Fraud alert: Agencies and contractors face prosecution over latest “tax credit” payroll schemes

HMRC has issued a warning to the recruitment sector regarding fraudulent payroll schemes. These models use “acquired tax credits” to falsely reduce tax liabilities (PAYE and NICs), exposing agencies, employers, and contractors to huge fines and potential criminal prosecution. We highlight which industries and workers could be most at risk of these schemes.

High-risk contractors and agencies on notice

This latest alert from HMRC is aimed at employment agencies and umbrella companies. Yet, contractors and temporary workers engaged via these services are also at significant risk. Any organisation being marketed ‘cheaper’ payroll services through arrangements like joint employment, co-employment, or Professional Employer Organisation (PEO) models that promise suspicious tax savings should be treated with extreme caution by all parties in the supply chain.

The fraudulent ‘tax credit’ model exposed

HMRC has found a rise in models marketed by organised crime groups that falsely claim to reduce an agency’s employment costs. These schemes run under the guise of acquiring third-party businesses—often those in financial distress or pre-administration—that supposedly hold large tax credits on file with HMRC.

The operators of the scheme, often calling themselves payroll providers or intermediaries, claim they can use these acquired tax credits to offset the Pay As You Earn (PAYE) and National Insurance Contributions (NICs) due from the agency’s workers.

In reality, HMRC states that these are instances of tax evasion. The taxes due are either simply not paid over to the Exchequer or are disguised through the creation of false documents designed to give the impression of compliance.

Industries and workers under scrutiny

The temporary employment and recruitment sector has been identified as a major target for these fraudulent models.

Temporary employment: Sectors with high staff turnover and frequent use of short-term contractors (e.g., Construction, Logistics, Health & Social Care).

Recruitment agencies: Agencies placing staff on PAYE contracts through third-party umbrella or payroll providers.

High-volume roles: Any roles where complex, high-volume PAYE and NICs processing is managed by an external intermediary.

The complex supply chain in the temporary labour market offers numerous opportunities for criminal groups to insert themselves and exploit the system by using the sheer volume of PAYE/NICs liabilities.

The hidden cost: risk for the individual contractor

While the focus of the HMRC warning is on corporate liability, individual contractors and temporary workers must recognise their personal exposure to these schemes.

A key indicator of such fraud is receiving a payslip that shows Income Tax and National Insurance deductions, but where those funds are, in fact, never remitted to HMRC by the fraudulent provider.

The long-term consequences for the individual contractor can include:

Tax liability: The contractor may be ultimately held responsible by HMRC for the unpaid Income Tax and National Insurance contributions, including substantial interest charges.

Benefit impact: Non-payment of NICs can result in gaps in an individual’s National Insurance record, severely affecting their future entitlement to the State Pension and other social security benefits.

Misleading pay: Being encouraged to be paid ‘gross’ or receiving pay that seems suspiciously high, often marketed as ‘not avoidance’, should be treated as a major red flag showing non-compliance.

Contractors must scrutinise their payslips and confirm that their provider is fully compliant, as relying on an agency or employer’s assurance may not be sufficient protection.

Agency liability and the lack of named cases

HMRC’s briefing delivers a message that the employer or agency is ultimately responsible for ensuring the correct amount of tax and National Insurance contributions are paid to HMRC.

Agencies that sign up to these schemes, even if unaware of the fraudulent nature, could face:

• Having to pay back the full amount of tax originally offset
• Significant interest charges and financial penalties
• Potential criminal prosecution where appropriate, for those involved in the promotion or use of the scheme

While HMRC confirmed its awareness of numerous new fraudulent models being marketed, the official government briefing did not name any specific umbrella companies or linked recruitment agencies that have been successfully prosecuted under this latest clampdown. This suggests the investigation is currently focused on raising awareness to disrupt the proliferation of the models before widespread public exposure of specific firms.

Key warning signs for non-compliance

Agencies, employers, and contractors are urged to undertake robust due diligence and watch out for the following red flags:

• Third parties offering models that claim to offset your tax liability using acquired tax credits from failing or pre-administration companies.
• Any provider claiming the arrangements are HMRC-approved or verified by ‘King’s Counsel (KC)’.
• Models claiming they will fall outside of the new umbrella company legislation due in April 2026.
• Offers of incentives or ‘kick-back’ payments for using the model, or take-home pay rates that seem unrealistically high compared to compliant services.

HMRC maintains that it does not approve models or schemes and considers any claims of such approval to be a major sign of potential tax evasion.

Be on top of your game every week. Sign up for our newsletter: