The most common types of Payroll Fraud

Payroll fraud costs UK companies around £12 billion per year, but exactly what is payroll fraud? And, where can you report payroll fraud if need be? This post will answer these questions and discuss the most common types of payroll fraud and how an expert fraud barrister can aid in common payroll fraud cases.

What is Payroll Fraud?

Payroll fraud is one of the most common types of corporate fraud. It can be defined as the theft of funds from a business via the payroll processing system. Payroll fraud is usually committed by an employee attempting to receive any money they are not entitled to from their workplace. However, an employer may also commit payroll fraud. Over the past year, this has commonly surfaced as furlough fraud.

Furlough fraud is a more recent phenomenon, facilitated by the government’s financial response to the COVID-19 pandemic. This type of payroll fraud is carried out by employers claiming financial support from the government for a non-existent, dismissed, or voluntary employee. Common payroll frauds can also include PAYE fraud, in which an employee or employer submits false information to the HMRC to avoid paying PAYE tax. There are many other payroll fraud examples, the most common of which are listed below.

Common Types of Payroll Fraud

1. Ghost Employee Fraud

Ghost employees only exist on paper; ghost employee fraud occurs when ‘employees’ listed in the payroll register receive payment but aren’t actually working for said company.

2. Timesheet Fraud

This type of payroll fraud is one of the most common payroll frauds. Timesheet fraud can be defined as an employee falsely claiming hours on their timesheet and getting paid for these hours while not actually at work. Timesheet fraud may occur in industries where employees are paid by the hour and can include:

• Clocking in and out at incorrect times
• False claims regarding the number of hours worked
• Having someone else punch in and/or out for them

3. Sick Leave Fraud

Sick leave fraud refers to an employee falsely claiming sick pay from their company while working in another job.

4. Fraudulent Claims Over Number of Units Produced

Another common payroll fraud example is falsified units produced. For example, in manufacturing or sales an employee may boost their numbers for higher pay and/or for more commission.

5. False Expenses Fraud

A false expense claim occurs when an employee submits a claim for expenses to be reimbursed without having the right to do so. For example, claiming personal expenses such as a meal with friends or family as a business expense.

6. Pay Rate Falsification

Pay rate falsification or wage falsification may occur due to a collaboration between employees and the payroll department whereby additional funds are allocated, paid out, and then divided between the two parties.

7. Misclassifying Employees

Companies may misclassify employees in the payroll system to reduce staffing costs and overall tax bills. For example, a company may classify full-time staff members as contractors.

8. Commission and Bonus Fraud

This type of payroll fraud occurs when additional funds like commission and bonuses are received by employees unjustly.

What are the Potential Penalties for Payroll Fraud?

The maximum penalty for payroll fraud is a sentence of up to 7 years imprisonment. If the HMRC finds an individual or company to be cheating the public revenue – that is any conduct that deprives the HMRC of money to which it is entitled – a maximum sentence of life imprisonment may be administered. The maximum penalty for furlough fraud can be found here.

What’s Involved in a Payroll Fraud Investigation?

If you have been accused of, or are under investigation for, a payroll fraud offence, the HMRC will require any staff members with access to the company payroll processing system to assist and be an active part of the investigation. Listed below are examples of what the HMRC may look at during its investigation:

• The system used to record wages, bonuses, expenses and benefits.
• The types of contracts your staff are employed under, including self-employed staff.
• How your staff are classified in your payroll system.
• How you pay wages in terms of regularity, fairness and accuracy.
• Redundancy payments.

In all cases of payroll fraud, HMRC has the right to make copies of documents where necessary.

How Do I Report Payroll Fraud to HMRC?

You must report if you suspect an individual or your business of potential payroll fraud. If you wish to submit a report, contact HMRC directly via the fraud hotline or use the online form. Any information shared will be treated as strictly confidential. Note that HMRC will not discuss any case details with you after your initial report.

For safety reasons, HMRC advises that you do not probe further into your payroll fraud suspicion and that you must not let anyone know you have made or plan to make a report.

How Can St Pauls Chambers Assist Payroll Fraud Cases?

We hope we have answered the question, ‘what is payroll fraud?’ and furthered your understanding of the different types of payroll fraud, the penalties that exist, and how to report payroll fraud to HMRC. Our expert fraud barristers have a wealth of experience in matters related to corporate fraud. If your client has been accused of or is being investigated for payroll fraud, one of our specialist fraud barriers can assist.

Please get in touch with our team to achieve a successful outcome for your client’s payroll fraud case.