Recruitment agencies beware: the criminals behind mini umbrella companies may come knocking

HMRC has been aware of mini umbrella companies (MUC) for years, but sadly, they’ve made the headlines again recently. Interestingly, rather than targeting temporary workers, the criminals behind mini umbrella companies are targeting recruitment agencies. Keep reading, and we’ll summarise what’s going on.

What is mini umbrella company fraud?

Astonishingly, an investigation undertaken by BBC 4’s File on 4 team found that 48,000 mini umbrella companies had been launched in the UK within the last 5 years.

On the government website, they confirm “there is no standard mini umbrella company fraud model and arrangements are constantly evolving as organised criminals try to hide their fraudulent activities from HMRC.” However, the recently reported case on the BBC is a classic example of mini umbrella company fraud, and we’ll summarise the arrangement below.

It’s been uncovered that some staff working at Covid test centres by G4S have been paid by mini umbrella companies with hardly any trading history. The BBC’s article focused on one contractor in particular who isn’t named. In this case, the worker noticed they were being paid by an organisation (third party) they had never heard of. And, having conducted some research on Companies House, it became apparent the company paying the worker their salary had only just set up the company within the last couple of months, with a Filipino director. It’s an odd arrangement, so why was this happening?

Mini umbrella companies exist to help recruitment agencies avoid paying tax and National Insurance Contributions by taking advantage of HMRC benefits such as the Employment Allowance. The BBC’s article summarised the mini umbrella company arrangement perfectly.

“Employers pay 13.8% in National Insurance contributions on most of their employees’ earnings, if the employee earns more than £170 a week.

But File on 4 discovered the way in which John is employed is used by recruitment agencies to cut their National Insurance bill.

It works by exploiting the government’s Employment Allowance – an annual discount of £4,000 per company on National Insurance contributions. The allowance was meant to encourage companies to take on more workers.

However, recruitment agencies exploit the allowance by employing temporary workers through a series of mini umbrella companies – or “MUCs”.

Each individual MUC has only a small number of workers and qualifies for the tax relief. These kind of arrangements can cost the taxpayer hundreds of millions in lost tax revenue a year.”

The founder of Good Law Project, Jo Maugham, shared his thoughts on mini umbrella companies:

“It’s not as though this is some tiny piece of tax avoidance – you know, where your local minicab firm isn’t declaring all of the fares that it receives. This is industrial scale tax abuse.

I mean it’s really absolutely extraordinary, hundreds of millions of pounds if not billions of pounds is likely to have been lost due to HMRC’s apparent disinclination to tackle this abuse.”

Identifying mini umbrella companies

Mini umbrella companies are being created in highly unethical and troubling ways. An example on the BBC explained how vulnerable people in the Philippines were being encouraged by criminals to sign paperwork that legally made them the director of a UK-based business – with the promise of a career and high earnings. Amazingly, this can be done with a minimal amount of paperwork and resources.

The government has unveiled some of the tale-tale signs that an arrangement is mini umbrella company fraud. We’ve summarised their list and have added a few of our own.

• Representatives of the payroll provider are telling you that you can reduce payments that you would normally expect to pay to operate compliantly
• They offer unusual incentives
• Paying less tax is mentioned as a selling point for candidates
• Short trading history
• Lack of information about the business online
• Foreign national directors
• Their listing on Companies House is not related to their actual business activities

The importance of referring to compliant umbrella companies

A recent report by the Low Incomes Tax Reform Group (LITRG) found that over 500 umbrella companies are operating in the UK. It’s no surprise that since off-payroll changes rolled out into the public sector, more umbrellas have launched to try and grab their share of a busy market. While most umbrella companies are fully compliant with HMRC rules and regulations, some are operating unethically, often attempting to grab market share and make some money quickly.

