MUCs may be used to defraud the government and, in some cases, their own workers. MUC fraud refers to the practice of separating one umbrella company into a number of separate MUCs, each employing a small number of workers. Depending on the nature of the fraud, the MUC may then claim incentives for small businesses, such as the employment allowance or the VAT flat rate scheme, and/or cease to trade without settling all liabilities due to HMRC.
We reported on the possible scale of MUC fraud in an earlier article. There are many umbrella companies that operate compliantly; however the structure is also used for tax avoidance purposes. For 2022/23, the government estimates that:
- umbrella companies were used to engage at least 700,000 temporary workers in the UK;
- of those workers, at least 275,000 were engaged by umbrella companies that failed to comply with their tax obligations; and
- approximately £500 million was lost to disguised remuneration tax avoidance schemes, almost all of which was facilitated by umbrella companies.
What are the risks to businesses?
In its letter, HMRC states that the business should “take reasonable steps” to ensure that its “labour supply chain is legitimate” or face “legal, financial, and reputational risks”. HMRC warns that it is “continually opening new investigations” and that, if it finds that a company should have known there was fraud, HMRC may deny deductions for VAT input tax and take action against the company’s officer.
The letter includes advice from the Employment Agency Standards Inspectorate. This reminds recruitment agencies in England, Scotland and Wales that they are obliged to provide agency workers with key information documents (KIDs), and to update KIDs for changes.
What action should businesses take?
The letter asks businesses to take the following steps:
- Review their labour outsourcing arrangements and identify any MUCs. HMRC’s guidance gives some “warning signs” to look out for, including:
- unusual company names;
- an unrelated business activity listed on Companies House;
- foreign national directors;
- the regular movement of employees between different MUCs; and
- businesses with a short life span.
- Remove any MUCs found in the supply chain.
- Be cautious about using temporary labour in the future. The letter recommends that businesses read HMRC’s guidance on supply chain due diligence and its Guidelines for Compliance 12 – Help with labour supply chain assurance.
Contact details for HMRC are provided should the recipient wish to discuss any of the issues raised in the letter.
Recent developments
In July 2025, the Upper Tribunal dismissed an appeal against HMRC’s decision to deregister several MUCs for VAT in the case of Elphysic Ltd and Others v HMRC. This followed a decision by the First-tier Tribunalin March 2024 to uphold HMRC’s decision to deny the MUC’s claims for the national insurance (NI) employment allowance. HMRC believes that the MUCs in the case were part of a scheme involving over 18,000 MUCs, with tax of over £260 million at stake.
The government has published draft legislation for Finance Bill 2025/26 that makes recruitment agencies (or end users) jointly and severally liable with the umbrella company for pay as you earn from 6 April 2026 where there is an umbrella company in the labour supply chain. Equivalent legislation will also be introduced to impose the same joint and several liability for class 1 NI purposes.
Further information
Tax policy update
HM Treasury will be attending ICAEW's Annual Conference 2025 with a session discussing tax policy and economic growth in the weeks ahead of the Budget.
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