Mini Umbrella Company (MUC) Fraud
Following this week’s BBC Radio 4 File on Four programme, HMRC has issued guidance on mini umbrella company (MUC) fraud.
The programme highlighted the use of MUCs to avoid Employers’ National Insurance Contributions (Ers NIC) by reason of multiple Employment Allowance (EA) claims. The EA was introduced to ease the burden of Ers NIC on smaller employers to encourage them to take on new staff. Currently EA stands at £4,000 per annum and, with Ers NIC charged at 13.8%, little or no Ers NIC falls to be paid if a small business employs a couple of individuals with a combined payroll of up to £45,000 per annum.
Of course, as with any tax allowance, the EA is hedged around with anti-avoidance provisions to try to stop exploitation of the allowance. Typically a one-man band company will not be able to claim and groups of companies will be restricted to one EA spread across the whole of the group.
The other main area being exploited by the use of MUCs is the VAT flat rate scheme (FRS). To save detailed record keeping the FRS allows small businesses to account for their net VAT liability based only on their turnover. The rate at which VAT needs to be accounted for depends on the type of activity undertaken by the small business. If it’s the type of business that has low levels of input VAT, then the business would charge VAT at 20% to its customers and then account for, say, VAT at 18% to HMRC, keeping 2% as the notional input VAT reclaimed.
How are these easements on small businesses being exploited? It is relatively easy to set up a limited company in the UK. The organisers of the MUCs set up companies using UK resident nominees, often recruited via social media, who are willing to pass on correspondence and sign documents for a few hundred pounds. Once the MUC is established with the UK authorities, the nominees for these companies would be replaced with overseas residents, who perform the nominee role for much lower fees than their UK counterparts.
At the same time, where there is a requirement for outsourced labour to fulfil a government contract, think G4S, Serco, or Capita, then these businesses need to get their hands on quite high numbers of relatively unskilled workers for engagements of perhaps only 6 months or a year. Accordingly they approach agencies, who often engage workers via umbrella companies. The unscrupulous MUC organisers would therefore employ a couple of these workers via a MUC, taking a normal umbrella company fee, avoiding Ers NIC by use of the EA for each MUC, and keeping the small VAT benefit afforded by the FRS.
As can be seen, the ultimate funder of these arrangements is often the UK government, with the various layers of intermediaries taking fees and without the government receiving the full amount in employment and other taxes that it’s entitled to. To add to the losses, the MUCs often run for short periods of time adding to their fraudulent activities by evading corporation tax and some payroll taxes by shutting down before these are handed over to HMRC.
HMRC‘s guidance urges suppliers, whether they are outsourcing companies or agencies, to be vigilant about their supply chains. With this wake-up call, agencies can expect more enquiries from their clients about supply arrangements and should be particularly careful about the umbrella companies used for staff supply.
If you have any concerns about your supply chain or want to understand how MUC fraud may impact you, then please do get in touch.