Fraud & scams businesses need to watch out for 2023
Businesses in the UK are facing an increasing number of fraud scams targeting their Tax and VAT arrangements. These scams can be very sophisticated and can often go undetected for months or even years. As a result, businesses can suffer significant financial losses. Businesses can protect themselves from fraud scams by being aware of the different types of scams and by taking steps to verify the identity of anyone who they are dealing with before making any payments.
This article describes and explains many of those business owners and employees’ experiences.
Fraud is a large and growing problem
Fraud is a serious problem for businesses of all sizes. In 2022, the average loss from fraud in the UK was £1.2 million. The most common type of fraud in the UK was payment fraud, which accounted for 44% of all fraud losses. The second most common type of fraud in the UK was identity fraud, which accounted for 34% of all fraud losses. The third most common type of fraud in the UK was investment fraud, which accounted for 12% of all fraud losses.
Here are some more statistics to make you think:
Cloned invoice scam: There were 12,000 reports of cloned invoice scams in 2022, with a total loss of £100 million. The average loss per cloned invoice scam was £8,333.
VAT refund scam: There were 8,000 reports of VAT refund scams in 2022, with a total loss of £50 million. The average loss per VAT refund scam was £6,250.
Fake tax authority scam: There were 6,000 reports of fake tax authority scams in 2022, with a total loss of £30 million. The average loss per fake tax authority scam was £5,000.
Overpayment scam: There were 4,000 reports of overpayment scams in 2022, with a total loss of £20 million. The average loss per overpayment scam was £4,167.
Fake bank transfer scam: There were 2,000 reports of fake bank transfer scams in 2022, with a total loss of £10 million. The average loss per fake bank transfer scam was £5,000.
Such statistics show that frauds and scams targeting UK businesses involving payments, tax and VAT are a major problem. Businesses can protect themselves from these scams by being aware of the different types of scams and by taking steps to verify the identity of anyone who they are dealing with before making any payments.
A deeper look into the types of Fraud
There are many different types of fraud that businesses can fall victim to. Some of the most common types of fraud include:
Cloned invoice scam: In this scam, fraudsters send an invoice to a business that appears to be from a legitimate supplier. However, the invoice is actually fake and the money paid to the fraudster is never received by the legitimate supplier. The fraudsters often clone the email address of the legitimate supplier and send the invoice from that address. They may also use a fake website that looks like the website of the legitimate supplier.
- To protect yourself from a clones invoice scam, be sure to verify the identity of the supplier before making any payments. You can do this by calling the supplier directly or by checking their website for a physical address.
VAT refund scam: In this scam, fraudsters contact a business and claim that they are entitled to a VAT refund. The fraudsters will often provide the business with false documentation in order to support their claim. Once the business has paid the refund, the fraudsters disappear and the business is left out of pocket.
- You can protect yourself from this scam by verifying the identity of the person or company requesting the refund. You can do this by calling the supplier directly or by checking their website for a physical address.
Fake tax authority scam: In this scam, fraudsters contact a business and claim to be from the tax authority. They will often say that the business owes money in taxes and that they need to pay immediately. The fraudsters will often provide the business with false documentation in order to support their claim. Once the business has paid the money, the fraudsters disappear and the business is left out of pocket.
- Be sure to verify the identity of the person or company contacting you. You can do this by calling the tax authority directly or by checking their website for a physical address. Do this and it will help you avoid this scam.
Overpayment scam: In this scam, fraudsters contact a business and claim to have overpaid for goods or services. They will often ask the business to refund the overpayment, but the refund will actually go to the fraudster.
- Similar to other scams of this nature, be sure to verify the identity of the person or company requesting the refund. You can do this by calling the supplier directly or by checking their website for a physical address.
Fake bank transfer scam: In this scam, fraudsters send a fake bank transfer to a business. The bank transfer will appear to be from a legitimate source, but it is actually fake. Once the business has spent the money, the fraudster will withdraw the money from the bank account and the business will be left out of pocket.
- Again, verification of the identity of the person or company sending the bank transfer is the key. Do this by calling the bank directly or by checking their website for a physical address.
HMRC Related Scams
HMRC related scams are a type of fraud that target businesses and individuals. These scams often involve the fraudster pretending to be from HMRC and demanding payment for a tax bill that does not exist. Other HMRC related scams may involve the fraudster asking for personal or financial information in order to steal the victim’s identity.
Here are some examples of HMRC related scams:
Scams involving tax refunds:
These scams typically involve scammers sending emails or making phone calls claiming to be from HMRC and offering a tax refund. The scammer will then ask for personal or financial information in order to process the refund. HMRC will never contact you by email or phone to offer a tax refund. If you receive such a communication, it is a scam.
