A recent experience in an HMRC enquiry provided an introduction to the dark world of payroll fraud. This is not a situation where an employer falsifies PAYE returns to suppress employment income or hide benefits. Instead, the fraud we are looking at in this article has much more to do with organised crime and a cynical financial fraud.
How does it work?
The story begins with a business being approached by an employment outsourcing service. The service will be provided by a limited company registered with Companies House and a representative will probably be armed with brochures and testimonials. The service offered is a complete outsourcing of the employees working in the business. The outsourcing company issues new employment contracts and becomes the employer for both tax and employment law. The business then pays the outsourced employer a monthly fee equivalent to the gross wages bill inclusive of the income tax and NIC that was previously being paid to HMRC under PAYE and a modest charge for the service being provided.
This was a fantastic proposition for our client. No more headaches with PAYE and real time reporting. No more problems with recruiting staff that could operate the payroll properly and the outsourced employment service would also deal with any HR problems; happy days. After a year or so the client was notified that the outsourced employment service provider was changing. ABC Ltd would no longer provide the service which would be taken over by XYZ Ltd. A year later the same thing happened. The client continued paying and the staff received the same net pay as before. Apart from a few late payments, everything worked well.
The other side of the arrangement is quite different. The outsourced service provider computes the PAYE that would have been due on gross wages, pays out the net amount to staff and provides them with a payslip showing the PAYE, NIC and other deductions as normal. Meanwhile, a completely different set of suppressed figures is reported to HMRC. The difference is pocketed by the fraudulent service provider. It “trades” for a limited period of time, no doubt getting behind with the PAYE it has reported, and then goes out of business. The money it has received is spirited away and the problem is not understood until the company is in liquidation and the liquidator and HMRC are left trying to piece together what happened. The process is repeated; XYZ Ltd follows ABC Ltd into liquidation but is replaced by 321 Ltd and so on.
The sting in the tail for our client happened during the pandemic. The liquidation of the last of the outsourced employment companies meant that none of the staff in the business were employed by anyone and the business was not able to claim furlough payments for staff who were at home waiting to return to work. Ultimately, the fraud hurt the client and the employees as well as diverting tax and NIC from the Exchequer.
What is HMRC doing?
HMRC has published new guidance on how businesses can detect and protect themselves from potential fraudsters. Check for signs of payroll company fraud – GOV.UK (www.gov.uk) It offers sensible advice on spotting the signs of fraud both for businesses and their staff and provides the facility for reporting suspicious activity to HMRC.
On the face of it, it isn’t easy to spot a potential fraudster. After all, employment agencies provide a very similar service. An agency employs the staff it supplies and is responsible for operating PAYE, etc. But this is where we need to wary of the too good to be true offers in the same way as traders who were dragged into VAT carousel fraud. Agency workers are typically more expensive and typically only used to meet short term staffing needs. In contrast, an offer to take over all of the staff from a business with only a relatively small administration charge cost is probably too good to be true. In some cases, there may even be a rebate paid on the administration charge. We can also tell a lot from how long the service company has been operating, whether it is up to date with its company filing, does it have a physical office address or an online presence matching the size of its business, etc.
The sting in the tail is the threat of what could happen if a business suspects a payroll fraud but does nothing.
The guidance on payroll fraud contains a warning for those who do not report a suspected fraud:
If we find that a business knew, or should have known, about fraud in the supply chain we may:
- deny the businesses in the supply chain the right to recover VAT input tax
- charge a penalty for transactions connected to fraud
You may be held responsible for any unpaid Income Tax or National Insurance Contributions, including interest.
Any business that enters into an arrangement with one of these outsourced employment providers is running the risk that HMRC takes counter steps to recover its losses that either cost more than the benefits of the arrangements or even result in insolvency.
For more information and advice for clients who may have encountered this issue, call our team…