New HMRC guidelines further evidence the government’s drive to encourage recruitment businesses to examine their supply chain and complete comprehensive due diligence before appointing a payroll provider.
It’s not uncommon for recruitment businesses to unknowingly put their business at risk by utilising a Mini Umbrella Company (MUC) in the supply chain. For this reason alone, it’s essential to undertake thorough due diligence to confirm an outsourced payroll provider can demonstrate it is fully compliant and ethical.
As a business focused on changing the shape of recruitment agency payroll with a best practice and above all HMRC compliant solution, HIVE360 is heightened to the tell-tale ‘warning signs’ of a non-compliant MUC. Sharing these insights is central to our commitment to champion a compliant, dependable, redefined payroll and employment administration process.
Warning signs
HRMC urges business to conduct regular due diligence checks to identify the risks of MUC practice in their supply chain.
Look-out for these key warning signs:
- Who pays the worker?
Typically, a MUC model of payroll payments is made via randomly named companies – that frequently change – with no transparency of pay deductions provided, and which often require the recruitment agency to submit multiple Key Information Documents for the same worker. There are few or no employers’ NI paid on worker’s pay – something that is now deemed as tax fraud by HMRC. Also, neither the recruitment agency nor the end client can evidence the taxes paid because there are multiple suppliers.
- Unusual company names
Workers paid and contracted through multiple limited companies with random and/or unusual names are a clear sign of a MUC, because the MUC model needs payroll companies to have limited payroll payments that allow the use of the employers’ NI allowance and very little else.
- Trading address, location, and business activities
Many MUC operate out of serviced offices, bulk mailbox offices, or even offshore locations. The individual business type registered with Companies House frequently doesn’t match the actual Trading Group name that the workers belong to, and any visits made by company representatives have to be ‘arranged’.
- Foreign Directors
The Directors/Shareholders of a MUC are often non-UK nationals, non-resident in the UK, and non-tax resident too, and this is another red flag. For a day-to-day operational point of view, this can also mean workers have no way of interacting with them, particularly over the phone.
- Flat rate VAT
Many MUC utilise flat rate VAT accounting, in order to gain additional income without the need for official, proper accounting records and systems.
There are various flat rate VAT schemes that are based on business type, and effectively increase the MUC’s access to ‘created’ or orchestrated VAT savings. This is the reason so many MUC have an incorrect business classification at Companies House, because a flat rate VAT gives them a large tax saving. Again, HMRC classify the use of incorrect flat rate VAT claims as a type of VAT fraud.
Note: the turnover registration for flat rate VAT is limited to £150,000 per annum, which under labour-based supplies equates to around six workers per company – and this is another reason workers frequently change company.
- How does flat rate VAT work?
First, the business must have less than £150,000 annual turnover. Subject to this, a company registers with HMRC for flat rate VAT, and identifies the rates band that applies.
HMRC says that labour-only supply businesses fall into a new category called ‘Limited costs business’, which has a flat rate VAT of 16.5%. It’s often assumed this means the company pockets 3.5% of the VAT charged to the client – but this is UNTRUE. Under flat rate VAT, the need to account for input VAT is approved, as the agreed % is set to replace VAT recovery for input tax.
So, the output tax charged to clients remains at 20%; the input tax is not calculated; only by default, the tax due is based on 16.5% multiplied by the invoice value, which includes VAT.
For sure, this is complicated, and it is really difficult to identify flat rate tax without directly asking the supplier if they apply for it. The only option is to request a copy of the VAT return or VAT portal from the supplier whilst carrying out due diligence, and before appointing them. This will provide the information to first identify the annual turnover, and then ask what flat rate tax percentage the company is working to if the turnover is shown to be below the £150,000 per annum threshold.
- Abuse of employers NI allowance
Genuine independent companies have access to a £5,000 employers’ NI discount on the annual Employers Allowance National Insurance (ERS NI) bill, but this is subject to them not being part of a group operated by connected parties, or having an annual NI bill of less than £100,000.
The NI allowance should also not be claimed when:
- More than half of workers are working for the public sector, eg for healthcare or education sector providers, who need to be especially vigilant and attune to this issue as this could be viewed as ‘significant liability’ if workers are paid under an MUC solution;
- The worker falls under the IR35 legislation.
MUC are structured to achieve multiple employment allowance opportunities because they operate using multiple Limited companies.
Business protection
The cost of poor due diligence is very high. The recruitment industry must grasp the nettle on the MUC issue, in order to eradicate the malpractice and abuse of tax legislation that threatens the reputation and survival of many businesses.
HIVE360
David McCormack is CEO of HIVE360, which  provides expert, compliant and reliable PAYE payroll support and comprehensive employment administration to recruiters and recruitment agencies, their workforce and candidates. He has over 20 years’ experience as a director within the recruitment sector and over 15 years running payroll businesses.
HIVE360 provides expert, compliant and reliable PAYE payroll support and comprehensive employment administration that reduces overheads and improves operational efficiencies for businesses, recruiters and recruitment agencies, their workforce and candidates. It provides its Engage Employee Benefits app as standard to businesses that outsource payroll and employment administration to the company. Engage includes My Training, My Health, My Money, My Discounts, and My Work features and has an average of 100,000-plus user sessions each month, with levels of user engagement topping 94% in July. The company is a GLAA (Gangmasters and Labour Abuse Authority) license holder.
More information: https://www.hive360.com, Mini umbrella company fraud – GOV.UK (www.gov.uk), and read HIVE360’s blog about MUC here https://www.hive360.com/is-your-payroll-compliant
