What You Need to Learn
- Understand the difference between fraud and theft
- Know the three types of fraud defined by the Fraud Act 2006
- Describe internal fraud, external fraud and corporate fraud with examples
- Explain how theft affects businesses, both internally and externally
- Understand the costs of fraud and theft to businesses and the wider economy
- Know how taxation affects businesses and how HMRC collects taxes
- Describe different types of tax: Income Tax, NICs, VAT, Corporation Tax and Business Rates
- Distinguish between tax planning, tax avoidance and tax evasion
- Understand the concept of the tax gap
4.1 Fraud and Theft
Fraud and theft are two of the biggest problems facing businesses. Although they are related, there is an important legal distinction:
| Theft | Fraud |
|---|---|
| Physically taking property or money that belongs to someone else | Obtaining money or property through deception — by false pretences |
| Example: Stealing cash from a till | Example: Submitting a fake expenses claim |
The Fraud Act 2006
The Fraud Act 2006 defines three types of fraud:
| Type of Fraud | Description |
|---|---|
| 1. False representation | Dishonestly making a false representation to gain an advantage or cause loss to another. For example, lying on a loan application or using someone else's credit card details. |
| 2. Failing to disclose information | Dishonestly failing to disclose information that you have a legal duty to share. For example, not telling an insurer about a previous claim. |
| 3. Abuse of position | Dishonestly abusing a position of trust for personal gain. For example, an employee diverting company funds into their own account. |
Fraud can be divided into two main categories: Internal fraud (committed by people within the business) and External fraud (committed by people outside the business). There is also Corporate fraud, committed by or on behalf of a company.
4.1.1 Internal Fraud
Internal fraud is committed by people who work within the business. This includes employees, managers, and directors. A key form of internal fraud is embezzlement — the dishonest taking or misuse of money or property that has been entrusted to your care as part of your job.
| Type (Table 4.1) | Description |
|---|---|
| False Expenses Claims | Employees claim for expenses they have not incurred, or inflate the amounts on genuine claims. For example, claiming for a first-class train ticket but travelling standard class. |
| Payroll Fraud | Creating fictitious employees on the payroll and diverting their wages, or continuing to pay employees who have left the company. |
| Invoice Fraud | Raising false invoices for goods or services that were never supplied, or inflating the value of real invoices and pocketing the difference. |
| Personnel Management Fraud | Manipulating HR systems, for example creating ghost employees, falsifying qualifications, or approving pay rises or bonuses for personal gain. |
4.1.2 External Fraud
External fraud is committed by people outside the business — criminals, fraudsters, hackers, or dishonest customers and suppliers.
| Type (Table 4.2) | Description |
|---|---|
| Intellectual Property Fraud | Stealing or copying a business's designs, patents, trademarks or trade secrets. Includes counterfeiting branded goods. |
| Payment Fraud | Using stolen or fake payment details (credit/debit cards, bank transfers) to obtain goods or services without paying. |
| Invoice Fraud | Sending fake invoices to a business, pretending to be a genuine supplier. The business pays the fraudster instead of the real supplier. |
| Fake Advertising Scams | Fraudsters trick businesses into paying for advertising that does not exist, or for entries in fake directories and publications. |
Internet Fraud
The growth of online business has led to a massive increase in internet fraud. This includes phishing emails, fake websites, hacking, ransomware attacks, and online scams that trick businesses into transferring money.
Identity Fraud
Identity fraud (also called identity theft) occurs when a criminal obtains someone's personal information — such as their name, date of birth, address, and financial details — and uses it to commit fraud. For businesses, identity fraud can mean:
- Criminals opening accounts or obtaining credit in the business's name
- Employees' identities being stolen, leading to payroll fraud
- Customer data breaches that damage the business's reputation
Insurance Fraud
Insurance fraud involves making false or exaggerated claims. Two common types are:
- "Crash for cash" — deliberately causing a car accident to make an insurance claim
- "Flash for cash" — flashing headlights to let another driver out, then deliberately crashing into them and blaming them
4.1.3 Corporate Fraud
Corporate fraud is fraud committed by a company or its directors, often on a large scale. Key types include:
| Type | Description |
|---|---|
| Insolvency-related fraud | Directors continue trading when they know the company cannot pay its debts, running up losses that fall on creditors. |
| Phoenix companies | A company goes bankrupt owing money, and the directors immediately set up a new company doing the same business — leaving creditors of the old company unpaid. |
| Asset stripping | Taking over a company and selling off its valuable assets (buildings, equipment, land) for personal profit, rather than running the business. |
| False accounting | Deliberately manipulating a company's financial records to make it appear more profitable or financially stable than it really is. |
| Mis-selling / Pressure sales | Selling financial products that are unsuitable for customers, often using high-pressure tactics or failing to explain the risks. |
4.1.4 Theft
Unlike fraud (which involves deception), theft is the physical taking of property or money. Businesses face theft from both internal and external sources.
