In today’s challenging labour supply market, conducting thorough due diligence is paramount. Here we examine the methods and implications of umbrella companies providing fake payslips.

Despite the heightened scrutiny by employment agencies and end-users (the clients) of labour suppliers, some suppliers still manage to deceive their clients.

Alarmingly, this kind of deceit often comes to light only during a client’s audit of the supplier.

The Motive Behind Fake Payslips

Labour suppliers are typically required to employ their workforce and manage PAYE (Pay As You Earn) on all payments. However, some suppliers abuse this trust by engaging workers on a self-employed basis or through intermediaries, such as personal service companies, making gross payments while billing clients rates that imply PAYE compliance. To maintain this deception, suppliers often produce fake documents during audits to give the appearance of operating PAYE.

While payslips are critical for evidencing PAYE, they alone may not expose fraudulent activity. A comprehensive audit of the entire arrangement is necessary to identify suspicious actions by the supplier that may require further investigation or action.

Verifying the Contractual Chain

One crucial aspect of any audit is confirming the integrity of the contractual chain, which, although it requires legal expertise, is highly beneficial. Payslips should outline pay elements and deductions, while the worker’s contract should detail entitlements such as pay rate, holiday entitlement, and pension contributions. Payments on the payslip should match the contract entitlements and any discrepancies can often signal deeper issues.

The contract between the supplier and the worker must be mutually agreed upon. Missing evidence of this agreement should be a sign that further investigation is needed. Clients should verify that the contract was sent to the worker, either as a copy of the email or an online portal log entry.

Reviewing the signing dates of the contract and ensuring the contract does not post-date the audit period are both essential steps in uncovering any potential issues. It is also crucial to examine and scrutinise the terms between the client and the supplier to ensure the supplier is properly positioned in the supply chain and that the client is protected.

Examining the Payslips

Payslips, varying in presentation depending on payroll software, must at minimum show earnings before and after deductions (NI, tax, student loans etc) and the number of hours worked if they vary. Common elements include the period covered (week or month), the worker’s tax code, and year-to-date figures. Missing or erroneous year-to-date figures can be indicative of a suspicious payslip, warranting further queries and checks.

Reconciling Employer Returns

Relying solely on payslips is risky as they are very easy to fabricate. A more reliable method is reconciling payslips with the Full Payment Submission (FPS) to HMRC. Discrepancies between these documents can suggest falsified payslips. Since the FPS format can vary, and potentially be fabricated to match fake payslips, reconciling the total amount due under the FPS with HMRC liabilities for the same period is crucial. Any discrepancies should be investigated promptly.

Reviewing of Bank Statements

Bank statements should list all payments to workers, with net amounts on payslips matching those on the statements. Discrepancies can indicate falsified payslips. Official bank statements are preferred over internal BACS reports, as the latter are not proof of payment. Any reluctance from a supplier to provide official bank statements should prompt further investigation.

All information in this article should be considered general and not official advice from K2 Accountancy Group. If you are suspicious of any element of your supply chain or would like further information on how fake payslips could affect you and your business, please contact us directly.