Organised Labour Fraud

As part of the August 2022 employer bulletin, HMRC has issued information on Organised Labour Fraud.

Organised labour fraud is the collective name HMRC gives to three main frauds:

  • labour fraud in construction
  • mini-umbrella company fraud
  • payroll company fraud

It’s ‘organised’ because it is orchestrated and conducted by organised crime groups. It’s ‘labour fraud’ because it always involves a genuine supply of labour.

HMRC groups the three frauds together because they share similar features. Organised labour fraud may grow to include other types of fraud where a labour supply is at the heart of the business operation.

Labour fraud in construction

HMRC defines this as the fraudulent use of contrived labour supply chains in the construction industry. It involves the abuse of the Construction Industry Scheme to move labour-related VAT (not subject to the Domestic Reverse Charge) and Income Tax liabilities into shell companies that go missing or default owing a debt to HMRC.

Mini-umbrella company fraud

This is an employment intermediary model which fragments a temporary workforce, who would typically be supplied by a single umbrella company, into many small, limited companies each with a few employees. Each of the micro companies may fraudulently claim Employment Allowance and, or abuse the VAT Flat Rate Scheme. These are both government incentives aimed at helping small businesses.

Payroll company fraud

This is when an active business transfers staff, along with payroll responsibilities, to a fraudulent entity. This entity purports to be a ‘payroll company’. The ‘payroll company’ then supplies the staff back to the business but fails to pay Income Tax, National Insurance and VAT to HMRC.

Common themes

All 3 frauds share some common traits, some shared by all 3 and others may be specific to just 2. Here are a few examples from a lengthy list:

  • fraudulent businesses in the labour supply chain have a short life span — sometimes as little as 12 months — they will then be abandoned or become insolvent — another entity will then take their place
  • hijacked VAT registration, Construction Industry Scheme registration and, or PAYE scheme numbers
  • unusually long supply chains which often make no commercial sense
  • turnover in fraudulent businesses rises at an exponential rate and debt accrues quickly
  • the director’s business history suggests they lack the experience to run a company of that type and size
  • directors may have a history of ‘phoenixing’ companies

Phoenixing’ is when a business is conducted through a succession of companies. Each in turn becomes insolvent and transfers the business onto the next company.

Impact on workers

With these types of fraud there is always an impact on the workers that affects their employment rights and may impact on their ability to claim benefits in the future.

HMRC’s response

Such fraudulent behaviour steals the vital revenue that funds UK public services. HMRC is committed to tackling organised labour fraud and supporting the victims.

HMRC’s ask

HMRC recommends that businesses apply the due diligence principles when they receive a supply of labour. This can be broken down into ‘Check, Act and Review’:

  • Check — know the risks: legal, financial, tax and the social obligations of suppliers
  • Act — conduct robust due diligence on suppliers and act to mitigate or remove risks
  • Review — effective due diligence requires continuous monitoring and review

HMRC also recommends that individuals register for their Personal Tax Account. Regular checking ensures that the information shown there is accurate.

Contacting HMRC

If you have information or concerns about a supplier or engager of labour or associated activities, you can contact HMRC at ‘Report fraud to HMRC’ or by Telephone: 0800 788 887 (Opening times: Monday to Friday: 9am to 5pm)

PAYadvice.UK 11/8/2022

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