HMRC have launched a new ‘one-to-many’ letter campaign requiring recruitment agencies to exclude Mini Umbrella Companies (MUCs) from their labour supply chains.
Why this matters
This latest initiative demonstrates HMRC’s continuing focus on tax compliance in the labour supply chain. It is also a timely reminder of MUC fraud risks before joint and several liability for umbrella company payroll debts comes into effect from April 2026.
Regardless of whether they’ve yet to receive a letter, recruitment agencies should confirm that their systems and processes effectively identify MUCs and exclude them from their contingent labour supply chains. They should also satisfy themselves that, if required, they could demonstrate to HMRC and other stakeholders (such as their clients) that they take all reasonable steps to ensure compliance.
Other businesses that could potentially have MUCs in their labour supply chains, including recruitment agencies’ clients who are provided with umbrella company employees’ labour, should consider taking similar steps.
What’s behind this HMRC campaign?
Recruitment agencies might engage with ‘umbrella’ companies that employ individual workers to source contingent labour for their clients. These companies have employment law, payroll withholding and other tax obligations. Compliant umbrella companies provide labour market flexibility, but non-compliant umbrella companies can exploit their workforce and undercut compliant competitors, harming individual workers and distorting the market.
MUC fraud involves bad actors, potentially organised criminals, artificially structuring what is, in substance, a single umbrella employment business (with many employees) as a large number of ‘mini’ umbrella companies, each of which employs a small number of workers. By fragmenting their workforce in this way, those MUCs then fraudulently claim tax reliefs that are intended to support legitimate small businesses, such as the NIC Employment Allowance or the VAT Flat Rate Scheme. MUC fraud can also involve these companies being wound up whilst owing money to HMRC.
What specific actions do HMRC require?
HMRC’s letter asks recipients to:
- Review their labour outsourcing arrangements to identify any MUCs (noting that these are often low down in the labour supply chain);
- Remove any MUCs they identify from their labour supply chain; and
- Guard against any MUCs re-entering the labour supply chain in the future.
The letter notes that there could be financial, reputational and legal risks for businesses that do not take ‘reasonable steps’ to ensure their contingent labour supply is legitimate
It also states that where no action is taken, if HMRC find on a future compliance review that a business in the labour supply chain knew, or should have known (e.g. where adequate due diligence was not performed), that MUC fraud was present, it could lose its ability to deduct input VAT, and associated penalties might potentially be transferred to the company officer.
What should recruitment agencies – and their clients – do?
Given the potential consequences of MUC fraud being present, and the introduction of joint and several liability for umbrella company payroll debts from April 2026, recruitment agencies and other businesses that engage contingent labour should confirm, as a matter of urgency, whether their systems and processes effectively exclude MUCs from their labour supply chains, and whether that could be demonstrated to HMRC and other stakeholders.
HMRC’s letter directs the recipient to their published guidance on labour supply chain assurance. Recruitment agencies and their clients should also ensure they could demonstrate compliance with HMRC’s specific guidance on excluding non-compliant umbrella companies from the labour supply chain, and consider a broader review of how they manage other labour supply chain risks (e.g. off-payroll working).
The letters KPMG in the UK have seen request action but do not require a direct response to HMRC. However, giving some form of assurance to the relevant HMRC Customer Compliance Manager (CCM), or other HMRC contact, that the points in HMRC’s letter have been addressed should be considered.
How KPMG can help
We have extensive experience helping organisations to design, operate, and maintain appropriate systems and processes to help them secure their labour supply chains. Please contact Caroline Laffey, Clare Tomlinson, Jim Findlay or your usual KPMG in the UK contact, to talk through how we could help you to discharge your obligations.
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