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HMRC internal manual

VAT Fraud

What is VAT fraud?: examples of different types of VAT fraud: labour provider fraud

Labour provider (LP) fraud involves fraudulent evasion of VAT by a defaulter.

LPs (also sometimes known as ‘Gangmasters’) are traditionally found in industries such as agriculture, construction, leisure, food, transport, security and cleaning.

Typically, in a LP fraud scheme (Word 37KB) the end user will contract with the Main Contractor (MC) to provide labour, who may then sub-contract the provision to a further labour provider. The actual employer of the workers may be the Main Contractor, the Sub-contractor or in some cases the End User themselves

The end user actually receives the supply of labour, and will be invoiced for this by the MC. The Sub-contractor will in turn invoice the MC, and will then disappear or default on the output VAT shown on those invoices. That VAT will be claimed as input tax by the MC, who will in turn invoice the End User for the supply of labour. Alternatively, in some cases there may be only two parties involved, with the MC taking on the role of defaulter.

Like other frauds, there are indications of hi-jacked VAT Registration Numbers also being used (VATF53210).

In respect of supplies made by labour providers (sub-contractors) in the construction industry, there are examples of providers also supplying plant and materials to Middlemen or Main Contractors - again supplied by missing traders, and in some cases by ex MTIC Traders.

In addition to VAT fraud, LPs might also:

  • fail to operate PAYE correctly and/or fail to remit deductions made for tax/National Insurance Contributions (NIC);
  • fail to operate the Construction Industry Scheme (CIS) correctly;
  • fail to make end of year returns such as P35, P14;
  • fail to pay National Minimum Wage;
  • fail to operate Statutory Sick Pay; and
  • falsify or make illegal deductions from workers’ pay.

If you discover a taxable person who you suspect to be part of a labour provider fraud you should contact the VAT Fraud Team.

VATF36100 looks at specific considerations that need to be taken into account when deciding whether to apply an intervention to labour providers.