Check for signs of outsourced labour payroll fraud
Source: gov.uk (2025-10-28)

Find out what checks you should complete if you’re an agency, employer or worker and how to report potential fraud.

Outsourced labour payroll fraud (formerly payroll company fraud) is the movement of workers and payroll responsibilities from a legitimate business, to another business.

It is part of a fraudulent supply chain, which does not declare or pay the correct taxes to HMRC.

Legitimate businesses are often unaware of any fraud.

You need to be aware of outsourced labour payroll fraud if you:
- are outsourcing your workforce or payroll
- are a recruitment or employment agency
- work for one company but are paid by another
- work for an agency
Outsourced labour payroll fraud is part of a wider group of organised crimes involving the supply of labour, known as organised labour fraud.

How it works and how to spot it

Signs of outsourced labour payroll fraud include:
- payroll companies requesting that an established business transfers staff to them
- savings on payroll and labour costs that seem too good to be true
- a payroll company with a similar name to the business
- irregular payment arrangements, such as requesting that you make a payment to a third party
- offers to refund administrative costs, a service also known as ‘milestone kickbacks’
- no physical presence at the registered office address
- no online presence or website
If you’re an employer or agency

If you have outsourced your workforce you should:
- carry out due diligence checks (https://www.gov.uk/government/publications/use-of-labour-providers) on your supply chain
- understand what service you’re being supplied
- be clear who pays your workers and how they’re paid
- question your supplier if you have concerns
This is not a definitive list. The checks you need to take will depend on what your business does, and how it operates.

You should keep a detailed record of all the checks you do.

Check your supplier

Fraudulent payroll companies may operate alongside several others, all providing connecting services, such as issuing invoices.

You should:
- check a company’s VAT registration with HMRC (https://www.gov.uk/check-uk-vat-number)
- check who holds the contracts of employment for your staff
- ask for evidence of RTI returns and the payments made to HMRC
Understand the supply you receive

You need to understand the type of supply you receive. It may be a supply of:
- labour only
- labour with payroll services
- payroll services only
If you know the type of supply you receive, you’ll be able to work out the correct treatment for VAT purposes.

Fraudsters often lie about the supply of labour to make the VAT seem higher than it should be, maximising illegal income.

We are aware of a model of outsourced labour payroll fraud which involves the ‘assignment’ or ‘transfer’ of workers’ contracts of employment to fraudulent entities, without any change in the terms and conditions of those contracts.

Our view is that this does not work. You may wish to seek independent legal advice on the arrangement.

If you’re involved in an arrangement like this, you may not be able to deduct VAT input tax for the cost and may be asked to repay it to HMRC.

Check if you’re an employment intermediary

If you supply workers to a client, you may be an employment intermediary.

You should check if you need to send employment intermediary reports (https://www.gov.uk/guidance/employment-status-employment-intermediaries).

If you need to send voluntary reports

Tell HMRC about your payroll outsourcing arrangements (https://www.gov.uk/government/publications/paye-report-payroll-outsourcing).

HMRC will check if the company submits the correct returns and pays the right amount of tax and National Insurance contributions.

If you’re a worker

You may be a victim of outsourced labour payroll fraud if your employer outsources their workforce.

Check your employment rights if:
- you’re an agency worker (https://www.gov.uk/agency-workers-your-rights/your-rights-as-a-temporary-agency-worker)
- your employment contract is transferred to another company (https://www.gov.uk/transfers-takeovers/transfers-of-employment-contracts)
You may get a false payslip showing that Income Tax and National Insurance contributions have been deducted. However, this may be different to what HMRC has been told, and it is often not paid.

You may also be told that you will be paid gross or encouraged to set up your own company, sometimes called a personal service company.

This can have long-term consequences on your entitlement to state pension and other benefits.

You can check what information is being reported to HMRC through your personal tax account (https://www.gov.uk/personal-tax-account).

Criminal companies may also claim to offer benefits that you struggle to access, such as voucher schemes and pension schemes.

You can report concerns about your workplace pension scheme (https://www.thepensionsregulator.gov.uk/en/contact-us/scheme-members-who-to-contact/report-concerns-about-your-workplace-pension) to the Pensions Regulator.

If you’re an agency worker or contractor, and work through an umbrella company, you can:
- read more about how and what you’ll be paid (https://www.gov.uk/guidance/working-through-an-umbrella-company)
- use our tool to work out pay from an umbrella company (https://www.gov.uk/guidance/work-out-pay-from-an-umbrella-company)
Reporting potential fraud or tax avoidance

You can report tax fraud online (https://www.gov.uk/report-tax-fraud) if you have concerns about:
- a supplier
- unpaid Income Tax and National Insurance contributions
- unpaid VAT
How it can affect your business

If we find that a business either knew or should have known about fraud in the supply chain, we may:
- deny the businesses in the supply chain the right to recover VAT input tax
- charge a penalty for transactions connected to fraud (https://www.gov.uk/government/publications/compliance-checks-penalties-for-transactions-connected-with-vat-fraud-ccfs42)
You may be held responsible for any unpaid Income Tax or National Insurance contributions, including interest.

We may also transfer VAT penalties to individuals, such as a director or manager of the company.

More information about outsourced labour payroll fraud

Watch a video about outsourced labour payroll fraud.

Outsourced labour payroll fraud (https://www.youtube.com/watch?v=sQ8wOmLnZpI).

You will learn about:
- how fraudulent companies in the supply chain operate
- the impact of National Insurance contributions not being paid to HMRC
- your responsibility to understand who pays the workers and how they’re paid
- the importance of completing regular checks and keeping detailed records