HMRC Crackdown on Tax Credit Payroll Fraud
Fraud Alert: Payroll Schemes Under Investigation
Recent warnings from HMRC have put the UK contracting sector on high alert. A new wave of fraudulent payroll schemes is targeting recruitment agencies, umbrella companies, and the contractors they serve. The schemes claim to cut tax bills by offsetting employment taxes with ‘acquired tax credits.’ The reality is more severe: agencies, employers, and individual workers could face heavy penalties and even criminal prosecution.
Who Is at Risk?
The latest HMRC alert focuses on:
Employment agencies
Umbrella companies
Contractors and temporary workers engaged through third-party payroll providers
Any party marketed ‘cheaper’ payroll or tax savings—particularly through joint employment, co-employment, or Professional Employer Organisation (PEO) models—should exercise caution.
“I remember reviewing a client’s payslip that looked legitimate, but the tax deductions never reached HMRC. They were unknowingly caught in a payroll scam.”
How the Fraudulent Model Works
Organised crime groups have refined a model that falsely promises to reduce agencies’ employment costs. Here’s how it operates:
Acquisition of distressed businesses: Fraudsters acquire businesses in financial trouble, especially those facing administration.
Claimed tax credits: These businesses are said to have large tax credits with HMRC.
Payroll providers/intermediaries: The fraudsters, posing as payroll experts, say they can use these credits to offset PAYE and National Insurance liabilities for agency workers.
Disguised non-payment: In reality, the taxes are not paid to HMRC. False documents may be created to give the impression of compliance.
The table below summarises the process:
| Step | Legitimate Practice | Fraudulent Practice |
|---|---|---|
| Payroll outsourcing | Agency uses verified provider | Agency uses provider offering ‘acquired tax credits’ |
| Tax deductions | Deductions paid to HMRC | Deductions not remitted; fake paperwork generated |
| Contractor payslips | Accurate, traceable, compliant | Appear compliant but tax not actually paid |
Sectors and Roles Under Scrutiny
HMRC highlights the temporary employment and recruitment sector as a particular target. The following are especially vulnerable:
Construction, logistics, and healthcare: Sectors with high turnover and frequent short-term contracts
Agencies placing PAYE workers through umbrella/payroll providers
High-volume PAYE/NICs processing roles
The complex supply chain in these sectors makes it easier for fraudulent actors to insert themselves.
Individual Contractors: Risks and Impact
While agencies are in the spotlight, individual contractors are not immune. Warning signs include:
Payslips showing tax and NICs deductions, but the sums never reaching HMRC
Encouragement to accept ‘gross’ pay or take-home rates that seem unusually high
Providers marketing their schemes as ‘not avoidance’ or ‘HMRC approved’
The consequences for contractors can be severe:
Tax liability: HMRC may pursue individuals for unpaid Income Tax and NICs, including interest
Benefit gaps: Missing NICs can impact future entitlement to State Pension and other social benefits
Misleading pay: Tempting take-home rates often indicate non-compliance
Contractors should not assume that an agency or umbrella provider’s assurances are enough. Scrutinising payslips and confirming provider compliance is vital.
Agency Liability and Enforcement
HMRC’s position is clear: agencies and employers are responsible for ensuring all correct taxes are paid. Signing up to these schemes, even inadvertently, can result in:
Repayment of all tax originally offset
Significant interest and financial penalties
Potential criminal prosecution for those involved
As of now, HMRC has not named specific umbrella companies or agencies prosecuted under the new crackdown. The focus appears to be on awareness and disruption before more public cases emerge.
Red Flags for Agencies, Employers, and Contractors
It is essential to conduct robust due diligence. The following are key warning signs:
Providers offering to offset tax liabilities using ‘acquired tax credits’ from failing companies
Claims that the model is HMRC-approved or verified by King’s Counsel (KC)
Promises to operate outside new umbrella company legislation coming in April 2026
Incentives or ‘kick-back’ payments for using the scheme
Take-home pay rates that are much higher than those from compliant providers
HMRC reiterates: it does not approve models or schemes. Any suggestion of such approval should be treated as a warning.
Quotes & Sources
“The models are designed to look compliant but ultimately fail to pay the required sums to the Exchequer,” HMRC’s official briefing states. “We are aware of numerous new fraudulent models being marketed.”
Further reading and official warnings can be found at the HMRC government website.
What Should Contractors and Agencies Do Next?
Review payroll arrangements: Check who is processing your pay and whether their practices are transparent
Ask questions: If something seems too good to be true, it probably is
Check compliance: Ask your provider for evidence of tax remittance
Consult HMRC guidance: Stay updated on official alerts
Report concerns: If you suspect a fraudulent scheme, contact HMRC directly
Staying vigilant is the only defence. The cost of ignoring red flags can be personal and permanent.
