‘PAYE’ attention

HMRC has issued a briefing regarding a significant increase in sophisticated tax fraud targeting employers and recruitment agencies offering ‘cheaper’ payroll models, particularly affecting those in the temporary labour market.

HMRC believe organised crime groups continue to market fraudulent payroll models that falsely claim to offer to dramatically reduce employer costs.  HMRC considers these arrangements to be tax evasion, not legitimate tax planning.  It is, therefore, vital that our clients are aware of the risks and take steps immediately to protect themselves.

The model

The core of this ‘scam’ (as HMRC term it) revolves around a false claim of using ‘tax credits’ to offset employment taxes.   In a nutshell:

• The providers claim to acquire third-party businesses, often those in financial difficulty or pre-administration, which they assert have existing ‘tax credits’ on file with HMRC.
• They then claim that they can use these acquired tax credits to offset a business’ legal liabilities for employment taxes, such as PAYE Income Tax and NICs.
• By doing this, they promise to significantly reduce the amount businesses need to pay for their operatives’ payroll.

The reality

In reality, these ‘fraudulent models’ simply do not pay the taxes to HMRC.  They achieve their ‘cheaper’ cost by either:

• Withholding the PAYE Income Tax and NICs that are owed to HMRC, and/or
• Generating counterfeit paperwork to create the illusion that the required returns have been filed and that the taxes have been paid over correctly.

The risk

In its briefing HMRC make it clear that the employer is ultimately responsible for ensuring that all tax and NICs are correctly paid.  Entering into any of these arrangements places the business in significant financial and legal jeopardy.

If HMRC investigates and determines that the alleged tax credits were incorrectly claimed, it may result in the business having to pay back the tax originally offset, along with interest and, potentially, penalties.  Further to this, if HMRC finds associated VAT losses, the business’ right to deduct input tax may be lost if HMRC determines that the business knew, or should have known, about the connection with fraud (commonly referred to as a Kittel assessment).  Depending on the circumstances, HMRC may also consider pursuing a criminal prosecution.  

The due diligence

HMRC advises businesses to be vigilant for signs that a, potentially, fraudulent model is being promoted. The warning signs include:

• Third parties, such as a joint employment, co-employment, Professional Employer Organisation (PEO) or other intermediaries offering models that claim to offset your tax liability using tax credits,
• Using tax credits obtained by acquiring companies in financial difficulty or maybe in pre administration,
• Accounting models that claim to avoid the umbrella legislation, which is set to come into force on 6 April 2026,
• Models that claim they are HMRC approved,
• Models that claim they are Kings Counsel (KC) approved, and
• Incentives or ‘kick back’ payments for using the model being offered.

HMRC is encouraging businesses to undertake their own “robust” due diligence and to seek independent advice before signing up to a model that promises to use tax credits to deliver PAYE Income Tax and NIC savings. 

In light of the April 2026 umbrella company tax reforms coming into play, this publication is likely to mark the beginning of a more targeted approach taken by HMRC.  We would strongly encourage any business that has concerns about these types of arrangements to contact Mark Taylor – marktaylor@chartergates.com, in the first instance.  We can help review any proposed models, highlight potential risks, and recommend practical steps to mitigate exposure to financial and legal penalties.

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Disclaimer:  Chartergate Legal Services Ltd has drafted this update to provide you with a general overview of the relevant law and developments at the date of sending only.  This update is provided as a general overview and should be taken as such.  It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.