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Avoiding fraud in your supply chain: The mini umbrella scheme explained

PayrollBlog • Jun 5, 2024 1:28:50 PM • Written by: Georgia Reynolds

In the world of employment and taxes, mini umbrella companies have been under the spotlight, with recent news revealing their fraudulent nature. These schemes operate by exploiting loopholes in tax and employment regulations, often involving complex webs of subcontractors and misleading financial arrangements. By presenting themselves as legitimate umbrella companies, mini umbrella companies deceive both workers and regulatory authorities, allowing the mini umbrella to evade taxes, exploit workers' rights, and avoid legal responsibilities. This dishonest behaviour doesn't just harm how the employment system works but also puts agencies at financial risk if they're involved in these schemes.

What is an Umbrella Company?

A compliant umbrella company is a PAYE payroll solution used by agencies and contractors whereby the umbrella company is the employer of record for the contractor. The recruitment agency or end client pays the umbrella company, who is then responsible for the payroll, employment and tax liabilities for the contractor. This arrangement simplifies the process for contractors, ensuring compliance with tax and employment regulations.

" Spotting mini umbrella companies buried deep in the supply chain can be tricky, but it’s crucial for maintaining compliance and avoiding legal pitfalls."

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Compared to a Mini Umbrella Company

A mini umbrella company is different. A mini umbrella company is a setup where multiple small companies, each with only a few workers, operate under one umbrella.

They've been in the spotlight recently because of their fraudulent nature. This fraud mainly exploits two government incentives for small businesses:

  • Flat Rate VAT Scheme: The Flat Rate VAT Scheme simplifies tax for small businesses by allowing them to typically pay a lower fixed percentage of VAT to the government, whilst charging the standard 20% on their sale invoices. As a result, allowing the opportunity to profit. 

  • Employment Allowance: The Employment Allowance allows eligible small businesses to reduce their Employer National Insurance contributions by up to £5,000. The business retains the Employer National Insurance from the income received from the agency but receives the allowance of £5,000 and as a result, can profit from this. 

However, it can also lead to the non-payment of other taxes, such as PAYE, National Insurance, and VAT. This reduces essential funding for the public services we all depend on. These companies mislead workers and authorities, posing significant risks for agencies involved with them.

Who’s at risk when using a Mini Umbrella Company?

Using a mini umbrella company can put several parties at risk:

Agencies: Recruitment agencies that engage with mini umbrella company can face serious consequences, including reputational damage, financial penalties, and legal liabilities if found complicit in tax evasion or fraud.

Contractors: Individual contractors employed under a mini umbrella company might unknowingly be part of a fraudulent scheme. This can lead to personal financial and legal troubles, such as unexpected tax bills or penalties.

End Clients: Companies hiring contractors through agencies using mini umbrella company may also face reputational damage and potential legal repercussions if found to be indirectly supporting tax evasion.

How to prevent a Mini Umbrella Company in your supply chain:

Spotting mini umbrella companies buried deep in the supply chain can be tricky, but it’s crucial for maintaining compliance and avoiding legal pitfalls. Here’s how to stay alert and identify a potential mini umbrella company:

  • Investigate new suppliers: Before entering into agreements, conduct background checks on new suppliers.
  • Review contracts carefully: Look for any unusual terms or structures that could indicate a mini umbrella scheme.
  • Implement regular audits: Periodically audit your supply chain to catch any suspicious activity.
  • Educate employees: Make sure your team understands the risks associated with mini umbrella companies and know what to look out for.

Signs to look for:

Start by doing regular checks to stay on top of things. Here are some signs to watch for, though one sign alone might not mean much. Most mini umbrella companies usually show several or all of these signs:

  • Odd company names: Keep an eye out for multiple companies with similar or strange names that were set up around the same time. Their listed address might not match what you'd expect for their business.
  • Unrelated business: The business activities listed on Companies House entries will often not relate to the services provided by the workers.
  • Foreign directors: Foreign nationals who have no previous experience in the UK labour supply industry, are often listed as directors. They can replace a temporary UK resident director after a short period of time.
  • Worker movement: Employees might get moved around a lot between different mini umbrella companies.
  • Short lifespan: These mini umbrella companies often don't last long, maybe less than 18 months, before they're shut down for not keeping up with the paperwork. Then new ones pop up to take their place.

In addition, contractors and recruitment agencies should be able to identify they are dealing with a mini umbrella scheme because they may need to issue a Key Information Document to their workers on a very regular basis because the mini umbrella company operator moves the worker from company to company. 

HMRC’s updated guidance on mini umbrella company fraud can be found here.


Now that we know mini umbrella companies are fraudulent, hopefully, this blog helps agencies identify and avoid them. These schemes exploit tax loopholes and mislead authorities, putting agencies at risk.

As agencies face these challenges, maintaining compliance and ethical standards is crucial. With over 30 years of experience providing software and support services to recruitment businesses globally, Giant doesn't engage in mini umbrella schemes but can help navigate these complexities, ensuring agencies stay compliant and reduce the risks associated with fraudulent schemes.

As a founding member of the FCSA, partnering with Giant you can avoid any tax risk as we become the employer of record. We ensure compliance with all legislation including employment status reviews, appropriate tax deductions, and statutory reporting requirements from on-boarding to off-boarding.

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Georgia Reynolds

Marketing Coordinator – Content