Mini Umbrella Company (“MUC”) Fraud – Deals

The use of recruitment agencies has come under scrutiny, following a recent investigation detailed in the Guardian regarding ‘Mini Umbrella Companies’, which typically employ and pay agency workers.

Most recruitment agencies operate legitimately, but not all. HMRC has warned that MUCs can be used to evade tax and undermine workers’ rights – estimates suggest they cost billions in taxes and unpaid wages each year. Given the dangers that this poses, the topic of how to staff contracts is one which many clients who we are speaking to are rightly concerned about.

What is MUC fraud?

According to the Government, there is no standard MUC fraud model. Typically multiple limited companies are created, each of which only employ a small number of temporary workers. This setup primarily facilitates the abuse of two government incentive schemes aimed at small businesses – the VAT Flat Rate Scheme and the Employment Allowance.

Why is this an issue?

Building and maintaining robust and resilient supply chains, which can be complex, is just one challenge currently facing companies.

The Government announced this month that it would regulate all umbrella companies, but it is not yet clear how they will do this. Regulation has far-reaching implications for large companies with contracted labour in their supply chain, who may not be aware of the full extent of their supply chain. MUCs are particularly relevant to the Business Services Sector, given their regular use of large numbers of temporary workers.

Potential risks are broad and include:

• Reputational damage
• Significant financial penalties under the Corporate Criminal Offences (CCO) legislation for the failure to prevent the facilitation of tax evasion
• Criminal offences relating to National Minimum Wage and National Living Wage
• Unpaid tax (PAYE, VAT) and NI liabilities
• Challenges to any tax avoidances arrangements
• Labour supply disruption

What do you need to consider?

It is important to be aware of the key indicators of fraud and misconduct. Key questions that are helpful to ask in relation to MUCs include:

1. How regularly do you map and review your supply chain?
2. How well do you know your labour suppliers (especially the contracting entities)?
3. Do the entities’ directors have any relevant industry experience? Are they UK resident? Do they regularly incorporate and wind down entities?
4. Is the company’s registered address used by numerous other companies?
5. Are workers moved between different employers? Is this frequency unusually high and unexplained?

It can be challenging to spot MUCs, but companies should know who they are doing business with. Unlike labour requirements, companies cannot outsource the responsibility of ensuring all workers are paid correctly and legally – something I have struggled with during previous casual wage employment.

Companies can and should act now to mitigate these risks to protect against unwittingly being a party to MUC or other supply chain fraud. In the current economic climate, it is important to ensure that workers are compensated fairly, and that businesses do not shirk their responsibilities to society.