10 Apr 2012

Using a CIS payroll company? Choose carefully!

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If your business is considering using a company to protect you from employment status challenges, choose that company very carefully.

There are other companies offering similar services as Marble however subtle differences in how they operate (and what they offer) have significant implications on the protection they may or may not provide your company with.

Payroll and CIS Payroll Services

If a company advertises the fact that they provide payroll services or CIS payroll company, we would seriously question what, if any, protection they will provide you from an employment status challenge.

If they are merely performing a payroll service for your company, you are not protected whatsoever. Some companies advertise the fact that they have defended their business model at the courts but if you read the actual judgement (rather than a synopsis they provide) you are likely to find that they argued they were not in the frame for liability at all as they were merely providing payroll and it should have been their clients that faced HMRC. Needless to say a company operating in this way can cause more damage to your business than good.  

What to look out for?

Website – Have a look at their website, do they refer to their business as a payroll solution/business? If they do, when HMRC come to you for the liability they will simply say that company calculated the pay and you are the actual engager of the individuals.

Contracts – If the contract between you and the company makes continuous references to the individuals/subcontractors and ties your business, the ‘payroll company’ and the individual all into one contract you will be in a significantly weaker position. The contract should be a business to business contract for the provision of services and there is no reason why that contract should have to keep referring to the subcontractors/operatives or persons providing the services.

Have a look at the contract they would want you to sign. If the contract refers to them providing payroll services question why and how this in fact would protect your company?

Experience and background – Do they have any experience in defending HMRC challenges and if so look at what they actually argued and defended?

If they have no experience, how can they possibly protect your company if they do not even know what is involved in an HMRC dispute, let alone successfully defending a challenge?

Payroll companies ‘guaranteeing’ your protection?

If the company refers to their business as a payroll company but they will provide some kind of guarantee or indemnity if you get challenged, it proves the point above – that you will still get challenged!

Putting to one side the wording of the ‘guarantee’ and whether it would contain more holes than a cheese grater, the fundamental principle is that they have acknowledged you will still get challenged by HMRC but that they will simply reimburse you if HMRC are successful.

Naturally this route would have its advantages (assuming they would pay out) but is far from ideal. You would still potentially have years of arguing with HMRC, providing them with endless information and have HMRC turning up and asking both your subcontractors and clients for information about the way in which you operate – which can never be good for business.

It is also worth bearing in mind the financial liability the payroll company would face – even the biggest of payroll companies would struggle to pay up if HMRC were successful at arguing employment status for a couple of their bigger clients. Taking the recent tribunal case of Eric Newman Developments where he faced a liability of £15k for one person (who earned just £328 a week). If just one of its bigger clients were challenged and they had 100 subcontractors of their own, they could well face a liability well in excess of £2m – would the payroll company really just hand over that amount of money. If they did hand it over and a couple over clients also got hit, would they agree to pay it or just go bust?

If it were to go under, it is worth bearing in mind for the entire time you have been using them and paying over money, you would no longer have any protection covering the whole time you were using them as they would no longer reimiburse your liability.

Another consideration is whether they would pay up quickly enough. Once a judgement is released, HMRC would be looking to retrieve the full amount quickly and can start a winding up petition if you or the payroll company drag your heels in paying – in which case you will have achieved very little by using them.

One last point in relation to the guarantee is whether the so called indemnity or guarantee would be underwritten by an independent insurance company or simply a contractual clause they will ‘honour’. Needless to say it would be far better if an independant insurance company were also backing the indemnity.

Other strange set-ups!

Although they are not as common, some companies operate by encouraging the individuals to become a ‘partner’ or ‘director’ of the business. If you are considering this route be sure to get independent legal advice on the nature of their business and whether the individuals are going to end up getting a raw deal.

It is worth remembering that both partners and directors have certain duties to the company and are ultimately responsible for the company’s actions. This could potentially mean that the individual is not only responsible for all the other individuals’ actions in the business but also anyone that has previously been involved.

This is putting to one side the risk of the business being considered a managed service company in which case each individual can become personally liable for the company’s liabilities (even if the company is incorporated)!

Marble Commercial Contracting?

Marble Commercial Contracting are a subcontracting company, not a payroll company. We engage and pay the individuals which severs the relationship between your business and the people providing the services. At the point you start using Marble, we would become your only subcontractor and as a limited company, HMRC cannot reclassify our business as an employee of your business. The individuals we engage equally cannot be deemed employees of your business as you would have no contractual or financial relationship with them (whereas the payroll company will still tie you in altogether in the contract so the individuals are linked to your business).

By using Marble you would not face the prospect of an HMRC employment status liability let alone the worry and hassle of having an enquiry, being dragged through the courts, having your workforce interviewed, cross examined etc and your reputation ruined and then being reliant on a separate business to pick up the tab.

For all of the above reasons, Marble are the only choice if you are looking to completely remove the risks of HMRC employment status challenges. If you already use a similar business, get in touch and start getting proper protection for your money.