Contractors' Questions: What is a Mini Umbrella Company?

Contractor’s Question: I spotted a mention of ‘mini’ umbrella companies on ContractorUK yesterday, but without much explanation! So, what is a mini-umbrella company?

Expert’s Answer: Good question - What is a Mini-Umbrella Company? The term ‘umbrella’ is not defined in legislation and therefore is often used as a generic term that describes a wide range of different offerings, many of which we would not identify as an umbrella company. 

The umbrella you actually want

All umbrella companies are subject to the same tax rules and therefore should all provide remarkably similar returns to the workers, the only difference being the margin charge. And even this should only make a few pence difference to the take-home pay!

An umbrella company is a limited company that employs their workers through a formal employment contract and applies PAYE tax on all their income, as any normal employer would.

It is as important, if not more so, to understand and recognise what is not an umbrella company as these service offerings come with high risks through the whole supply chain.

A Mini Umbrella Company 

One common variation we see in the market today is what you ask about -- the Mini Umbrella Company (MUC).

On the surface, a Mini Umbrella Company could look like a ‘normal’ umbrella, with the recruitment company paying all monies in to a single bank account for all their workers. Evidence provided on contracts and payslips may also look like a ‘normal’ umbrella. Often these arrangements are run with very low fees applying.

The key difference is that, behind the scenes, there are an array of small companies typically employing only a few workers. They use this structure to claim the employment relief on employer National Insurance and, in some cases, utilise the Flat Rate VAT Scheme.

Tell-tale signs of a Mini Umbrella Company

Here are some common features to look out for to help identify a Mini Umbrella Company:

• Odd company name

A whole plethora of companies are set up around the same time having a similar or unusual name and will often be registered at an address which does not seem appropriate for the type of business activity it purports to be conducting.

• Business activity description is off

The nature of the business described in the Companies House entry is at odds and incompatible with the services provided.

• Directors are foreign nationals

When a Mini Umbrella Company is formed, often foreign nationals are appointed as directors or can replace a temporary UK resident director after a short time.  More likely, the directors have no experience in the UK labour supply market!

• High movement of workers

If workers move frequently between different ‘employers’ who meet the common criteria of a Mini Umbrella Company, this should fire alarm bells!

• Short-lived businesses

Individual Mini Umbrella Companies have a short lifespan and are dissolved by Companies House because they fail to meet their filing obligations. But beware, new Mini Umbrella Companies will replace them!

In addition, contractor recruitment agencies should be able to identify they are dealing with a MUC because they may need to issue a Key Information Document to their workers on a very regular basis.

So it's all in the detail...

For contractors, here’s the long and short of it. It’s important to look carefully at the credentials of a provider claiming to be an umbrella firm and understand what is really being offered. It is this detail that will determine if it is indeed a genuine PAYE umbrella company, a Mini Umbrella Company or similar -- a ‘have I got a good idea for you’ scheme which is best avoided.

The expert was Crawford Temple, CEO and founder of Professional Passport, the largest independent assessor of payment intermediary compliance.