Here is an example of a scam email that may be sent by a fraudster:
Dear [Recipient Name],
We are writing to inform you that you are entitled to a tax refund of £[Amount].
To claim your refund, please click on the link below and enter your personal information.
[Link]
This link will take you to a fraudulent website that looks like the HMRC website. If you enter your personal information on this website, the fraudster will be able to steal your identity.
Scams involving penalties and fines:
These scams typically involve scammers sending emails or making phone calls claiming to be from HMRC and saying that you owe a penalty or fine. The scammer will then ask for payment in order to avoid further action. HMRC will never contact you by email or phone to demand payment for a penalty or fine. If you receive such a communication, it is a scam.
Here is an example of a scam phone call that may be made by a fraudster:
This is a scam. HMRC will never call you and demand payment for a penalty or fine. If you receive such a call, hang up immediately.
Scams involving identity theft:
These scams typically involve scammers sending emails or making phone calls claiming to be from HMRC and asking for personal financial information. The scammer will then use this information to commit identity theft. HMRC will never contact you by email or phone to ask for personal financial information. If you receive such a communication, it is a scam.
Here is an example of a scam email that may be sent by a fraudster:
Dear [Recipient Name],
We are writing to inform you that we have recently detected suspicious activity on your HMRC account. In order to protect your account, we need to verify your identity.
Please click on the link below and enter your personal information.
[Link]
This link will take you to a fraudulent website that looks like the HMRC website. If you enter your personal information on this website, the fraudster will be able to steal your identity.
VAT Scams & Fraud
AT fraud is a type of tax fraud that involves the fraudulent evasion of Value Added Tax (VAT). VAT is a consumption tax that is added to the price of goods and services at each stage of the supply chain. Businesses that are registered for VAT are required to collect VAT from their customers and then pay it to HM Revenue and Customs (HMRC).
There are a number of ways that scammers might use to commit VAT fraud against unsuspecting businesses. Some of the most common methods include:
Missing trader intra-community (MTIC) fraud: In this type of fraud, the fraudster sets up a fake business and registers for VAT. The fraudster then buys goods from legitimate businesses within the European Union (EU) and claims the VAT back from HMRC. However, the fraudster does not actually sell the goods and does not pay the VAT to HMRC. This type of fraud is known as MTIC fraud because the fraudster is missing from the supply chain.
Invoicing fraud: Here, the fraudster sends an invoice to a business for goods or services that have not been ordered. The invoice may look like it is from a legitimate business, but it is actually from a fraudster. The fraudster will then ask for payment for the invoice. If the business pays the invoice, the fraudster will keep the money and the business will not receive the goods or services.
Refund fraud: The fraudster will make a fraudulent claim for a VAT refund from HMRC. The fraudster may use a fake VAT registration number or they may claim for a refund for goods or services that were not actually sold. If the fraudster is successful in claiming the refund, they will keep the money and HMRC will lose out on the VAT revenue.
VAT fraud is a serious problem that can cost businesses and HMRC a lot of money. Businesses can protect themselves from VAT fraud by being aware of the different types of fraud and by taking steps to prevent fraud, such as:
- Checking the identity of their suppliers: Businesses should check the identity of their suppliers before they do business with them. This can be done by checking the supplier’s VAT registration number and by asking for references.
- Only paying invoices from legitimate businesses: Businesses should only pay invoices from businesses that they know and trust. If an invoice looks suspicious, the business should contact the supplier to verify the invoice.
Reporting suspicious activity to HMRC: Businesses should report any suspicious activity to HMRC. This can be done by calling the HMRC fraud hotline on 0800 788 887. Find out more about reporting fraud on HMRC’s website here.
How to Protect Yourself from Fraud
There are a number of things that businesses can do to protect themselves from fraud:
- Educate your employees: This is probably your best line of defence. Make sure your employees are aware of the different types of fraud scams that target businesses. Train them to be suspicious of any unsolicited emails or phone calls, and to never give out personal or financial information over the phone or online. Familiarity with your business operations, supply chains and customers, their trends and typical activities, is an excellent way of helping employees spot fraud and scams.
- Use strong passwords and security measures: Make sure your business has strong passwords and security measures in place. This will help to protect your business from hackers and other cyber criminals.
- Be careful what you click on: Never click on links in emails or text messages from unknown senders. These links may contain malware that can infect your computer.
- Always be suspicious of and query communications from official sources, such as your banks and HMRC, especially those over the phone or through email.