If anyone representing your recruitment agency was to refer a candidate to a non-compliant arrangement or tax avoidance scheme, HMRC could hold the entire business responsible. This could result in severe penalties and tax bills (if HMRC cannot reclaim the due tax and National Insurance Contributions down the supply chain). HMRC has made it evident they’re increasing their efforts to catch facilitators of tax avoidance schemes. For example, how much do you know about the Criminal Finances Act 2017? The legislation came into effect in September 2017. It made it a lot easier for HMRC to go after and prosecute companies that facilitate tax avoidance and tax evasion – even if a single rogue consultant is responsible and the overall intentions of the recruitment agency under investigation are good.

The recruitment sector is hugely competitive, so It’s worth adding that if an agency is found guilty of facilitating tax avoidance to boost profits, it almost certainly means their reputation will be damaged beyond repair. After all, recruiters should always put the interests of their candidates first, along with overall compliance within their sector.

The easy way to manage your Preferred Supplier List (PSL)

Thanks to the Freelancer and Contractor Services Association (FCSA), there has never been an easier way for recruitment agencies to manage and monitor their Preferred Supplier List (PSL). Every company that has obtained FCSA membership has proven that its internal processes are fully compliant with UK tax law, and they put their candidates needs first.

Achieving FCSA accreditation is hard work. Contractor accountants and umbrella companies are audited head to toe by external stakeholders, and no stone is left unturned. If a company complies with the FCSA’s strict Codes of Compliance, the FCSA will reward them with membership. However, if a company does not – they’ll swiftly be denied membership, and they’ll be required to reapply when they’ve amended their procedures. It’s also worth noting that everything that’s discovered during an FCSA audit is made available to HMRC – should they wish to have a look themselves. There’s no question that the FCSA value compliance and transparency.

Here are just a few reasons why recruitment agencies should only consider adding FCSA accredited contractor accountants, umbrella companies and additional payroll providers to their PSL:

• Every company has been thoroughly audited to ensure they’re compliant, put their clients first, and are ethically run.
• The companies are committed to ongoing compliance and must pass annual compliance reviews.
• The FCSA’s strict Codes of Compliance are available for all to see – showcasing the transparency of FCSA accreditation. These Codes of Compliance are well worth a read, because they show the FCSA’s values, as well as the standards that FCSA members must adhere to in order to achieve and maintain their accreditation.
• In an ever-growing marketplace, more and more unethically motivated payroll providers are entering the sector. Non-compliance could seriously harm recruitment agencies, staff, and candidates referred to unscrupulous tax avoidance schemes. There is no benefit to referring to non-compliant providers.
• Ongoing PSL management is easy – if a company has FCSA accreditation, they should be considered for your agency’s PSL. If they don’t – they shouldn’t be! And, you don’t have to waste hours of time and high costs reviewing each provider because the FCSA will do this for you – annually.
• The FCSA is always looking to protect temporary workers and ensure the supply chain is compliant and ethical. They have your candidates and your business’s best interests at heart and will fight for all parties in the supply chain.

Churchill Knight is proudly accredited by the FCSA

The FCSA accredits both Churchill Knight & Associates Ltd (contractor accountants) and Churchill Knight Umbrella. We believe there is no better way to showcase our commitment to compliance within our sector. Both companies have recently undergone their annual FCSA compliance review, and we’re delighted to announce we’ve had our FCSA accreditation renewed for another year.

By referring your candidates to Churchill Knight, you can be sure they’re in the safest hands. We’ve been setting the standards in the industry for compliance and customer service for over 20 years. Since 1998, we have helped over 25,000 contractors, freelancers and agency workers with their payroll.

To find out more about our services and why partnering with us will safeguard your entire recruitment agency and your temporary candidates, please give our dedicated Agency Department a call on 0808 2525533 or email agency@churchill-knight.co.uk. Our team specialises in building lasting relationships with some of the UK’s biggest recruitment agencies. Assuming you’re as committed to compliance as we are – both your consultants and candidates will be in the very safest hands with us.