HMRC payroll fraud alert
Payroll Company Fraud (PCF) is an Organised Crime threat to the UK Exchequer.
HMRC, in collaboration with other Government departments, law enforcement agencies and trade and professional bodies are committed to tackling the fraud, minimising the tax revenue lost and prosecuting the Organised Criminal Groups (OCGs) conducting the fraudulent activity.
Businesses and their advisers need to be alert to the mechanics of the fraud allowing them to undertake sufficient due diligence to prevent the business becoming a victim. The following information will help in this respect.
What is Payroll Company Fraud?
PCF in its simplest form occurs when a business transfers staff, along with payroll responsibilities, to a fraudulent entity (the payroll company) who supply the staff back to the business at a cost roughly equivalent to gross wages plus VAT. The payroll company pays the staff but fails to remit the Income Tax, National Insurance contributions and VAT to HMRC.
Models of the fraud can differ considerably from that described here - for example, there may not always be the transfer of a permanent workforce - however, when PCF occurs, there are two ever-present factors; a supply of labour and the non-remission of taxes by the entity supplying the workforce.
The fraudulent entity can be as simple as a stand-alone company or as complex as a group of companies with separate and distinct functions designed to mask the fraudulent activity.
Such fraudulent behaviour steals the vital revenue that funds UK public services. HMRC is therefore committed to tackling those criminal groups conducting Payroll Company Fraud.
Who is most likely to be affected?
The OCGs conducting the fraud are not limited by specific sectors or business types. Providing there is a workforce and a subsequent necessity for a payroll function, they can target any business. They are less likely to target large businesses as, on the whole, large businesses have robust due diligence in place and the payroll company’s business model will not, generally, stand up to scrutiny.
OCGs are more likely to target medium and small businesses whose financial position is weak. The OCG attempts to exploit this vulnerability by offering the struggling business an opportunity to cut in-house costs with cheap payroll services. However, the subsequent cost to the business and its employees can be more damaging. For example, the employees’ NI and Pension contributions often go, not only unpaid but unreported, which may only come to light to individuals later in life.
What the outcomes can be for the employer when the PAYE and NICs don't reach HMRC?
Businesses need to be vigilant when considering opportunities to outsource payroll responsibilities.
There may be legitimate business reasons to transfer a workforce to a payroll company. However, businesses also need to be aware that if they are offered this service, it could mean that they are being targeted by a fraudulent payroll provider.
If this is the case, then the fraudulent provider will often arrange to be the only one to deal directly with HMRC. This means they can keep the business in the dark over any failures. It also allows them the opportunity to charge VAT on the total value of the supply, not just on the payroll service aspect. The payroll company may also claim that it insulates the business from any liability in the event of their failure to remit payments to HMRC. However, this is not necessarily the case.
Failure to undertake an appropriate level of due diligence checks can be damaging to the business. If it can be shown that the business knew or should have known that transactions in the supply chain were linked to fraud, the business could lose the right to recover the VAT Input Tax on those transactions. HMRC may also challenge the claim that the payroll company is the ‘employer’ of the workforce and assert that they are instead merely an intermediary. That could mean that the liability to pay Income Tax and NI Contributions reverts to the business.
What happens to the payroll provider, when HMRC detects problems?
When HMRC detects problems, the fraudulent payroll company will often attempt to wind up or simply abandon their company. They may transfer staff to another entity and continue to supply them back to the original business. Neither the business nor staff are likely to be aware that this switch has been made. That’s because there is usually one person in the fraudulent payroll company that the business deals with. Despite the changes ‘behind the scenes’, that person remains the point of contact to give the illusion that all is fine.
In the event of restructuring, there may be some indicators such as a change in bank account details. However, quite often the bank account that the business makes payments to is operated by a seemingly unrelated third party and, in this scenario, would not change. It should be noted that, when the bank account is operated by an entity other than the payroll company, HMRC would expect this to have been questioned as part of the initial due diligence checks.
Is there any form of redress for the employer?
Despite having made payments to the payroll company, a business could still be deemed liable for those payments to HMRC if it is proven that they knew or should have known that there was fraud in the supply chain.
Apart from the right to appeal any appealable decision made by HMRC, the only other recourse the business has is to recover the sums from the payroll company. Unfortunately, the chances of that succeeding are minimal – therefore businesses should make every attempt to carry out robust due diligence in the first place.
HMRC will never penalise those who are genuine victims of fraud and wants to support businesses in carrying out necessary checks.
What form of due diligence should an employer take when considering engaging a new payroll provider?
While the type of service provided by the payroll provider and the level of risk the business is exposing itself to will vary depending on the business itself, the guidance below provides pointers for robust due diligence. This includes giving details on how a business can report payroll outsourcing to HMRC.
All businesses need to undertake sufficient and proportionate due diligence to protect themselves not only from fraudulent payroll companies but also to address other risks inherent in participating in a labour supply chain.