- Be suspicious of offers that seem too good to be true: If an offer seems too good to be true, it probably is. Don’t be afraid to ask questions before you make a payment.
By following these tips, you can help to protect your business from fraud.
Here are some additional tips that may be helpful:
- Keep your software up to date: Software updates often include security patches that can help to protect your computer from malware. Malware can give fraudsters a unique insight into your business that may allow them to pass themselves off as someone from an official source, as they will have convincing personal information to refer to.
- Use a firewall: A firewall can help to protect your computer from unauthorized access.
- Back up your data regularly: This will help you to recover your data if it is lost or damaged due to a fraud attack. This is critical in stopping RansomeWare attacks.
- Report fraud: If you believe that you have been the victim of fraud, report it to the authorities.
How director's loan accounts work, including tax implications and risks
What is a director’s loan account?
A director’s loan account is a record of all the money that a director of a UK limited company has borrowed from, or lent to, the company. This can include money that has been borrowed or lent for any reason, such as to cover personal expenses, to invest in the company, or to help the company with cash flow problems.
Director’s loan accounts are not regulated by law, but they are subject to certain accounting and tax rules. Directors are required to keep accurate records of all transactions relating to their loan accounts, and they must disclose the existence of any loan accounts to the company’s auditors.
How do director’s loan accounts work?
When a director borrows money from the company, the amount is recorded as a debit on the director’s loan account. When the director repays the money, the amount is recorded as a credit on the account. If the director has borrowed more money from the company than they have repaid, the account is said to be overdrawn.
There are two main types of director’s loan accounts:
- Repayment-free loan accounts. These are accounts where the director is not required to repay the loan to the company. The company may choose to set up a repayment-free loan account if the director is providing a personal guarantee for the company’s debts.
- Repayment-on-demand loan accounts. These are accounts where the company can demand that the director repay the loan at any time. The company may choose to set up a repayment-on-demand loan account if the director is borrowing money from the company to invest in the company or to help the company with cash flow problems.
What are the tax implications of director’s loan accounts?
The tax implications of director’s loan accounts can be complex, and it is important to seek professional advice. However, in general, interest that is charged on an overdrawn director’s loan account is taxable income for the director. Additionally, if a director’s loan account is not repaid within nine months of the company’s accounting year end, the director may be liable to pay National Insurance contributions on the amount of the loan.
For example, let’s say that a director borrows £10,000 from the company and does not repay the loan within nine months of the company’s accounting year end. The director will be liable to pay income tax on the interest that is charged on the loan, even if the loan is not repaid. The director will also be liable to pay National Insurance contributions on the amount of the loan.
What happens if I overdraw by more than £15,000?
If you overdraw your director’s account by more than £15,000, you may be subject to additional tax charges. This is because the government considers loans of this size to be more likely to be used for personal expenses rather than business purposes.
The exact amount of tax you will owe will depend on your individual circumstances, but it could be as much as 33.75% of the amount of the loan.
In addition to the tax charges, you may also be at risk of being disqualified from acting as a director of a UK company. This is because the government considers loans of this size to be a sign of poor financial management.
If you are considering overdrawing your director’s account by more than £15,000, it is important to seek professional advice to understand the potential risks and consequences.
What are the risks of director’s loan accounts?
There are a number of risks associated with director’s loan accounts. These include:
- Personal liability. If the company is unable to repay its debts, the director may be personally liable for those debts. This is because the director is considered to be a creditor of the company, and creditors have a right to be repaid before shareholders.
- Tax implications. As mentioned above, interest that is charged on an overdrawn director’s loan account is taxable income for the director. Additionally, if a director’s loan account is not repaid within nine months of the company’s accounting year end, the director may be liable to pay National Insurance contributions on the amount of the loan.
- Disqualification. If a director does not repay an overdrawn director’s loan account within nine months of the company’s accounting year end, they may be disqualified from acting as a director of a UK company.
What should I do if I have a director’s loan account?
If you have a director’s loan account, it is important to understand the risks involved and to take steps to mitigate those risks. This may include:
- Repaying the loan as soon as possible.
- Making sure that the loan is documented properly.
- Keeping accurate records of all transactions relating to the loan.
- Seeking professional advice on the tax implications of the loan.
Final thoughts
Director’s loan accounts can be a useful tool for directors of UK limited companies. However, it is important to understand the risks involved and to take steps to mitigate those risks. If you are considering setting up a director’s loan account, it is advisable to seek professional advice.
TaxAgility has been working with small business owners in and around Richmond and Putney for many years. We’ve assisted them manage their financial operations and advised them on the use of their directors account.
Contact us today on 020 8108 0090 to learn more about how we can help you.