Save content
Have you found this content useful? Use the button above to save it to your profile.
A yellow umbrella | AccountingWEB | The deceitful business of fake payslips uncovered
istock_umbrella_eoneren

The deceitful business of fake payslips uncovered

by

Zubair Ahmed from Chartergates draws back the curtain on umbrella companies generating fake payslips and warns of ensuring due diligence in the labour supply market.

28th May 2024
Save content
Have you found this content useful? Use the button above to save it to your profile.

With the current pressures on the labour supply market, performing thorough due diligence is of critical importance.

Despite the increased vigilance of employment agencies or end-users that use labour suppliers (the client), some labour suppliers (the supplier) continue to find ways to deceive their clients.

Alarmingly, this deceit is often only uncovered during a client’s audit of the supplier.

The motive behind deception

Many labour suppliers are required to employ their workforce and operate PAYE (Pay As You Earn) on all payments.

However, some suppliers exploit this trust by engaging individuals on a self-employed basis or via intermediaries, such as personal service companies. They make payments on a gross basis while charging customers rates that suggest PAYE compliance.

To sustain this façade, suppliers often present fabricated documents during audits to give the illusion of operating PAYE.

Contrary to common belief, although a payslip is a crucial document for evidencing PAYE, it alone may not reveal suspicious behaviour.

The whole arrangement needs to be audited to truly uncover whether there is suspicious activity by the supplier that would warrant further investigation and/or action being taken.

Contractual chain

One of the most critical aspects of any audit is verifying the integrity of the contractual chain. This process requires legal expertise but is among the most beneficial components of an audit.

A payslip will outline various pay elements and deductions, while the worker's contract specifies their entitlements, such as pay rate, holiday entitlement, and pension contributions. The payments detailed on the payslip should match the entitlements stated in the contract. Discrepancies between these documents often indicate deeper issues with either the payslip, the contract, or both.

The contract between the supplier and the worker must be mutually agreed. If evidence of agreement is missing, further investigation is necessary. Clients should seek proof that the contract was sent to the worker, such as a copy of the email or, if competed online, a log entry from the online portal.

Reviewing the dates when the contract was signed and ensuring it does not post-date the audit period are crucial steps. These checks can uncover potential issues that may point to more serious problems.

Moreover, it’s not just the worker’s contract that needs scrutiny. Potential liabilities often arise when the contractual chain is compromised, possibly making the client responsible for the worker.

In such circumstances, failures by the supplier can implicate the client, so it's essential to review the terms between the customer and the supplier. This ensures that the supplier is appropriately positioned in the supply chain and that the client is adequately protected.

The payslip

Most readers will know what a payslip looks like. But, depending on the payroll software being used, the presentation of a payslip can vary.

However, as an absolute minimum, all payslips must show earnings before and after deductions and identify the number of hours worked if these vary.

Additionally, other elements typically found on payslips include:

  • The period covered (week or month)
  • The worker’s tax code
  • Year-to-date (YTD) figures

Missing elements or errors, especially in YTD figures, can indicate a suspicious payslip and further queries should be made and checks undertaken to alleviate any concerns, as set out below.

Employer returns

Many businesses rely on payslips alone but these are easy to fabricate and may not raise any alarm bells when reviewed in isolation. A more reliable method is reconciling payslips with the Full Payment Submission (FPS) to HMRC. Any discrepancies between the two documents can suggest a falsified payslip.

Interestingly, the format in which the FPS is shared by the supplier can vary and, depending on the extent of the supplier’s deceitful behaviour, the FPS could also be fabricated to match the fake payslip.

It is therefore crucial to reconcile the total amount due under the FPS (typically for the tax month) against the total liabilities owed to HMRC for the same period.

These liabilities are accessible through HMRC’s PAYE Online Service, available to every employer via their Government Gateway. Any discrepancies identified during this verification process should be promptly investigated, as it may indicate a suspicious FPS.

Bank statements

Bank statements should list all payments made to workers, with net amounts on payslips matching the amounts on the statements. Discrepancies between net pay on the payslip and the amount paid to the worker can be indication of falsified payslips.

Also, official bank statements are preferable over internal BACS reports, which is not proof of payment. In our experience, a supplier’s reluctance to provide official bank statements merits further investigation.

Replies (4)

Please login or register to join the discussion.

avatar
By Jdopus
28th May 2024 15:47

The fundamental problem here is that HMRC have given up tackling the actual fraudsters in this situation - who are a hard target because they vanish into the aether.

I have a few clients who have been deceived like this and the approach HMRC are taking is to go after the person who has been defrauded by their employer, insist that this non-financially knowledgeable member of the public has actually been self employed all along and then, once they have made this erroneous accusation, they apply legislation which was written to tackle the infamous employer loan schemes to these employees and attempt to make them liable for years worth of underpaid taxes which the employee believed had been deducted by their employer. Usually (always) an umbrella company.