Internal Theft
Theft by employees is surprisingly common. Examples include:
- Taking stationery and office supplies home
- Stealing cash from the till or safe
- Taking stock or products
- Dipping into petty cash
- Helping themselves to food and drink without permission
External Theft
Theft by people outside the business includes:
- Break-ins — burglary of business premises
- Delivery van theft — stealing goods from vans or lorries
- Shoplifting — customers stealing goods from shops
- Robberies — theft using force or threat of violence
Case Study: Tom's Toy Shop
Tom noticed his toy shop was losing a lot of stock. He invested £3,000 in CCTV cameras to monitor the shop floor and storeroom. Within a few months, the cameras revealed that £5,000 worth of stock had gone missing. Most shockingly, the CCTV caught Tom's manager stealing products and taking them home. The manager was dismissed and prosecuted. The CCTV investment paid for itself quickly by stopping the losses.
Card Sort: Internal Fraud, External Fraud, Corporate Fraud or Theft?
Sort these 10 examples into the correct category:
4.1.5 Costs of Fraud and Theft
Fraud and theft have a massive financial impact on the UK economy:
| Area | Annual Loss |
|---|---|
| Total loss to UK economy | £190 billion |
| Private business sector | £140 billion (including £3 billion in banking fraud) |
| Public sector | £40.3 billion |
Beyond the direct financial losses, businesses also face significant additional costs:
- Investigation costs — hiring forensic accountants, IT experts, or private investigators
- Legal costs — prosecuting fraudsters, defending lawsuits, and regulatory fines
- Protection costs — investing in security systems, CCTV, alarm systems, staff training, and cyber security
- Loss of reputation — customers may lose trust and take their business elsewhere
4.1.6 Impact on Businesses and Consumers
Fraud and theft create a chain of consequences that affects everyone:
Higher costs from fraud/theft → Fall in profit for the business
OR
Higher costs from fraud/theft → Business increases prices → Customers pay more
This means that fraud and theft do not just affect businesses — they affect consumers too, through higher prices for goods and services.
4.2 Taxation and Business Money Management
All businesses must pay tax. HMRC (Her Majesty's Revenue and Customs) is the government department responsible for collecting taxes in the UK. Businesses must:
- Complete tax returns accurately and on time
- Keep detailed financial records of all income and expenditure
- Many businesses employ accountants to manage their tax affairs and ensure compliance
4.2.1 Income Tax and National Insurance
How income tax and National Insurance work depends on whether someone is self-employed or an employee:
| Self-Employed | Employees |
|---|---|
| Must calculate and pay their own Income Tax and National Insurance directly to HMRC | The employer deducts Income Tax and National Insurance from wages before they are paid (PAYE — Pay As You Earn) |
| Must complete a Self Assessment tax return each year | The employer handles all the paperwork and payments to HMRC |
4.2.2 VAT (Value Added Tax)
VAT is a tax added to the price of most goods and services. Businesses collect VAT on behalf of HMRC.
| VAT Rate | Percentage | Examples |
|---|---|---|
| Standard rate | 20% | Most goods and services (electronics, clothing, restaurant meals) |
| Reduced rate | 5% | Home energy (gas and electricity), child car seats, sanitary products |
| Zero rate | 0% | Most food, children's clothing, books, newspapers |
VAT registration: Businesses must register for VAT if their taxable turnover exceeds the VAT registration threshold. Once registered, they must charge VAT on sales and can reclaim VAT on business purchases.
Case Study: Sue Baker
Sue runs a small bakery. When her annual turnover exceeds the VAT threshold, she must register for VAT with HMRC. She now has to charge 20% VAT on her standard-rated products (such as cakes eaten on the premises) but charges 0% on basic food items (such as bread sold to take away). Every quarter, Sue must submit a VAT return to HMRC, paying the difference between VAT collected from customers and VAT paid on business supplies.
