How to avoid a ‘have I got a good idea for you’ scheme

Crawford Temple, CEO and founder of Professional Passport, outlines the importance of looking carefully at the credentials of a provider claiming to be an umbrella firm and understand what is really being offered

The term Umbrella is not defined in legislation and therefore is often used as a generic term that describes a wide range of different offerings, many of which we would not identify as an umbrella company.

All umbrella companies are subject to the same tax rules and therefore should all provide remarkably similar returns to the workers, the only difference being the margin charge. This should only make a few pence difference to the take-home pay. An umbrella company is a limited company that employs its workers through a formal employment contract and applies PAYE tax on all their income, as any normal employer would.

It is as important, if not more so, to understand and recognise what is not an umbrella company as these service offerings come with high risks through the whole supply chain.

Mini Umbrella Company (MUC)

One common variation we see in the market today is the Mini Umbrella Company (MUC) which was recently highlighted by the BBC’s File on 4 programme: https://www.bbc.co.uk/news/uk-57021128

The programme reported that more than 40,000 people from the Philippines have been recruited to front British companies as part of schemes costing the UK “hundreds of millions of pounds” in lost taxes and also discovered more than 48,000 of these companies have been created in the past five years.

On the surface, a MUC could look like a ‘normal’ umbrella with the recruitment company paying all monies into a single bank account for all their workers. Evidence provided on contracts and payslips may also look like a ‘normal’ umbrella. Often these arrangements are run with very low fees applying.

The difference is that behind the scenes there are an array of small companies typically employing only a few workers. They use this structure to claim the employment relief on employers National Insurance and, in some cases, utilise the Flat Rate VAT Scheme.

There are some common features to look out for to help identify a MUC:

• Odd company name – a whole plethora of companies are set up around the same time having a similar or unusual name and will often be registered at an address that does not seem appropriate for the type of business activity it purports to be conducting
• Business activity description – the nature of the business described in the Companies House entry is at odds and incompatible with the services provided
• Directors are foreign nationals – when a MUC is formed often foreign nationals are appointed as directors or can replace a temporary UK resident director after a short time. More likely, the directors have no experience in the UK labour supply market.
• High movement of workers – if workers move frequently between different ‘employers’ who meet the common criteria of a MUC this should fire alarm bells
• Short-lived businesses – individual MUCs have a short lifespan and are dissolved by Companies House because they fail to meet their filing obligations. New MUCs will replace them.

Whilst agencies should be able to spot a MUC it is also now more pressing than ever that HMRC takes visible enforcement action to stamp out these schemes. When Off-Payroll working was introduced to the public sector in 2017, HMRC was warned that limiting the recovery of tax from the fee payer would lead to many forms of abuse. And so it is playing out as predicted. It is important that the whole supply chain is alert to such schemes and that everyone plays their part to rid the industry of all malpractice.