Number of businesses suspected of payroll fraud spikes

The number of businesses which HMRC suspects of committing payroll fraud has risen by almost a third over the past year, according to analysis by Pinsent Masons.

The firm's research indicates that HMRC now has 2,099 businesses on its watch list, a 31% rise on last year's total of 1,599. Pinsent Masons says that HMRC has become increasingly concerned over the number of businesses that might be underpaying their employees' payroll tax and National Insurance. Two years ago HMRC considered just 1,350 businesses to be at risk of evading payroll taxes.

Chris Thomas, Pinsent Masons senior associate, said: 'There are a surprising number of businesses that don't pass on the tax and National Insurance that they deduct from employees to HMRC. Sometimes that is because they intend to defraud HMRC but often it is because they need the money to keep the company going.'

The firm expects investigations into payroll irregularities to rise as HMRC starts to mine information gathered via the new Real Time Information regime, which is collected on a monthly rather than annual basis.

Thomas cautioned that there are several issues that HMRC may challenge when they are looking at a company's payroll policy. These include payments of a large tax-free lump sum on the termination of an individual's employment, to ensure that the employee was genuinely made redundant; ensuring that expat employees are being charged tax on any work they do when they are in the UK; and instances of staff being paid a contractors (ie with no employer's NI being paid) when they should be treated as an employee.

'Once HMRC find one problem with an employer's payroll they tend to keep on digging until they find other problems. So the whole process of a payroll investigation can be very time consuming and expensive for a company. Many of the problems occur when HR arranges for a change in the employees benefits package but doesn't tell the finance or tax team about the change,' Thomas said.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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