Are You Using a Non-Compliant Umbrella? Here’s How to Tell

Are You Using a Non-Compliant Umbrella?

Here’s How to Tell

Umbrella Company Compliance

Umbrella companies are a popular solution for contractors seeking an efficient way to manage their pay and taxes. However, not all umbrella companies operate within a compliant framework. Umbrella companies have increasingly come under scrutiny from HMRC over recent years.

In this blog, we will explore how to identify and avoid non-compliant umbrella companies, and the risks involved.

What is an Umbrella Company?

There is no strict legal definition of what constitutes an umbrella company. However, in practice, it is an employment business that operates within the contractual supply chain, positioned between the recruitment agency (or end client) and the temporary worker.

The core role of the umbrella company is to employ and pay the temporary workers for the services they provide to an end client. This includes:

• – handling payroll
• – deducting tax and National Insurance Contributions (NICs) through PAYE and
• – ensuring statutory employment rights such as holiday pay and pension contributions are fulfilled.

For recruiters and end clients, engaging an umbrella offers a practical way to outsource the complexities of employing contingent labour. It significantly reduces the administrative burden and helps mitigate risks related to employment law, tax compliance, and worker rights.

By acting as the employer, the umbrella company provides a buffer, simplifies workforce management and ensures contractors are paid efficiently and compliantly.

What is a Mini Umbrella Company?

In principle, a mini umbrella company operates in a way that appears similar to a standard umbrella company. However, unlike legitimate umbrellas that employ large numbers of workers under a single entity, mini umbrellas are characterised by having only a small handful of employees on their payroll, hence the term “mini.”

The primary purpose of a mini umbrella scheme is to fraudulently avoid paying taxes. These structures are set up to exploit government incentives designed to support small businesses, such as the Employment Allowance and the VAT Flat Rate Scheme. Individually, the financial gains from one mini umbrella may be modest. However, when replicated thousands of times across a network of shell companies, the fraud can amount to millions of pounds in lost tax revenue.

Once the key financial benefits have been extracted, the workers are simply shifted to a new mini umbrella, and the old company is often dissolved. In many cases, the criminals behind these schemes retain the tax and National Insurance deductions taken from workers’ pay rather than passing them on to HMRC.

Risks of Using a Mini Umbrella Company

Mini umbrella companies are not compliant structures and working through one can have serious legal and financial consequences for all parties involved. Engaging with a non-compliant umbrella, even unknowingly, puts you at serious risk.

Legal Consequences

The Criminal Finances Act 2017 (CFA) introduced two corporate criminal offences for failing to prevent the facilitation of tax evasion. It makes it a criminal offence if a business (or individual within a supply chain) facilitates tax evasion, even when unintentional. This means authorities can still investigate you and hold you liable under the CFA, even if you didn’t actively participate in any wrongdoing.

Due diligence therefore becomes essential when sourcing and engaging with an umbrella company. The CFA is clear that ignorance is not a valid defence if you are involved in a tax avoidance scheme. Furthermore, the CFA requires that all parties in the supply chain must take personal responsibility for ensuring compliance.

Financial Risks

The income tax and NICs of workers engaged by mini umbrellas may never reach HMRC. As a result, this leaves individuals exposed to investigations to recover unpaid taxes. Additionally, any businesses involved in the labour supply chain could be denied the right to recover VAT input tax.

How to Spot a Non-Compliant Umbrella

There are usually specific signs that workers and recruiters can look for in identifying a non-compliant umbrella. These might not always be obvious initially, but being able to recognise them is crucial to avoiding involvement in tax avoidance schemes, protecting your income, and staying compliant. The most common signs that show an umbrella may not be legitimate include:

• – Offers of unrealistic take-home pay
• – Lack of transparency on payslips
• – Changing employer names on documentation
• – Company Directors listed as based overseas
• – No clear breakdown of deductions
• – No accreditations such as FCSA or Professional Passport

Whether you are a contractor choosing a payroll provider or a recruitment agency engaging supply chain partners, carrying out basic due diligence can help prevent costly mistakes.

Upcoming Umbrella Company Reforms

As part of the 2024 Autumn Budget, the UK government announced significant reforms to the umbrella company sector, with new measures set to come into effect from April 2026. These reforms aim to tackle widespread non-compliance and exploitative practices that have become prevalent within the industry. The proposed changes will not only address tax avoidance but will also seek to improve standards around employment rights, worker status, and pay transparency.

Although the full legislation is still pending, all parties in the contractor supply chain must take responsibility for ensuring proper compliance oversight and conducting due diligence.

Staying Compliant

When working through an umbrella, workers should always check their payslips carefully. This is because a compliant umbrella will always provide a transparent breakdown of gross pay, PAYE tax, NICs, and any other deductions. If your payslip lacks detail or appears overly complex without explanation, this could indicate a non-compliant structure.

Again, workers should be particularly cautious when it comes to promises of a high take-home pay. Any umbrella company claiming you will keep 80–90% of your income after tax is almost certainly non-compliant. These schemes often involve disguised remuneration or tax avoidance practices that could leave you personally liable to HMRC.

With increasing scrutiny from HMRC and the risks posed by non-compliant umbrellas, all parties within the contractor supply chain must stay informed and remain proactive. If you suspect a mini umbrella company has engaged you, act quickly. End the engagement immediately and report your concerns directly to HMRC.

The information contained in this blog is provided for informational purposes only and should not be construed as legal advice on any matter. Circumstances will affect risk and legal advice should be tailored to your individual circumstances.