NATIONAL PAYROLL WEEK
Payroll company fraud
HMRC’s Fraud Investigation Service confirms the importance of the CIPP to its work in tackling fraudulent activity
F or 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
| Professional in Payroll, Pensions and Reward | October 2019 | Issue 54 22
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