Organised labour fraud: Warning to employers from HMRC

HMRC’s August employer bulletin was released last week and included in it were warnings to employers on organised labour fraud. Organised labour fraud is the umbrella term HMRC gives to three main types of fraud which all share similar features.

The three types of fraud are:

• Payroll company fraud
• Labour fraud in construction
• Mini-umbrella company fraud

These types of fraud are orchestrated by organised crime groups and involve a genuine supply of labour. Crime groups may grow their operations to include other types of fraud where the supply of labour is central to how the fraud operates.

Organised labour fraud affects HMRC, businesses, employees, and the general public. These frauds steal vital revenue that funds the UK’s public services, can hurt the finances and reputations of businesses, and for employees, it can affect their employment rights and may impact their ability to claim benefits in the future.

Payroll company fraud

This type of fraud takes place when a business outsources its payroll responsibilities to a fraudulent third party who claim to be a payroll provider. The fraudulent ‘payroll provider’ will process the payroll of their victims’ employees. While they will pay the employees their wages, they will fail to pay income tax, National Insurance and VAT to HMRC. This is how they get away with the scam for some time, as the employer may take a while to notice what has been happening. With this type of fraud, there is a risk that the employer could still be deemed liable for the tax, NI and VAT payments that were never received by HMRC.

Labour fraud in construction

This is another type of fraud which targets employers. HMRC defines it as “the fraudulent use of contrived labour supply chains in the construction industry.” This fraud involves the abuse of the Construction Industry Scheme to move labour-related VAT and Income Tax liabilities into “shell corporations.” Shell corporations are companies which have no business operations or significant assets. These companies are sometimes used in organised crime. The shell companies will then go default and will owe a debt to HMRC.

Mini-umbrella company fraud

The third fraud is one that can affect businesses which use temporary labour. It works by criminals creating multiple limited companies, with each one employing a small number of temporary employees. Each of these micro companies may fraudulently claim Employment Allowance and abuse the VAT Flat Rate Scheme which are government incentives aimed at helping small businesses.

Common traits of organised labour fraud

In their 2022, August bulletin, HMRC have listed a number of red flags or common traits to watch out for in fraudulent businesses, including:

• Businesses with a short life span — sometimes as little as 12 months. These businesses will then be abandoned or become insolvent, and another entity will take their place
• Hijacked VAT registration, Construction Industry Scheme registration and, or PAYE scheme numbers
• Unusually long supply chains which often make no commercial sense
• Turnover 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 which is when a business is conducted through a succession of companies. Each in turn becomes insolvent and transfers the business onto the next company.

What can you do to avoid being a victim of organised labour fraud

HMRC recommends that businesses have a system in place whenever they receive a supply of labour. Every business should:

• Check the legal, financial, tax and social obligations of suppliers
• conduct robust due diligence on suppliers and act to mitigate or remove risks
• Continuously monitor and review your due diligence

HMRC also recommends that individuals register for their Personal Tax Account as regular checking ensures that the information shown there is accurate.

You should contact HMRC as soon as possible if you have information or concerns regarding a supplier.

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Posted byElaine CarrollinNews