Lots of organisations in the private and public sectors – recruitment agencies in particular – use umbrella companies to pay temporary workers and provide a flexible workforce.

But in some cases, the rise in the use of umbrella companies by employment intermediaries is being used by organised crime groups (OCGs) to exploit both the UK tax system, businesses and their employees.

Rogue umbrella companies have been able to flourish and undercut their compliant counterparts thanks to a blend of ineffectual policy, tax rules and company law.

To combat this, the UK Government launched a consultation (June 2023) to tackle tax non-compliance, with various changes to the tax and employment rights of umbrella companies.

However, several of the proposed changes will directly impact payroll providers in 2024, as Helen Cummings, consultant solicitor in the contentious tax team at law firm, Jurit LLP, discusses.

It goes without saying that imposing legislative requirements on mini umbrella companies will be welcomed by most, as it will discourage rogue payroll traders from entering the market.

But what could change and how will this impact those that are compliant? One of the first ports of call is regulation.

Changes to legislative definition and regulation

In the future, mini umbrella models will have a legislative definition and will become regulated. This means that, rightly or wrongly, payroll companies operating a mini umbrella are more likely to be caught by legislation and pursued by HMRC.

In view of this, payroll operators may want to seek legal advice on their business structures to ensure compliance with future legislation and will need to plan this into their budgets for 2024 and beyond.

Restrictions on supply chain

Payroll companies can expect supply chain restrictions which will mean that one person or business is permitted in the supply chain between an employment business and the individual to be supplied to do the work.

This is to overcome problems associated with brokers who introduce payroll providers to recruitment providers, whilst having an interest in the payroll providers themselves.

For example, some brokers introduce payroll companies to recruitment organisations, that are in fact linked to one of their directors. When that payroll provider falls through, the broker recommends another which is, again, linked to their directors. The cycle continues, and their pockets are lined.

Most recruitment companies won’t event realise the association between these providers, because they believe they have been introduced by an independent broker. However, HMRC is arguing that recruitment companies ought to be aware of this, by undertaking better due diligence on their brokers.

Creation of more formal paper trails to support HMRC

HMRC will expect to see an agreed contract of service between a payroll company and the recruitment provider going forwards.

This means that payroll companies will need a direct contractual relationship with the individual who is supplied to carry out the work, and a separate supply agreement with the employment business.

Creating a paper trail in this way will give HMRC a clearer path to follow when investigating any malpractice. It will also remove the involvement of so-called parent companies in any chain and will ensure director responsibility.

Mandatory due diligence  

Because of new statutory requirements, payroll companies can expect to be on the receiving end of many more due diligence questions from recruitment companies, as they seek to avoid becoming responsible for payroll tax debts. They will also want additional proof that PAYE calculations are correct.

This means payroll providers will need to operate in a much more open and transparent way in 2024, as they consider their customers’ due diligence requirements and build that into their operations and marketing, to secure new business.

But with more due diligence comes more administrative burden – for both parties. This additional red tape will make it hard for smaller companies who will struggle to resource this requirement.

The signs that something is fraudulent can be so slight, that companies will need to invest in training at their cost, which will add to the financial burden for SMEs and start-ups.

Speaking of start-ups, the air of suspicion now hanging over payroll means that it will become much harder for companies to start a new payroll business, as the limited due diligence information available may, wrongly, flag to a recruitment company that something is not right.

This will make it hard for new entrants into the market in 2024, as they will struggle to get over the initial due diligence threshold to start trading properly. There will also be much less room to refuse information requests on the basis that documents are commerciality sensitive.

More burden for company directors

Personal Liability Notices allow HMRC to hold company directors personally liable for a tax loss. Nevertheless, there is no mitigation built into the system. The new legislation will have to address that for those directors who have acted in good faith and have been compliant throughout with HMRC.

A UK Director will also need to be in place before employment allowance can be claimed. Yet, payroll providers can change directors during the course of a company’s life, so it is unclear how this requirement will be monitored.

Alongside this, payroll software may be amended to ensure that a UK Director is appointed before employment allowance is claimed.

More VAT assessments from HMRC

HMRC is likely to continue its focus on issuing VAT assessments in 2024, with the aim of recovering money lost to fraud.

And it’s not just payroll providers that will be targeted – the companies that traded with fraudulent operators will also be at risk if they cannot demonstrate that they unknowingly engaged with a fraudulent operator.

To compete in the market in 2024, mini umbrella payroll providers will need to adapt to thrive.

Given additional due diligence requirements and the need for more transparency, payroll providers will need to prepare a strong marketing strategy in 2024, to prove to recruitment providers that they are not only compliant, but worthy of the company taking on the commercial risk of the engagement.

Helen Cummings, consultant in the contentious tax team at virtual law firm, Jurit LLP.

Jurit LLP works with payroll providers to offer insight into marketing and business strategies to support a tax compliant way of working, as well as providing expert contentious tax advice in the event of litigation.


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