HMRC Finally Cracking Down on Mini Umbrellas
by on October 13, 2023
In the last few weeks we’ve received several phone calls from concerned recruitment agencies who’ve had visits from HMRC in which they’ve been given 6 months to stop using mini umbrella companies. Here we look at what mini umbrellas are, what’s caused this flurry of activity from HMRC, and what agencies and contractors should do if they’re involved with one.
What is a mini umbrella company?
Mini umbrella companies are yet another way of defrauding HMRC from collecting the correct level of tax. The mini umbrella host/operator opens 100s of randomly named Ltd companies that a UK based umbrella company can then choose to work with via an online portal. These companies employ only a small number of contractors at any one time. Then they register them at odd addresses, such as domestic residences, but fail to list the VAT status correctly for the flat rate scheme, this is to take advantage of the higher percentages available. In addition, during a workers assignment period, they are often moved from company to company to take advantage of the employers NI allowance, without either their consent or their knowledge. The Limited companies are frequently dissolved by Companies House because they don’t meet the required filing obligations. Then they start again, with a new raft of names, and the process continues.
What danger do they pose?
Mini umbrella companies exist solely to defraud. They take advantage of two government initiatives which are aimed at small businesses:
The VAT Flat Rate Scheme – applicable to businesses with a turnover of less than £150,000, this scheme allows businesses to pay a fixed rate of VAT, to retain the difference between what they charge their customers and what they pay to HMRC, and to reclaim VAT on purchases of certain capital assets over £2,000
The Employment Allowance – this allows certain employers to reduce their NI liability by up to £5,000.
While both these practices are legitimate, the operators of mini umbrella companies, when the time is right, may close the company, possibly failing to pay the correct levels of tax or NI on behalf of its contractors.
How does this affect recruitment agents and contractors?
As we’re seeing now, HMRC will investigate any attempted fraud and will attempt to recoup the money that hasn’t been paid into its coffers, in line with its guidance which you can see here.
Recruitment agencies that, whether knowingly or unwittingly, partner with a mini umbrella company may be on the receiving end of one of these letters, and then face a possible investigation into the entirety of their business affairs, due to them potentially facilitating fraudulent activity, leading to commercial disruption and possible fines.
Contractors who choose mini umbrellas, possibly in the hope of retaining more of their take-home pay, face the prospects of having to repay everything that the mini failed to pay to HMRC on their behalf.
What can recruiters do?
The letters from HMRC indicate that recruitment agencies have 6 months in which to sort out their affairs and to ensure that none of the umbrella companies they partner with are minis. We’ve previously discussed the importance of Accreditation, Tax Liabilities and identifying potential Tax Avoidance Schemes, and these letters must be a wake-up call to all recruiters to ensure that the umbrellas they partner with operate legally and are fully compliant within all HMRC’s rules and regulations.
One way recruiters can ensure that the umbrellas they partner with is to review their PSLs (Preferred Supplier Lists). This will enable them to be absolutely certain that the companies they’re dealing with are compliant. Given that HMRC are focusing hard on the activities of mini umbrellas and their connection to recruitment agencies, it’s important that they act NOW to avoid investigation and to ensure that they’re putting the interests of their contractors first.
The most important way recruiters can achieve this is to only partner with a fully compliant umbrella company, like Payme. Not only do we have over a decade of experience providing clear, compliant payroll solutions for recruiters, we also handle over 4,000 contractors every week, giving them value-for-money contractor payment services, and offering them full employment rights. We’re a fully-accredited member of the Freelancer and Contractor Services Association (FCSA) which demonstrates our commitment to upholding the law, treating our contractors with respect, and valuing our recruitment partners.
The message from HMRC is clear. They’re cracking down on fraudulent mini umbrella companies and recruitment agents had better either decouple themselves from them, or face the consequences. We welcome HMRC’s actions which will provide a fairer and more transparent umbrella company landscape for all involved in the supply chain.
You can find out more about the compliant and cost-effective services we offer in our latest guide ‘Navigating the Storm: Essential Strategies for Choosing the Right Umbrella Company’ which will equip you with strategies and suggestions for remaining compliant when choosing an umbrella company partner. And if you want to find out more about working with a compliant, reputable payroll solutions company, call us on 0333 200 0845, email us at email@example.com, or fill in the contact form here.