC provides the temporary workers at cost, but makes a profit from the Employment Allowance given by HMRC and takes advantage of the Flat Rate VAT Scheme, which between them could amount to a gain of £150 per employee per month or more. In more serious cases, payroll deductions are not accounted for and the MUC liquidated after only a year or 18 months’ trading, increasing the loss to HMRC still further. VAT fraud is another feature.
Implications for end users of temporary labour
Failing to take reasonable action to make sure that your supply of labour is legitimate can lead to significant legal, financial and reputational risks to your business. It could even stop your business from operating altogether if enforcement action by HMRC shuts off your labour supply.
End users could become liable for unpaid PAYE and National Insurance contributions not accounted for by MUCs. They may be unable to deduct VAT payments made to them and could be criminally prosecuted with an unlimited fine if someone acting on your behalf facilitates tax evasion and they are held knowingly to have not acted to prevent this.
Modern slavery responsibilities
Proper checks are also important for protecting workers and preventing modern slavery. Certain organisations need to produce an annual modern slavery statement. The statement must set out what steps they have taken during the financial year to make sure that modern slavery is not happening in their supply chains or own organisation. There is a legal obligation to check that an individual is allowed to work in the UK before they are employed as well as making sure they are not breaching any visa restrictions, even where they are provided via an labour umbrella company.
How to assure your labour supply chain
End users should perform due diligence to be able to make a judgement on transactions and the integrity of the supply chain. They must protect their business by testing the credibility, legitimacy, legal and tax compliance of suppliers, supplies, customers, employees and labour supply.
Exploitation, fraud and avoidance are easier to hide below the surface of a supply chain when effective due diligence is not done the length and breadth of it. Checks done purely in relation to immediate suppliers and customers might not be sufficient. HMRC have issued detailed guidelines on the principles that should be applied in carrying out labour supply chain due diligence, which can be read here.
HMRC action to clamp down on Mini-Umbrella Company (MUC) fraud
There are three separate bodies within HMRC, the Home Office and the Department for Business dedicated to enforcing various aspects of labour market compliance, with a combined budget in 2020/21 of £35m and 568 staff.
MUC fraud is currently a major focus for HMRC, which has the largest of these units with 420 staff. Increasing use of technology solutions to identify abusers is leading to a rise in enforcement action. HMRC is particularly concerned to tackle VAT fraud by MUCs.
Taking expert professional advice
This is a highly technical area, where considerable expertise and experience is necessary to identify labour supply abuse risk, clarify the responsibilities of end users and design practical solutions. If you are concerned about these issues, Opus has the necessary knowledge to help. We has extensive experience of difficult situations like theses. You can contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.