This at its source also arises from the way the government chose to tackle the problem of dodgy umbrella companies. The rules essentially let the "real employer" who is engaging workers via umbrella company pass all of the legal responsibility and employment rights responsibilities to these dodgy third parties and completely wash their hands of it. Once they have washed their hands of the umbrella companies and are out of the picture, the umbrella company underreports PAYE for years and then eventually HMRC come knocking and the only mug left standing is Joe Bloggs, the random low ranking worker who has no knowledge about how any of these things are supposed to operate and is now caught in an extremely complex and expensive HMRC enquiry.

Unfortunately Accounting Web's profanity filter prevents me from adequately expressing my true thoughts on this entire matter.

Thanks (6)
avatar
By FactChecker
28th May 2024 16:52

All of the above is true ... and yet wholly unsuitable for what it purports to be (a justification for thorough auditing of Payroll that has been processed by one of the audited client's suppliers).

The underlying issue is, as set out by Jdopus, caused by a failure of nerve when the legislators decided not to lay the bill for any shortfall at the door of the 'employer'.
IF that had been done (which would be fairer than chasing individuals and more likely to be effective than chasing the disappeared umbrellas), THEN the above article would make more sense - although I suspect it wouldn't be necessary because the risk-averse 'employers' would simply cease to place their business with umbrella companies in the first place. Job done!

FWIW if anyone does want to 'audit' (in the colloquial sense) a Payroll operator, there's no need to go to the inordinate lengths suggested above.
All you need to do, in order to combat the most obvious/common frauds, are:
1. check that each worker for a period has been processed and included in relevant FPS
2. check, via sampling, that gross pay is correct vs whatever central record is maintained
3. check, via sampling, for any egregious-looking/substantial pre-tax deductions
4. check, via sampling, whether net pay looks in the right ball-park for taxable pay
5. check, via sampling, whether that net pay figure corresponds with the BACS payment

Or, in shorthand, have the correct people been paid? / at the correct headline rate and without dubious 'siphoning off'? / and does net pay reported to HMRC appear unchanged when it reaches employee's bank account?

Of course if the audit uncovers potential concerns, then a deeper forensic dive may be required. But the basics are not complicated or even particularly arduous!

Thanks (7)
avatar
By Sandnickel
29th May 2024 10:06

The unspoken part of this article is that most of the recruitment agencies DO know what is happening. In the worst examples they are profiting from and complicit with the umbrellas whilst pleading ignorance about the situation.

The way to stop this is either to ban the use of umbrella companies which penalises the worker and the complaint players or regulate it to the point of individual responsibility. Regulation means government involvement which they will be reluctant to propose or implement.

Thanks (2)
Chartergate Audit Services Ltd
By Zubair Ahmed
31st May 2024 14:11

It's always encouraging to see an article spark discussion and engage readers. The core of this topic is the issue of labour suppliers intentionally misleading their customers. Whilst I appreciate the argument that the root cause lies in legislative shortcomings (and it may well be true that the legislative framework and policy need improving), as things currently stand we are stuck with this framework and it is therefore essential for businesses using labour suppliers to understand the existing regulations and how these rules can affect them.

Crucially, default PAYE liability rests with the employer, and in the context of this article that is the umbrella company. There are of course exceptions whereby an agency may become responsible for the liability or a penalty, such as when the agency is involved in the supplier's non-compliant practices. It is of course very unfortunate if an employee is caught up in the non-compliance – although for PAYE liability to pass to an employee there are various conditions e.g. that the employee has received earnings knowing that their employer has wilfully failed to deduct tax. In any case, where an intermediary is involved in the supply chain, PAYE must be operated by the intermediary unless it can be demonstrated that there is no supervision, direction, or control (SDC) over the manner in which services are provided (even in a self-employed case, which is worth noting). If SDC does exist, the default liable party is the first intermediary (i.e., the agency contracting with the end-client).

However, the issue highlighted here is that some labour suppliers deceive their customers by falsely claiming to operate PAYE. Due to this deceitful behaviour, the first intermediary may argue that they relied on the supplier’s evidence regarding PAYE operations and should not be held liable. While this argument might not bear fruit if agencies are turning a blind eye to such arrangements, it's important to note that not all agencies or umbrella companies are complicit.

Regarding auditing a ‘Payroll operator,’ the notion that a basic payment check suffices is risky. While checking that each worker has been processed and included in the relevant FPS and reconciling net pay against bank statements are common practices, labour suppliers have now been identified as falsifying payslips and RTI data. Thus, the essence of the article is to raise awareness and to encourage a more thorough and cautious approach to auditing suppliers.

Importantly, despite the opinion on the extent of necessary checks, it’s clear that merely verifying gross pay and deductions is inadequate if documents can be fabricated. Consequently, and arguably of more importance, maintaining the integrity of the contractual chain is vital. If the integrity of the contractual chain is compromised, workers might be considered employees of the business using the labour supplier, thus making that business liable for employer responsibilities towards these workers. The more cautious approach to auditing should also include undertaking enhanced VAT due diligence on suppliers to further protect the user from unwanted ramifications under the Kittel principle.

Ultimately, pay-related checks alone are insufficient. Businesses must audit the contractual, legal and tax aspects of their arrangements with labour suppliers to ensure adequate protection.

Thanks (1)