A Scots businessman who invented a phantom workforce to milk nearly £500,000 from the Ministry of Defence was jailed for three-and-a-half years yesterday.

Another Scot involved in the scam was jailed for 18 months.

Scaffolding company chief James McLaughlan, 58, from Kilwinning in Ayrshire, orchestrated the huge fraud at the Devonport Dockyard site in Plymouth when it was being upgraded to maintain Trident submarines.

London's Southwark Crown Court heard that, having recruited his stepdaughter, site manager and an "insider" at another company, he regularly added imaginary scaffolders to the work roster.

Using hush money and gifts of free cars, accommodation and weekend breaks he corrupted and manipulated others into helping him pocket £424,923 of taxpayers' money, the court heard.

On one day alone, using a simple clocking-in scam, 58 so-called "dead men", or absent workers - more than double the real number - were paid for a full shift.

In reality, they were either at home, in the pub, no longer worked there, never had worked there or simply did not exist. In other cases, unsuspecting genuine workers had their hours inflated.

The "dead men" con was so blatant that even when everyone went on strike, bogus paperwork suggested many of McLaughlan's staff had still worked a full day.

McLaughlan admitted conspiring to defraud the Secretary of State for Defence by "dishonestly causing or allowing false invoicing for extra hours" between January 1, 2001, and March 31 the following year.

His 28-year-old stepdaughter Rebekah Hart, of Kingston, Surrey - whose undergraduate boyfriend was one of the "ghosts" - pled guilty to two sample counts of false accounting. She was given a two-year conditional discharge.

The scaffolding company's site manager Robert Burns, 38, of Ardrossan, Ayrshire, who was found guilty of the conspiracy count at an earlier trial, was jailed for 18 months.

Also convicted of taking part in the conspiracy was assistant quantity surveyor Christopher Ackerman, 33, of Plymouth. He was jailed for 12 months.

The scam netted up to £27,500 a week and became such an open secret it ended up immortalised in numerous comments on the walls of a toilet block, before being brought to a halt by a tip-off to MoD police.

Sending McLaughlan to prison for three-and-a-half years, Judge Nicholas Loraine-Smith told him: "You were the instigator of this fraud, a man who brought others into it and directed their involvement."

Paul Garlic, QC, prosecuting, said McLaughlan was manipulative and bombastic, and corrupted others into taking part. "He was described as Mr Generosity, but his generosity was targeted towards getting others to fall in with the conspiracy and his dishonest acts," he added.