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Recruitment companies and tax fraud: Due diligence is key

Posted on 6 April 2022

HMRC are continuing to investigate high levels of suspected fraud in labour supply chains, and by companies offering payroll services in particular.

A common example of payroll company fraud occurs when a business transfers staff and payroll responsibility to a fraudulent payroll company, which supplies the staff back to the business. Such payroll companies then do not make the necessary payments to HMRC for income tax, national insurance contributions (NICs) or VAT.

Fraudulent payroll companies are not limited to specific sectors or business types, but businesses in the recruitment sector in particular appear to be getting caught out at the moment.

If it can be shown that employers knew (or should have known) the transactions in the supply chain were linked to fraud, they may lose the right to recover VAT paid on such transactions. In some cases, HMRC may also held them liable for any unpaid tax or NICs.

Employers can therefore be liable where they "should have known" about the fraud, per the so-called Kittel principle. For example, a large recruitment company that used outsourced payroll providers has recently been issued with multi-million pound VAT assessments and penalties, along with notices that can transfer certain of those penalties onto the company's directors.

It is therefore vital that employers perform suitable due diligence to make a judgment on transactions via, and the integrity of, a supply chain. Whilst HMRC are not prescriptive in setting out what such due diligence should look like, they offer some guidance here

There is then a further potential sting in the tail. If tax fraud takes place in a business's supply chain, there is the risk that it could be prosecuted under the Corporate Criminal Offence (CCO, as discussed in an earlier edition of Tax Aware for having failed to prevent it). Under the CCO, a business can be prosecuted where it fails to prevent an "associated person" from facilitating tax fraud. The definition of "associated person" is broad and as a consequence, there is a risk that the fraudulent actions of third party suppliers can put a business at risk of prosecution, no matter how far removed in the supply chain.

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