Outsourcing Payroll Services Linked to MTIC Fraud
Outsourcing Payroll Services Linked to MTIC Fraud
Missing Trader Intra-Community (MTIC) fraud has extended into the payroll outsourcing sector, presenting risks that many businesses may not be aware of.
The typical scenario operates as follows: Company A outsources its payroll function to Company B. Payments are made to Company B including VAT for the services provided. However, Company B fails to account for the VAT it has collected and does not pay it over to HMRC. In this situation, HMRC may look to deny Company A’s input tax recovery on the basis that the transaction was connected to fraud.
The risk is compounded when subcontracting is introduced into the arrangement. Where Company B subcontracts elements of the payroll service to further intermediary companies, those intermediaries may disappear without paying over the VAT they have collected. This creates additional layers of complexity and increases the exposure for the original company that outsourced the work in good faith.
HMRC’s approach in these cases mirrors the established MTIC fraud framework. They will pursue the original company if it knew or should have known that its transactions were connected to fraud in the supply chain. The burden of proof falls on HMRC to demonstrate that the company had the requisite knowledge, but businesses should be aware that simply outsourcing a routine function like payroll can carry significant VAT risks if the service provider is not properly vetted.
Further information can be found on our Kittel & VAT Disputes page.
Companies that outsource payroll or similar services should conduct appropriate due diligence on their providers and retain evidence of the checks they have carried out.
Frequently asked questions
How does subcontracting increase MTIC fraud risk in payroll outsourcing?
Where the payroll provider subcontracts elements of the service to further intermediary companies, those intermediaries may disappear without paying over the VAT they have collected. This adds layers of complexity and increases the exposure of the original company that outsourced the work, even where it did so in good faith.
Who has to prove knowledge of fraud in a payroll MTIC case?
The burden of proof falls on HMRC. Mirroring the established MTIC fraud framework, HMRC will pursue the original company if it knew or should have known that its transactions were connected to fraud in the supply chain, and it is for HMRC to demonstrate that the company had that requisite knowledge.
What should a business do before outsourcing payroll to avoid VAT risk?
Companies that outsource payroll or similar services should conduct appropriate due diligence on their providers and retain evidence of the checks they have carried out. Simply outsourcing a routine function like payroll can carry significant VAT risks if the service provider is not properly vetted and later fails to account for VAT.
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