Payroll company fraud

01 October 2019

This article was featured in the October 2019 issue of the magazine. 

HMRC’s Fraud Investigation Service confirms the importance of the CIPP to its work in tackling fraudulent activity

For some time now, HM Revenue & Customs (HMRC) has acknowledged that the Chartered Institute of Payroll Professionals is a key stakeholder in the work that we do. The CIPP’s position as joint-chair of the Employment & Payroll Group (EPG) clearly demonstrates how vital its collaboration is to HMRC. The EPG is the main stakeholder forum for HMRC and other government departments to engage with the employment and payroll community on pay as you earn operational policy and process issues.

More recently, however, HMRC and, in particular, the Fraud Investigation Service (FIS), have been seeking the thoughts and views of the CIPP on another, more specific subject: payroll company fraud (PCF). Additionally, earlier this year the FIS gave a presentation to the EPG on the issue.

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, including the CIPP, are committed to tackling the fraud, minimising the tax revenue lost and prosecuting the organised criminal groups (OCGs) conducting the fraudulent activity. 

HMRC is trying to educate businesses and their advisers on the way the fraud works. This allows businesses to undertake sufficient due diligence to prevent them becoming a victim. HMRC also recognises that the behaviour of fraudulent payroll companies creates an uneven ‘playing field’ for those payroll companies that adhere to, and abide by, the rules. HMRC’s ambition is to eliminate fraudulent payroll companies from the marketplace and restore parity. 

PCF, in its simplest form, occurs when a business transfers staff, along with payroll responsibilities, to a fraudulent entity (the payroll company) which then supplies 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 (NICs) and value added tax (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, 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. For example, one company may contract with the business, another may employ the staff, and another may provide the payroll function; and so on. The purpose of this structure is a deliberate attempt to hide the fraud from the business and make it more difficult for HMRC to investigate. 

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. However, 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 as their financial position is weak. The OCGs attempt 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’ NICs and pension contributions often go not only unpaid but unreported, which may only come to light to individuals later in life. 

Such fraudulent behaviour steals the vital revenue that funds UK public services. HMRC is therefore committed to tackling criminal groups conducting payroll company fraud.

HMRC has been advising businesses to be vigilant when considering opportunities to outsource payroll responsibilities; as a result, prospective clients may be asking more questions than in the past. For example, HMRC understands, having spoken to many legitimate payroll providers, that there are sometimes good reasons to transfer a workforce to a payroll company; however, this can be a key indicator of fraud. Accordingly, where businesses are offered this service, HMRC advise them to undertake sufficient due diligence to ensure that they do not become a victim of fraud. So, if you do offer this type of service, please be aware that your client may seek some additional assurances from you. 

HMRC further advises businesses that failure to undertake an appropriate level of due diligence checks can be damaging to them. If it can be shown that a business knew or should have known that transactions in their supply chain were linked to fraud, the business could lose their right to recover the VAT input tax on those transactions despite having made payments to the payroll company.

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, HMRC advises that businesses should make every attempt to carry out robust due diligence in the first place. It is, therefore, understandable that a prospective client may wish to have some assurances about the service you are providing and we would ask you to fully engage with them in this first step of your business relationship.

It should be noted that HMRC will never penalise genuine victims of fraud and wants to support businesses in carrying out necessary checks.

HMRC recognises that payroll services are not regulated at all and anyone can offer the service. Additionally, HMRC cannot endorse any professional organisation as we have no control over the checks that they subject their members to. However, we do acknowledge that if a payroll company is a member of the CIPP it is likely, but not guaranteed, that they will be lower risk. It is for this reason that we continue to seek collaboration from the CIPP when exploring ways to establish best practice. 

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.

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, guidance ( here provides pointers for robust due diligence. This includes giving details on how a business can report payroll outsourcing to HMRC if they have any concerns. 

HMRC looks forward to a long collaborative relationship with the CIPP through the EPG but also on an ad hoc basis. HMRC will seek to engage with the payroll community via the CIPP seeking their views, not only on how future policy and legislation will impact on PCF but also, just as importantly, how any changes will affect legitimate businesses. HMRC is keen to ensure that any future changes have minimal impact on those businesses that abide by the rules and pay over the taxes and NICs that they are due to pay. We recognise that working with the honest tax-paying professionals within the payroll profession is key to cracking the fraud.