01 December 2021
The last eighteen months have seen businesses face unprecedented challenges. As they look to rebuild, some may be tempted to cut costs to maintain profit margins. It is these sorts of conditions that criminals can look to exploit.
The National Crime Agency’s 2021 National Strategic Assessment – http://ow.ly/yOBi30s0Hrw – showed that the threat from organised crime has ‘proved resilient in the face of Covid-19’. One area criminals seek to infiltrate and exploit is the supply of labour.
HMRC recognises that organised labour fraud (OLF) poses a significant risk. OLF is a supply chain fraud, and the name signifies two main things:
it is ‘organised’ because the frauds are orchestrated and carried out by organised crime groups
it is ‘labour fraud’ because it always involves a genuine supply of labour from a fraudulent entity or entities.
In OLF, the taxes in relation to the supply are either suppressed or evaded altogether.
One such example of this is payroll company fraud which, in its simplest form, occurs when a business transfers staff, along with payroll responsibilities, to a fraudulent entity (purporting to be a payroll company) which then supplies the staff back to the business, at a cost roughly equivalent to gross wages plus value added tax (VAT).
The payroll company pays the staff but fails to remit the income tax, National Insurance contributions (NICs) and VAT to HMRC. Please see the October 2019 issue of Professional for further information: http://ow.ly/39p330s0HwF.
The impacts of this type of fraud are significant and wide reaching, including on:
the exchequer – money is not paid to fund vital public services
workers – affecting employment rights and other entitlements, such as pensions and benefits
the labour recipient – this could have serious reputational impacts and may even affect their ability to operate.
As businesses attempt to source an affordable supply of labour, opportunities arise for criminals to exploit. With offers of savings that are literally too good to be true, criminals can adopt a very professional front, employing sales techniques that make it difficult to resist. They often, but not always, target businesses that are in a weak financial position.
How can businesses protect themselves?
If services such as labour supply are being outsourced, or an umbrella company is in place, HMRC recommends applying supply chain due diligence principles of ‘check, act and review’. This will allow a business to apply effective risk management and robust due diligence to assure the integrity of supply chains, minimising exposure to risks. So:
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.
Applying these principles will allow for judgement to be made on transactions, and the integrity of supply chains. It will also protect businesses by testing the credibility, legitimacy, legal and tax compliance of suppliers, supplies, customers, employees and labour supply. Contractors should be aware that, in most cases, HMRC does not consider there to be any genuine financial benefit to long supply chains and these should be treated with caution where they are discovered. Failure to undertake sufficient due diligence checks can have serious financial impacts for the business, such as the disallowance of input VAT in relation to the supply.
Exploitation, fraud and avoidance are easier to hide below the surface of a supply chain when effective due diligence is not performed by all parties. Therefore, checks done purely in relation to immediate suppliers and customers may be insufficient.
Margins become tighter with every layer of subcontracting and opportunities increase for fraudulent infiltration of supply chains. One aspect of a contractor’s due diligence activities should include ensuring they have a good understanding of the supply chain structure, including the entities involved and any changes in supply.
Additionally, suppliers may advise that they operate ‘tax efficient’ schemes. Contractors should be aware that, although these may seem plausible on the surface, the underlying operating model could actually be fraudulent or evasive. n
HMRC’s guidance about supply chain due diligence can be found on GOV.UK: http://ow.ly/gcr430s0Hy4.
For outsourced payroll services, an online portal is available on the GOV.UK website for the engager to voluntarily report it. It can be found here: http://ow.ly/orqs30s0Hyp. This gives HMRC visibility of who is being engaged, so it can act if there are issues.
If you have information or concerns about a supplier or engager of labour and associated activities, you can contact HMRC’s hotline online or by telephone on 0800 788 887.
Featured in the December 2021 / January 2022 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.