Payroll company fraud is widespread and often goes undetected by businesses until HMRC conduct a tax investigation and inform you that there are VAT, Income Tax and National Insurance Contributions losses in your supply chain.

If there are VAT losses, this often leads to HMRC disallowing your VAT input tax claims on purchase invoices from suppliers of payroll services.  You could receive a substantial assessment, in other words.

How Does Payroll Outsourcing Fraud Work?

Criminals set up payroll companies and approach legitimate businesses, offering to take on their staff and payroll responsibilities, usually for a fee. However, these payroll companies then create false Real Time Information (RTI) returns for HMRC, and false payslips for workers. While these documents will show Income Tax and National Insurance contributions being deducted, the tax due is often not paid across to HMRC. A payroll company (or a payroll company further down the chain) will also almost always fail to account for the VAT due on their invoices, or make false VAT returns to HMRC.

Fraud committed by an outsourcing company is not always easy to detect, but HMRC will say that it is your responsibility to be alert to the risks and look for indicators of tax fraud, including:

• Fees for Payroll services that are too good to be true.
• The payroll provider closing after a short period of time and recommending a new company.
• Payroll companies that do not have business premises or do not appear to have staff that can provide the payroll services offered.
• Payment methods on invoices that are not identical to the payroll company name.
• Payroll company that has very little online presence, including LinkedIn, a professional website etc.

In its simplest form, a company (Company A) will outsource its payroll work to a payroll company (Company B).

Company B will invoice for its services and Company A (which is you) will pay the amount plus VAT. Company B, as it had always planned to, either goes missing or defaults without paying the VAT, National Insurance Contributions or PAYE to HMRC.

The fraudulent payroll outsourcing is not always restricted to one company and several companies can be involved in outsourcing through complex supply chains designed to frustrate HMRC’s investigations.

Just like MTIC fraud in other industries, if HMRC believe that Company A knew, or should have known, of the connection to fraud, they will deny them the right to reclaim the input VAT on Company B’s invoices. That is the case even if the fraud is not committed directly by your supplier but by others in your supply chain.

This not only results in substantial VAT Assessments being raised, sometimes running into the millions of pounds, but often creates a personal liability for the company Officers. The personal liability can occur in 2 ways.

1.     If the directors of Company A do not challenge the allegation that they knew, or should have known, of a fraud and simply liquidate the company, it will be taken that they did know of the fraud. Liquidators are then able to recover the full amount of the lost VAT from them personally.

2.     HMRC will also automatically raise a company penalty (set at 30% of the lost VAT) and, if the company is unable to pay it, the Officers of the company are liable for the full 30%, subject to mitigating circumstances.

We have been involved in over 200 such cases where VAT Assessments have already been raised and where a Tax Tribunal appeal is progressing, or has concluded. We are also currently working hard to provide evidence to HMRC that our clients could not have known about the fraud, before HMRC even make a decision. This is a vital area, as it can prevent an HMRC decision to raise a VAT Assessment that will ultimately lead to substantial legal costs in what is normally at least a 2-year Tribunal appeal process.

Both situations (pre-decision and after) need careful management, and we would be happy to advise on such matters.

Further information on Kittel/MTIC fraud in general can also be found on our website.

Please contact us on 0345 557 5557 for further information.