Her Majesty’s Revenue and Customs’ (HMRC’s) fraud investigation service (FIS) provides an overview of what organised labour fraud (OLF) is

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What is OLF?

OLF is the collective name HMRC gives to three main frauds:

• labour fraud in construction

• mini-umbrella company fraud

• payroll company fraud.

OLF is ‘organised’ because it’s orchestrated and carried out by organised crime groups. OLF may grow to include other types of fraud where a labour supply is at the heart of the business operation.

Labour fraud got its title because it always involves a genuine supply of labour.

 

Labour fraud in construction

This is most easily defined as the fraudulent use of contrived labour supply chains within the construction industry that involves the abuse of the construction industry scheme (CIS), to move labour-related value added tax (VAT) (not subject to the domestic reverse charge) and income tax liabilities into shell companies that go missing or default, owing a debt to HMRC.

 

Mini-umbrella company fraud

This is an employment intermediary model which fragments a temporary workforce, who would typically be supplied by a single umbrella company, into multiple small, limited companies, each with a few employees. Each of the micro companies may fraudulently claim employment allowance and / or abuse the VAT flat rate scheme, both of which are government incentives aimed at helping small businesses.

 

Payroll company fraud

In its simplest form, this is when an active business transfers staff, along with payroll responsibilities, to a fraudulent entity purporting to be a payroll company, who then supplies the staff back to the business but fails to pay income tax, National Insurance and VAT to HMRC.

 

HMRC’s ask

When a business is receiving a supply of labour, HMRC recommends that businesses apply the supply chain due diligence principles of ‘check, act and review’.

• check – know the risks; legal, financial, tax and the social obligations of suppliers

• act – carry out robust due diligence on suppliers and act to mitigate or remove risks

• review – effective due diligence requires continuous monitoring and review.

HMRC also recommends that individuals register for their personal tax account on GOV.UK, and that they regularly check the information shown there is accurate.

 

The workers’ perspective

• workers are given no choice other than to work through labour supply businesses or agencies

• when workers are transferred from one business to another, they’re often unaware there has been a change

• information on payslips may be different to information supplied to HMRC meaning the employee’s personal tax account record is incomplete or inaccurate

• the employer’s name shown on the payslip may be different from the business the worker provides their services to

• workers may not be correctly registered in a workplace pension scheme or their contributions may not be paid over to the pension provider

• workers may not receive all the holiday pay and sick pay they are entitled to

• in labour fraud in construction, workers may be victims of modern slavery, working unreasonable hours in unsafe conditions with no freedom to leave the employment.

 

Common themes

All three frauds share some common traits; some shared by all three and others may be specific to just two. Here are just a few of a very long list:

• fraudulent businesses in the labour supply chain have a short life span (usually 12-18 months) before being abandoned or becoming insolvent. Another entity will then take their place

• hijacked VAT registration, CIS registration and / or pay as you earn (PAYE) scheme numbers

• unusually long supply chains, which often make no commercial sense

• turnover in fraudulent businesses rises at an exponential rate and debt accrues quickly

• the director’s business history suggests they lack the experience to run a company of that type and size

• directors may have a history of ‘phoenixing’* companies.

 

Contacting HMRC

If you have information or concerns about a supplier / engager of labour or associated activities, you can contact HMRC online via the ‘Report fraud to HMRC’ page of GOV.UK or by telephone, on 0800 788 887.

 

*‘Phoenixing’ is when a business is carried out through a succession of companies, each of which in turn becomes insolvent and transfers the business onto the next company.

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