If you are thinking of considering the services of a payroll company for your business to protect you from the taxation challenges, choose them wisely.
Many companies advertise that they provide payroll services, but the most important question is what protection they are providing you with an employment status challenge. You are not protected if that company is simply performing a payroll service. Some companies portray that they have defended themselves at the court but there are some cases where the actual judgement is different. They have argued that they are not liable because they have been only providing payroll services and it is their clients that should have faced HMRC. These companies are causing more damage to your venture than good.
Things to watch out for:
Website- If they refer to their business as a payroll solution then when HMRC holds you liable, these agencies will simply portray that you are the original engager and the company only calculated the pay.
Contract- You will be in a weaker position if the contract ties the ‘payroll company’, your business and the individual all into one contract. The contract should clearly be straightforward,i.e, business to business.
Experience and background – You should definitely look into their experiences of defending HMRC challenges. Without experience, they can no way protect you or your company.
Guaranteeing your protection
Well if the payroll company includes the term “guaranteeing” something if you get challenged, then it only proves the point that there are still chances of you getting challenged. Now if you consider the hidden meaning, these companies are trying to acknowledge that you can get challenged by HMRC but they will definitely reimburse if HMRC is successful.
If you think wisely, this is far from an ideal situation. It has its perks assuming that the company will pay you out but it is definitely not a feasible solution. This can lead to years of turmoil with the HMRC and in turn the HMRC asking your clients and subcontractors questions about your business which is not at all good.
Now the harsh truth is if the HMRC were successful, even the biggest of payroll companies would find it difficult to pay up. Consider the example of the tribunal case of Eric Newman Developments where the liability faced was £15k for a single person(whose earning was only £328 a week). If just one of their bigger clients faced this challenge having 100 subcontractors, the liability would exceed £2m! Now would the payroll company pay out the same?
Another point is how quickly would they pay up? It is because once a judgement is passed, HMRC would start retrieval of the money as quickly as possible and may even start a winding up petition if there is a delay in payment.
Some companies encourage an individual to become a ‘partner’ or ‘director’ of the business. Always get a consultation before taking up this step because this individual(‘partner’ or ‘director’ ) will be having certain duties and will be directly responsible for the company’s actions.
Lastly, choose them wisely!