HMRC Warns Businesses About Payroll Fraud Schemes

HMRC has issued a warning about schemes claiming to reduce PAYE and National Insurance costs through the use of acquired tax credits. HMRC considers these arrangements to be tax evasion and has warned employers, recruitment businesses and agencies to exercise caution before entering into any arrangement that promises significant savings on employment taxes.

These arrangements may be marketed as:

• Payroll solutions
• Umbrella arrangements
• Back-office services
• Employment cost reduction schemes

According to HMRC, some providers claim they can acquire businesses with tax credits and use those credits to offset PAYE and National Insurance liabilities. HMRC has made it clear that it does not approve these arrangements and that businesses should be wary of claims that a scheme has HMRC approval or verification.

Why should employers be concerned?

Many of these schemes are marketed as a legitimate way to reduce employment costs. In reality, HMRC’s concern is that taxes are often not being paid over to HMRC at all, despite employers believing their obligations have been met. HMRC warns that false paperwork may be produced to give the impression that payroll taxes have been accounted for correctly.

Importantly, employers remain responsible for ensuring that the correct PAYE and National Insurance is paid to HMRC, even where payroll has been outsourced to a third party. If HMRC determines that a scheme has been used incorrectly, businesses could face:

• Repayment of unpaid PAYE and National Insurance
• Interest on late-paid amounts
• Financial penalties
• HMRC enquiries and investigations
• Significant management time and disruption

HMRC has specifically warned that businesses should not assume an arrangement is compliant simply because it is marketed as being outside tax avoidance rules or because a provider claims to have received professional approval.

Warning signs to look out for

Businesses should be particularly cautious where a provider:

• Promises substantial reductions in PAYE or National Insurance costs
• Claims to use tax credits acquired from other businesses
• States that HMRC has approved or verified the arrangement
• Offers incentives or kickback payments
• Claims the arrangement avoids changes to umbrella company legislation
• Cannot clearly explain how the savings are generated

If something appears too good to be true, it often is. Genuine payroll efficiencies can usually be explained clearly and transparently.

How James Todd & Co can help

Our payroll and tax specialists can help businesses review existing payroll arrangements and identify any potential compliance risks before they become costly problems.

We can assist with:

• Independent reviews of payroll providers and outsourced payroll arrangements
• PAYE and National Insurance compliance checks
• Payroll health checks and process reviews
• Advice on employment status and worker engagement models
• Reviews of umbrella company arrangements
• Support with HMRC payroll enquiries and compliance checks
• Fully managed payroll services for businesses looking for a trusted payroll partner

Where a proposed arrangement claims to generate significant employment tax savings, we recommend seeking independent advice before entering into any agreement. An upfront review is often far less costly than dealing with a future HMRC investigation.

Source: HMRC briefing, “Tax fraud warning for employment agencies and employers: tax credits reducing liabilities for employers”, published 14 November 2025.