Check for signs of payroll company fraud
Find out what checks you should complete and how to report potential fraud if you’re an agency, employer or worker.
What payroll company fraud is
Payroll company fraud is when a legitimate business transfers their staff and payroll responsibilities to a fraudulent company, which does not declare or pay the correct taxes to HMRC. The legitimate business is often unaware of any fraud.
It’s part of a wider group of crimes known as organised labour fraud.
You need to be aware of payroll company fraud if:
- you outsource or are considering outsourcing your workforce or payroll
- you’re a recruitment or employment agency
- you work for one company but are paid by another
- you work for an agency
How payroll company fraud works
Criminals set up payroll companies and approach legitimate businesses, offering to take on their staff and payroll responsibilities, usually for a fee.
The business will then:
- transfer its employees to the payroll company
- pay them the gross wages and related VAT
The payroll company will then supply the workers back to the business. They’ll often make false Real Time Information (RTI) returns to HMRC.
They may issue false payslips to workers showing that Income Tax and National Insurance contributions have been deducted from their wages. However, this is often not paid to HMRC.
They will then fail to account for the VAT due or make false VAT returns to HMRC.
The payroll company will eventually cease trading and transfer the workers to another fraudulent payroll company.
Recognising signs of payroll company fraud
Some common signs of payroll company fraud include:
- a payroll company requesting that you transfer staff to them
- savings on payroll and labour costs that seem too good to be true
- no physical office address
- no online presence or website
- a payroll company with a similar name to the business
- irregular payment arrangements, such as requesting that you make a payment to a third party
If you’re an employer or agency
If your business has outsourced its workforce it’s your responsibility to:
- carry out due diligence checks on your supply chain
- understand what service you’re being supplied
- be clear who pays your workers and how they’re paid
- question your supplier if you have concerns
This is not a definitive list. The checks you need to take will depend on what your business does and how it operates.
You should keep a detailed record of all the checks you do.
Know your supplier
You should check a company’s VAT registration with HMRC.
Fraudulent payroll companies may operate alongside several others, all providing connecting services, such as issuing invoices. You should check who holds the contracts of employment for your staff.
You should also ask for evidence of RTI returns and the payments made to HMRC.
They may offer to refund your administrative costs, a service also known as ‘milestone kickbacks’.
Check if you’re an employment intermediary
If you supply workers to a client, you may be an employment intermediary.
You should check if you need to send employment intermediary reports.
Send voluntary reports
You can tell HMRC about your payroll outsourcing arrangements. HMRC can then check if the company:
- submits the correct returns
- pays the right amount of tax and National Insurance contributions
If you’re a worker
You may be a victim of payroll company fraud if your employer outsources their workforce.
You can check your employment rights if:
You may get a false payslip showing that Income Tax and National Insurance contributions have been deducted. However, this is often not paid to HMRC.
This can have long-term consequences on your entitlement to state pension and other benefits. You can check what information is being reported to HMRC through your personal tax account.
Criminal companies may also claim to offer benefits that you struggle to access, such as voucher schemes and pension schemes. You can report concerns about your workplace pension scheme to the Pensions Regulator.
How to report potential fraud or tax avoidance
Contact HMRC to report tax fraud if you have concerns about:
- a supplier
- unpaid Income Tax and National Insurance contributions
- unpaid VAT
How payroll company fraud can affect your business
If we find that a business knew, or should have known, about fraud in the supply chain we may:
- deny the businesses in the supply chain the right to recover VAT input tax
- charge a penalty for transactions connected to fraud
You may be held responsible for any unpaid Income Tax or National Insurance Contributions, including interest.
We may also transfer VAT penalties to individuals, such as a director or manager of the company.
Last updated 2 March 2023 + show all updates
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The heading 'How payroll company fraud can affect your business' has replaced 'If you do not report payroll company fraud'. This change is for clarity and accuracy.
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First published.