Workers can suffer significant consequences due to a lack of effective due diligence. Robust due diligence is essential to protect workers’ rights, including compliance with the National Minimum Wage (NMW), statutory entitlements (e.g., NMW/NLW, holiday pay, auto-enrolment pensions, AWR 12-week parity), and ethical supply chain practices. Good governance ensures workers are treated fairly and paid appropriately.
The primary motivation for those involved in modern slavery and payroll fraud is financial gain. These actors exploit workers while evading tax obligations by misappropriating VAT, Income Tax, and National Insurance Contributions (NICs). Such practices often go unnoticed by workers and can have long-term consequences.
Common Examples of Exploitation and Fraud:
- VAT Evasion and Hidden Economy:
- Companies may fail to register for VAT or underreport profits to evade taxes, contributing to the hidden economy.
- Underpayment of Workers:
- Workers may be paid below NMW/NLW or not at all, violating legal wage standards.
- Misappropriation of PAYE and NICs:
- Deductions for PAYE and employee NICs are shown on payslips but not accounted for to HMRC. This is unlawful and creates serious compliance risk; it can also cause issues for workers (e.g., tax/NIC records) until corrected.
- Holiday-pay abuse:
- Accrued holiday pay withheld, “skimmed”, or mis-calculated; lack of transparency over rolled-up holiday pay rules.
- Umbrella on-costs charged to workers:
- Employer NICs/apprenticeship levy improperly passed to workers as deductions (instead of being funded from the assignment rate).
HMRC’s Role:
From a tax-enforcement perspective, HMRC targets behaviours that facilitate abuse of tax and payroll systems, such as:
- Misreporting or evading VAT and Income Tax.
- Exploiting workers through wage theft or underpayment.
- Operating in the hidden economy, avoiding accountability and transparency.
