HMRC has stepped up its efforts to tackle fraud and non-compliance in the temporary labour market, introducing new compliance and legislative changes aimed at protecting workers, as well as businesses. Organisations involved in labour supply chains will be expected to undertake greater due diligence, while those facilitating or benefitting from non-compliant arrangements face increased scrutiny.
The temporary labour market plays a vital role across sectors including construction, logistics, healthcare and professional services. However, HMRC believes that parts of the market have become vulnerable to organised labour fraud, where complex labour supply chains are used to avoid VAT, Income Tax and National Insurance contributions.
According to HMRC, organised labour fraud occurs when criminals exploit labour supply chains to divert taxes that should be paid to the Exchequer. In some cases, workers themselves can become victims, discovering only later that tax deductions shown on their payslips were never paid to HMRC.
New guidance on payslip fraud
As part of its wider campaign, HMRC recently published guidance on avoiding payslip fraud. The guidance is directed at agency workers, contractors and individuals working through umbrella or payroll companies.
Payslip fraud can occur when workers receive payslips showing tax or National Insurance deductions that have not actually been paid to HMRC. Fraudulent payslips may appear genuine, making it difficult to identify until workers attempt to claim benefits or check their records. These non-payment of deductions can lead to reduced entitlement to benefits, trouble claiming statutory payments, lower state pension entitlements, unexpected tax liabilities and issues receiving tax repayments.
Employees are therefore being heavily encouraged to check their payslips regularly against their HMRC personal tax account and National Insurance records. Frequent changes in payroll providers, unexplained deductions, missing payslips or discrepancies between gross pay and hours worked are all highlighted as potential warning signs.
Major PAYE changes now in force
Alongside employee-focused guidance, HMRC introduced significant reforms affecting labour supply chains that use umbrella companies
Since 6 April 2026, agencies supplying workers through umbrella companies are general responsible for ensuring that PAYE is operated correctly. Where there is no agency involved, responsibility falls to the end client.
This represents a major shift in accountability. Previously, the umbrella company itself typically carried responsibility for remitting PAYE and National Insurance. Under the new framework, HMRC can recover underpaid PAYE directly from agency, or from the end client where no agency exists.
The reforms are designed to prevent non-compliant umbrella companies from entering labour supply chains in the first place. HMRC’s view is that agencies and end clients are often best placed to choose who they work with and therefore should carry greater responsibility for ensuring tax obligations are met.
Businesses that use temporary workers through umbrella arrangements should therefore review their labour supply chains carefully and strengthen their due diligence procedures where necessary.
Tackling umbrella company non-compliance
The PAYE reforms make up part of a wider government strategy to address longstanding concerns about the umbrella company market.
While many umbrella companies operate legitimately and provide valuable payroll and employment services, HMRC has repeatedly highlighted examples of operators facilitating tax avoidance, tax fraud and other others of non-compliance.
The government’s policy paper on the umbrella company market states that fraudulent operators can leave workers facing substantial unexpected tax bills, while also undercutting compliant businesses that operate within the rules.
To address this, legislation has introduced joint and several liability provisions, enabling HMRC to pursue agencies and end clients for payroll taxes that a non-compliant umbrella company fails to pay.
Tax policy objectives are clear:
- Reduce losses to the Exchequer caused by labour supply chain fraud.
- Protect workers from unexpected PAYE and National Insurance liabilities.
- Create a level playing field for compliant businesses.
- Reduce opportunities for organised criminal groups operating within the temporary labour market.
HMRC believes that increasing accountability throughout the supply chain will encourage agencies and end clients to conduct more rigorous checks before engaging payroll providers and umbrella companies.
Increased compliance activity expected
Recent HMRC communications suggest that enforcement activity is likely to increase further.
The department has expanded its organised labour fraud resources, publishing dedicated guidance covering mini umbrella company fraud, payroll company fraud, construction sector risks and labour supply chain assurance procedures. These resources are intended to help businesses identify suspicious arrangements before problems arise.
Particular attention continues to be focused on mini umbrella company fraud, where multiple small entities are established to exploit government reliefs and tax advantages. HMRC has repeatedly emphasised that all participants in a labour supply chain can face legal, financial and reputational consequences if reasonable steps have not been taken to verify the legitimacy of supply arrangements.
What should businesses do now?
For businesses that engage temporary workers, supply chain due diligence is not simply an administrative exercise.
Organisations should understand exactly who is supplying their workers, who is operating payroll, how deductions are processed and whether PAYE obligations are being met correctly. Regular reviews of labour supply chains, documented due diligence procedures and ongoing monitoring of suppliers are becoming increasingly important.
Our experts expect HMRC’s focus on labour market fraud to remain a key compliance priority over the coming years. Businesses that rely on temporary labour should take the opportunity to review their current arrangements and ensure they are prepared for the heightened compliance environment.
Taking action now could help reduce both tax risk and potential exposure to future HMRC investigations, while supporting fair competition across the temporary labour market.