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Mini Umbrella Companies and the Risks to Recruiters

Umbrella Company

BBC Radio 4’s current affairs documentary program File on 4 recently reported on industrial scale tax fraud involving more than 48,000 so called mini umbrella companies in the supply of temporary staff to Covid testing centres. In this article we’ll look at how this story affects UK recruiters and how you can protect your business.

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How does the mini umbrella company scam work?

The scam exploits the flat rate VAT scheme and Employment Allowance, which allows smaller companies to claim an annual discount of £4,000 on their Employer’s National Insurance Contributions (NICs). To qualify, a company must have paid employer’s NICs of less than £100,000 in the previous tax year, which excludes companies with large numbers of employees.

By splitting up a large workforce over many small “mini umbrella companies” (MUCs) the scammers can get away with claiming Employment Allowance when in reality they shouldn’t be eligible. The scam is thought to cost the UK taxpayer millions in lost revenue each year.

The companies are originally incorporated with a British director recruited via private groups on Facebook. The British director resigns after a short period, and a Filipino director is appointed in their place. It can be harder for HMRC to pursue companies with directors in other jurisdictions, and it’s likely that the Philippines was chosen because there is no double taxation treaty in place with the UK.   

How does this affect recruiters?

The BBC has named a major recruiter with 30 offices in the UK and their client who are one of the world’s largest private-sector employers, as being involved in the supply of workers who were being paid via MUCs.

The British public have no patience at all with the idea of tax avoidance and evasion, and tax fraud is the last thing any UK company wants to be associated with – even at arm’s length. Your hard-won reputation and relationships with your clients are very much on the line. And while defending your commercial decisions in the press isn’t anyone’s idea of a good time, the consequences don’t necessarily stop there.

The Criminal Finance Act 2017 makes you responsible for compliance in your supply chain. If a member of your staff recommends a non-compliant company to your contractors, your recruitment business could face criminal prosecution and unlimited fines. There could even be custodial sentences for those involved.

It doesn’t matter if you were unaware of the fraudulent activity – the only defence is to be able to prove you took “reasonable steps” to prevent the facilitation of tax evasion, which will include properly vetting your suppliers.

HMRC have stated that they’ve made a number of arrests in relation to MUC fraud, and also taken steps to recover input tax in cases where a business in the supply chain knew or should have known that there was fraud. You can read HMRC’s recently published guidance on MUC fraud here.

The scale of the problem

According to the BBC’s investigation, over 40,000 people from the Philippines were recruited to front more than 48,000 MUCs over the last 5 years.

As Jo Maugham, a tax QC and founder of the Good Law Project told the BBC.

“This is industrial scale tax abuse. I mean it’s absolutely extraordinary, hundreds of millions of pounds, if not billions of pounds, is likely to have been lost”.

Given the huge scale of this operation, it’s inevitable that a great many recruitment agencies will have been touched by it, and prudent recruiters all over the country are now asking themselves if this could include them.

How recruiters can protect themselves.

As a recruiter, the only effective way to protect your business is to know about the companies in your supply chain, so you can be confident that they don’t take part in this kind of activity.

Realistically, this means using a Preferred Supplier List (PSL) of compliant umbrella companies, and only working with the companies on your list. We strongly advise making FCSA accreditation a key requirement for inclusion on your PSL.

If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email


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