Umbrella companies employ temporary workers such as contractors on behalf of employment agencies or very large companies. The umbrella company will operate the payroll and makes money by taking a cut of the fees earned by the individual.
An umbrella company should provide each worker with an employment contract and payslips. It should also provide a breakdown of the worker’s assignment rate received and list its costs including employer’s national insurance contributions (NIC). The employer’s NIC should not be deducted from the worker’s contract rate.
Some umbrella companies try to boost their profits by bending the law to take advantage of tax breaks designed for small companies. One method is to form multiple ‘mini umbrella’ companies (MUCs) each of which employs only one or two people. Each MUC then claims the employment allowance which is worth up to £4,000 per year and may also use the VAT flat rate scheme to save some VAT.
If you are a contractor caught up in a mini umbrella scam you should speak to your ultimate customer immediately and warn them about potential fraud in their supply chain.
If your business uses temporary workers be sure to carry out due diligence checks on your supply chain and be clear about who pays those workers and how. Alarm bells should ring if your workers have been promised non-taxable pay, higher take-home pay or have been asked to sign a loan or annuity agreement.