4.2.3 Corporation Tax and Business Rates
| Tax | Description |
|---|---|
| Corporation Tax | A tax on a company's profits. All limited companies (both Ltd and PLC) must pay corporation tax to HMRC on their taxable profits each year. |
| Business Rates | A local tax paid by businesses on commercial properties they occupy (shops, offices, factories, warehouses). Rates are set by local authorities and help fund local services. |
Match the Tax Types
4.2.4 Impact of Taxation on Business
| Positive Impacts | Negative Impacts |
|---|---|
| Funds education — businesses benefit from a skilled workforce | Administration costs — time and money spent completing tax returns and keeping records |
| Pays for roads and infrastructure — essential for transporting goods and commuting | Accountancy fees — many businesses must hire accountants to manage complex tax affairs |
| Funds regulation and consumer protection — creates a fair market for honest businesses | Reduces profits — corporation tax, business rates and employers' NICs all reduce the money available for investment and growth |
| Pays for law and order — police, courts and prisons protect businesses from crime | Effect on prices and employment — businesses may pass tax costs on to customers through higher prices, or reduce staff numbers to cut costs |
4.2.5 Ways of Reducing Tax Liability
There are three approaches to reducing the amount of tax paid, and it is essential to understand the difference between them:
1. Tax Planning (Legal)
Tax planning means using legitimate methods provided by the government to reduce your tax bill. These are specifically designed to encourage certain behaviours:
- ISAs — Individual Savings Accounts allow tax-free savings and investments
- Deducting business costs — legitimate expenses reduce taxable profits
- Capital allowances — businesses can claim tax relief on purchases of equipment and machinery
- R&D relief — tax credits for businesses that invest in research and development
- Charity shop tax advantages — charities receive business rates relief and Gift Aid on donations
2. Tax Avoidance (Legal but Controversial)
Tax avoidance means exploiting loopholes in tax law to reduce tax bills. It is legal but often considered morally wrong:
- Tax havens — registering businesses in countries with very low or zero tax rates
- High-profile individuals like Gary Barlow and Jimmy Carr faced public criticism for using aggressive tax avoidance schemes
- Major corporations like Amazon, Starbucks, Google and Facebook have been criticised for shifting profits to low-tax countries, paying very little UK tax despite huge UK revenues
- The UK introduced a Digital Services Tax in 2020 (2% on revenues of large digital companies) to address this issue
3. Tax Evasion (Illegal)
Tax evasion is deliberately breaking the law to avoid paying tax. It is a criminal offence:
- Under-reporting revenue — not declaring all income received
- Over-reporting expenditure — claiming costs that were not incurred
- Making false claims — fabricating deductions or allowances
4.2.6 The Tax Gap
The tax gap is the difference between the amount of tax that should theoretically be collected and the amount that is actually collected.
| Component | Amount |
|---|---|
| Total tax gap | £31 billion (4.7% of all tax due) |
| Tax avoidance | £1.7 billion |
| Tax evasion | £4.6 billion |
| Other (errors, non-payment, legal interpretation) | £24.7 billion |
True or False: Fraud, Theft and Taxation
Flip Cards: Key Terms
Practice Quiz
Summary
| Topic | Key Points |
|---|---|
| Fraud vs Theft | Fraud = deception; Theft = physically taking property. Fraud Act 2006 defines three types of fraud. |
| Internal Fraud | Committed by employees: false expenses, payroll fraud, invoice fraud, personnel management fraud. Key term: embezzlement. |
| External Fraud | IP fraud, payment fraud, invoice fraud, fake ads, internet fraud, identity fraud, insurance fraud ("crash for cash"). |
| Corporate Fraud | Phoenix companies, asset stripping, false accounting (Enron), mis-selling (PPI scandal). |
| Cost of Fraud/Theft | £190bn to UK economy; £140bn to private business; £40.3bn to public sector. Plus investigation, legal, security and reputation costs. |
| Taxation | Income Tax, NICs (employee and employer), VAT (20%, 5%, 0%), Corporation Tax, Business Rates. Managed by HMRC. |
| Reducing Tax | Tax planning (legal), tax avoidance (legal but loopholes), tax evasion (illegal). Tax gap = £31bn. |
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