In recent years, payroll companies have become viewed with increasing suspicion and concern – both by their customers and the UK Government – with terms such as fraud, personal liability notices and tax avoidance associated with them.

Of course, the vast majority of payroll businesses are not fraudulent, but the Government is committed to cracking down on tax non-compliance in the umbrella company market, after evidence gathered in 2022 suggested that it was causing harm to workers, businesses and taxpayers.

As they put it: “By placing responsibility for operating PAYE nearer the top of the labour supply chain…[we believe that] non-compliant umbrella companies would be less likely to enter the chain.”

However, it won’t just be fraudulent payroll companies affected by the changes proposed by Government.

It will become more challenging for all payroll providers in general – but why? Helen Cummings, consultant solicitor in the contentious tax team at Jurit LLP, discusses.

The increase in the National Living Wage to £11.44 per hour in April, together with ever-tightening margins and increased competition in the payroll market, is going to make trading conditions difficult for payroll providers this year.

Add to these hurdles the fact that a range of new legislative requirements are coming in, and it could be the final nail in the coffin for some of the smaller providers in 2024.

The root cause of this is the influence that rogue traders operating tax avoidance schemes have had on the market – tainting the perception of umbrella companies as a whole. As a result, a government crackdown will mean that all businesses will need to comply with a range of new legislative requirements designed to deter non-compliance.

How can payroll providers ensure they are on the compliance front-foot? And what will give compliant companies that competitive advantage to ensure that they can survive and thrive? Here are some of our top tips.

Identify due diligence weaknesses now

Whilst recruitment firms and other businesses continue to outsource the administration of operating a payroll, they now need to ensure that any such outsourcing is contracted to reputable firms.

Payroll companies should take into account the due diligence documents that recruitment providers may be required to provide to HMRC, as they in turn will be likely to need to provide the same in order to secure contracts.

Take the opportunity to identify due diligence weaknesses now, so that you can rectify these ahead of the legal changes to the due diligence required by recruitment companies coming in.

Re-assess your banking platforms

Take a look at the use of any offshore banking platforms used and reassess if these are necessary, because this can lead to increased suspicion around the credibility of compliant payroll operations.

Develop transparent marketing

Work hard to develop your sales messaging to deliver a focused sales package that addresses the issues of VAT and PAYE fraud and the steps that have been taken to minimise this risk for the customer, in a clear and transparent way.

You should also reconsider your websites, brochures, e-mail addresses and social media to ensure the accuracy of information contained there. Particularly addresses as these will be cross-checked as part of the due diligence process, so need to be accurate.

Re-evaluate relationships and implement risk management strategy

Re-evaluate your links to mini umbrella companies and, where required, engage in urgent discussions about the sharing of due diligence information between both companies and the preparation of risk management strategies.

Examine your business structure

Consider what business links you have with international companies involved in your structuring because the UK government has expressed clear concern about international directors and links to payroll.

You should also prepare individual business plans to clearly demonstrate transparency over rates charged, as this will satisfy customers that a profit is possible from the structure.

Budget for potential litigation

Whether you think you are compliant or not, you should budget for the possibility of litigation or the requirement for legal advice – whether on your internal business structure and how your mini umbrella companies operate within that, or to deal with a claim from HMRC.

Taking these steps will help to ensure that, amid challenging times for payroll businesses, it is still possible to develop and grow your business in this sector, in a tax compliant way.

At Jurit LLP, we provide discrete business and commercial advice to payroll providers linked with business operations to ensure ongoing business growth. We aim to reassure recruitment and payroll providers that it is very possible to continue to trade and grow your business in an increasingly difficult market.


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