Spotting Payroll and Labour Fraud

# Spotting Payroll and Labour Fraud

Fraudulent companies can insert themselves into your supply chain, leaving you liable for unpaid taxes and penalties even if you didn't know about the fraud. Understanding the warning signs of payroll and labour fraud protects your business from financial and legal consequences, whether you operate in construction or use outsourced labour providers.

What is labour fraud?

Labour fraud occurs when criminals create companies that become part of legitimate business supply chains. These fraudulent companies pass Income Tax, National Insurance, and VAT liabilities through multiple shell companies before either defaulting on payments to HMRC or disappearing entirely.

You need to be particularly aware if your business operates in construction, you spend more than £3 million on construction annually, you pay subcontractors for construction work, or you outsource your workforce or payroll to other companies.

Warning signs for employers and business owners

Several red flags can help you identify potentially fraudulent suppliers before they cause problems for your business:

Pricing and commercial signs:

• Labour or payroll costs that seem too good to be true
• Offers to refund administrative costs (known as 'milestone kickbacks')
• Savings on payroll and labour costs that don't make commercial sense

Company information concerns:

• No online presence or website
• No physical presence at the registered office address
• A payroll company with a similar name to your business
• Businesses with a short lifespan
• Frequently changing businesses in the supply chain (called 'phoenixing')
• Directors with no experience in construction (for construction-related fraud)
• Directors with a history of going into liquidation

Documentation and process issues:

• Lack of documentation such as contracts
• Inconsistencies in paperwork, including invoice dates
• Unusually long supply chains
• Payments from unknown third parties
• Unusual payment arrangements, like payments to third parties
• Payroll companies approaching established businesses to transfer staff to them

Your responsibilities as an employer

If your business has outsourced its workforce or payroll, you remain responsible for checking the credibility of your supply chain. You must carry out due diligence checks and keep detailed records of all checks you perform.

Checking your suppliers

You should check a company's VAT registration with HMRC and ask for evidence of Real Time Information (RTI) returns and payments made to HMRC. Understanding the relationship between the supplier and the workers is essential—you need to be clear about who pays the workers and how they're paid.

Some suppliers use multiple companies to create complex labour supply chains. These arrangements can hide workers from HMRC and create opportunities for other offences, including modern slavery.

You can tell HMRC about your payroll outsourcing arrangements so they can check whether the company submits correct returns and pays the right amount of tax and National Insurance.

Understanding the service

You need to understand exactly what service your supplier provides: labour only, payroll services only, or labour with payroll services. Knowing this helps you work out how much VAT you should be paying. Fraudsters often lie about the supply of labour to make VAT seem higher than it should be.

If an arrangement involves transferring workers' contracts to another company without changing terms and conditions, you should get independent legal advice. You may not be able to deduct VAT input tax for the cost and may have to repay it to HMRC.

Checking workers

You must ensure your workers are paid the correct amount. Check the qualifications of workers hired, as those hired by fraudulent companies may have no Construction Skills Certification Scheme card or false details.

You should also check the employment status of your workers to make sure it matches their working arrangements.

Warning signs for workers

If you work through an agency, umbrella company, or payroll company, watch for these signs of fraud:

• Being told you'll receive your full pay without tax taken off (gross pay)
• No longer being able to see your payslips or sign into your employer's payslip portal
• Being asked to set up your own company (a 'personal service company')
• Being suddenly moved to a different umbrella or payroll company
• Struggling to access benefits your company offers, such as voucher or pension schemes

You can check with HMRC to make sure the tax and National Insurance on your payslip is correct. Use your personal tax account or the HMRC app to verify you're on the correct tax code.

For construction workers, if you're self-employed, your Construction Industry Scheme (CIS) deductions may not be paid to HMRC, meaning you may not be able to claim an expected repayment. Your repayment might also be paid directly from HMRC to someone else, such as an agent.

Consequences of failing to spot fraud

If HMRC finds that your business knew, or should have known, about labour or payroll fraud in the supply chain, serious consequences follow:

• HMRC may deny your business the right to recover VAT input tax
• You may be held responsible for unpaid Income Tax, National Insurance contributions, or CIS deductions, including interest
• HMRC may remove a subcontractor's gross payment status
• HMRC can charge penalties for inaccurate returns
• For VAT fraud, HMRC can charge penalties to your business and people in charge, such as directors or managers

How fraud affects workers

If you're a worker and your employer hasn't paid the correct tax and National Insurance to HMRC on your behalf, you may not be able to get:

• Benefits like Universal Credit
• Maternity or paternity pay
• Your full State Pension

Reporting fraud

You should report tax fraud or avoidance to HMRC if you have concerns about a supplier or hirer of labour, an employer or agency, unpaid VAT, unpaid Income Tax and National Insurance contributions, or incorrect CIS deductions. You don't need to give your personal details when making a report.

Sources

• Check for signs of labour fraud in construction
• Check for signs of outsourced labour payroll fraud

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.