What is Payroll Fraud?
Payroll fraud is the theft of money from a business via the payroll processing system. It can be carried out by individual employees or by the employer (most recently relating to Furlough Fraud).
It is most commonly seen when employees falsely boost the amount that they should be paid. It can also relate to PAYE fraud, where payroll information is falsified in order to avoid paying Pay As You Earn tax to HMRC.
In recent months, payroll fraud has been carried out by companies to claim government furlough support (Coronavirus Job Retention Scheme) for a dismissed or non-existent employee, or for employees who are being forced to work voluntarily.
New legislation aims to move this kind of furlough-related payroll fraud into a separate financial crime category.
What are the Different Types of Payroll Fraud?
There are four main types of payroll fraud:
Ghost Employee Fraud
Creating a fake employee in the payroll records, or prolonging the pay of an employee who has left the company.
This type of payroll fraud can be carried out by individuals in the payroll department – signing over the false paycheck to their own bank account. This action can expose a company to a risk of an HMRC investigation, as the ‘ghost’ pay check often has no PAYE or NI deductions.
Ghost employee fraud can also be carried out by companies. Examples include embezzlement of amounts that are claimed to have been paid to employees, evasion of financial benefits for which staff members should be legally eligible, and other similar offences.
Furlough fraud can also use ghost employee fraud as a method to gain Coronavirus-related government support for a non-existent or dismissed staff member.
Falsification of Time Sheets
Workers who are paid hourly can falsify the number of hours worked, sign in and out of work at incorrect times, ask a colleague to sign on or off, or falsely claim to have worked certain shifts.
Falsifying units produced
Employees who are paid by the number of units they produce (for example in manufacturing or in sales) can falsify the units.
Sick Leave Fraud
An employee faking an illness in order to claim sick leave, while working in another job.
False Expenses Fraud
Inflating or falsifying claims on expense sheets.
What is PAYE fraud?
HMRC defines PAYE fraud as “a business not paying over to HMRC all of the PAYE it has deducted from its employees’ pay”.
Companies can be investigated and charged for a number of offences under PAYE fraud:
- Tax fraud or tax evasion
- Infringement of employee rights
- Cheating the public revenue
- Taxation fraud related to crime or organised crime
- Making false financial statements or providing false, misleading or forged documentation
- Deception, concealment, conspiracy or corruption
Payroll services companies
If your company has outsourced its payroll systems in order to reduce admin, you may be at risk of payroll and PAYE fraud.
Fraudulent payroll service providers take payment for their services and claim to submit PAYE and NI returns on your company’s behalf, but fail to submit these payments to HMRC.
Subsequent HMRC investigations can hold your company or your employees liable for tax evasion or other tax fraud.
What’s involved in a payroll or PAYE fraud investigation?
If you have been the subject of PAYE fraud accusations or allegations of payroll fraud, HMRC will investigate:
- The regularity, fairness and accuracy in which you pay wages
- How you record and report all expenses and benefits
- Reasons for using self-employed staff, and how they are paid
- Redundancy payments
The HMRC officers will require access to all any relevant books and records and has the right to take copies of any documents they require.
Any staff members who have access your company’s PAYE and payroll systems will be part of the investigation.
What is the maximum penalty for PAYE/payroll fraud?
Most tax fraud offences are punishable by up to 7 years in prison. However, if an individual is found guilty of cheating the public revenue, there is the possibility of a life sentence.
When Should I Seek Legal Advice About Payroll Fraud?
If you or your company have been accused by HMRC of supplying incorrect information regarding PAYE on your tax return, or you are facing accusations from staff regarding payroll discrepancies, it is important that you seek professional advice.
Equally, if you suspect or discover that an employee is committing payroll fraud, or you suspect you have been victim or a payroll service provider scam, then legal advice is vital.
A tax lawyer can help you file any necessary documentation and advise and represent you in any case against an employee or defend you in a financial fraud investigation.
For tax advice and representation in an financial fraud or HMRC investigation with one of the UK’s leading specialist tax advisers, please contact Patrick Cannon here
Alongside this, Patrick Cannon can advise and defend individuals on:
Frequently Asked Questions
Patrick has been advising on tax for over 35 years, first as a solicitor and latterly as a barrister. This experience has given him expertise in helping businesses negotiate the complexities of HMRC investigations. As a barrister, he represents companies and individuals in appeals against HMRC, and can offer advice on cases of financial fraud.
Payroll fraud can be committed by employees in a number of ways:
- Falsifying time sheets
- Claiming sick leave while doing another paid job
- Falsifying amount of units produced for pay
- Inflating or falsifying expenses
- Creating a non-existent employee on payroll and taking their wages
A company can claim that it is paying an employee, but actually embezzles all or some of that wage.
More recently, companies have fraudulently claimed money from the government for furloughed employees from the coronavirus support scheme.
Payroll fraud is a falsification of information about the amount of money paid or received by employees.
PAYE fraud is the falsification of information submitted to HMRC in order to avoid paying Pay As You Earn tax.