MTIC Fraud – Outsourcing Payroll Services
MTIC Fraud – Outsourcing Payroll Services
Missing Trader Intra-Community (MTIC) fraud involving outsourced payroll services is an increasingly common scheme that HMRC is actively targeting. Understanding how these schemes operate is essential for businesses that outsource their payroll functions.
How the Scheme Works
The typical structure involves the following:
Company A outsources its payroll operations to Company B. Company B invoices Company A for its services, charging VAT on those invoices. Company A pays the invoices, including the VAT element, and reclaims the input VAT on its VAT return.
Company B then goes missing or defaults on its obligations without ever paying the collected VAT over to HMRC. The VAT charged to Company A is never remitted to the Exchequer.
Complex Supply Chains
In more sophisticated arrangements, the scheme can involve multiple companies operating through complex supply chains. This adds layers of transactions designed to obscure the fraudulent element and make it more difficult for HMRC to trace the connection between the legitimate business and the defaulting trader.
HMRC’s Response
If HMRC determines that Company A knew or should have known that its transactions were connected with fraud, they will deny Company A’s right to reclaim the input VAT paid on the payroll invoices.
Consequences
The consequences for businesses caught up in these arrangements can be severe:
- Substantial VAT assessments covering all periods in which the fraudulent supplier was used
- Personal director liability through the liquidation of the company, which HMRC may treat as an admission of the debt
- Automatic 30% penalties applied to the assessed amounts, which can also be transferred to directors personally
Further information can be found on our Kittel & VAT Disputes page.
Businesses that outsource payroll services should exercise thorough due diligence on their suppliers and seek specialist advice if they have any concerns about the legitimacy of their supply chain.
Frequently asked questions
How does MTIC fraud work in outsourced payroll services?
A business (Company A) outsources its payroll to a provider (Company B), which invoices for its services and charges VAT. Company A pays the invoices and reclaims the input VAT. Company B then goes missing or defaults without paying the collected VAT to HMRC. More sophisticated versions use multiple companies in complex supply chains to obscure the fraudulent element.
What penalties apply if a payroll supplier is linked to MTIC fraud?
Businesses caught up in these arrangements can face automatic 30% penalties applied to the assessed amounts, and those penalties can also be transferred to directors personally. The penalties sit alongside substantial VAT assessments covering all periods in which the fraudulent payroll supplier was used, following HMRC's denial of the input VAT reclaimed on the payroll invoices.
Can directors be personally liable for payroll MTIC fraud assessments?
Yes. Directors can face personal liability through the liquidation of the company, which HMRC may treat as an admission of the debt. In addition, the automatic 30% penalties applied to the assessed amounts can be transferred to directors personally. Businesses that outsource payroll are advised to carry out thorough due diligence on their suppliers.
Why are complex supply chains used in payroll fraud schemes?
In more sophisticated arrangements, multiple companies operate through complex supply chains. These additional layers of transactions are designed to obscure the fraudulent element and make it more difficult for HMRC to trace the connection between the legitimate business that outsourced its payroll and the defaulting trader that failed to pay over the VAT.
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