Supply Chain Fraud

20 June 2019

HMRC is aware of increasing levels of fraud in labour supply chains and with companies offering payroll services.


HMRC recognises that these arrangements are mostly used legitimately but would like employers to take extra care when engaging with these services.


Payroll Company Fraud, at its most basic, occurs when a business transfers staff and payroll responsibility to a fraudulent Payroll Company who supply the staff back to the business. When they are fraudulent, these Payroll Companies will not make the necessary payments to HMRC for Income Tax, National Insurance Contributions (NICs) or VAT.


The companies conducting the fraud are not limited to specific sectors or business types – providing there is a workforce and a subsequent need for a payroll function, they can target any business. However, they are more likely to target companies whose financial position is weak, almost certainly to exploit this vulnerability with cheap payroll services, offering the struggling business an opportunity to cut in-house payroll costs.


The fraudsters can offer cheap services as, ultimately, they’re stealing the tax and NICs.



The co-employment model is something HMRC has seen more often recently.  This is generally defined as when control and supervision of an employee’s activity is shared amongst two or more business entities. One company will be the original employer and the other/others will take over the personnel related functions, claiming that the workforce is employed jointly by all companies.


There are a number of risks that can occur here – primarily with the new company set-up accruing debts to HMRC and then dissolving. Businesses entering into a co-employment model should undertake sufficient due diligence to ensure the business arrangements are tax compliant.


Mini Umbrella Companies

An umbrella company is a company that acts between the ultimate employer and the staff doing the work. The workforce is segmented into small companies with, usually, a very small number of employees in each company. This is done with the intention of exploiting specific allowances designed to help small businesses, with the aim of reducing the tax paid to HMRC.


With some of these schemes, promotors will offer “payroll services” to legitimate employment agencies, at a rate that is not commercially viable, sometimes with the offer of financial inducements to win the contract.


How can this affect you?

Employers need to be vigilant for these types of fraud. If it can be shown that your company knew, or should have known, that transactions in your supply chain are linked to fraud you may lose the right to recover VAT you paid on these transactions. Additionally, in some cases, you may also still be liable for any unpaid tax or National Insurance.

You may also face reputational harm if you take part in non-compliant supply chains, whether directly or by association, and your commercial relationships may be compromised, affecting your ability to maintain contracts.


What can you do to protect yourself?

The first thing HMRC recommends to anyone entering into an arrangement with a payroll company or umbrella company is to undertake sufficient and proportionate due diligence checks. Be as sure as you can be that the company that you’re entering into an arrangement with is legitimate.


HRC has some guidance available on the GOV.UK website on Due Diligence that you may find helpful here.


If you are outsourcing your Payroll services, you can inform HMRC via the GOV.UK website here. This will allow HMRC to carry out its own checks. However, HMRC may not be able to advise you of the outcome of those checks.


If you have information or concerns about a supplier/engager of labour or associated activities, contact the HMRC hotline by telephone or online.



This topic was covered in the June edition of HMRC’s Employer Bulletin.