Last edited 11 Mar 2020

Payroll companies

The government believes that ‘employment intermediaries’, or ‘payroll companies’ have been used to enable workers to falsely claim that they are self-employed sub-contractors when in fact they are permanent, full-time employees. This allows them to reduce their employment taxes and obligations.

Payroll companies charge for this service, typically up to £25 a week, but payments can be as much as £1,250 per year (ref. HM Treasury Overview of Legislation in Draft 10 December 2013). It has also been reported that ‘rebates’ are sometimes offered by payroll companies to contractors and agencies that use them (ref. Construction Enquirer 19 February 2014).

Legislation was introduced in the Finance Bill 2014 to prevent this by treating payroll companies as employers and so requiring that they subject workers to tax and employee National Insurance Contributions (NICs) deductions at source and introducing a new liability to pay employer NICs.

These new measures came into effect on 6 April 2014.

It is considered that this will have the greatest impact on the construction sector, where around 200,000 workers are thought to be employed through onshore employment intermediaries. These workers will face higher tax and NICs liabilities, but will no longer be paying service charges, will gain statutory payments such as statutory sick pay and maternity pay, some will be eligible for the national minimum wage and they may become eligible for other employment rights.

There is criticism in the industry that this measure will burden contractors with extra costs at a time when the economic recovery is still very fragile. It has also been claimed that labour costs could rise by 25% and that this will hit sub-contractors on fixed-price contracts very hard (ref. Construction Enquirer 20 February 2014).

In 2018, An employment tribunal ruled that payroll company Hudson Contract Services was a effectively a contractor and so liable to pay the CITB levy. Hudson twice appealed the ruling but was refused on both occasions. On 10 March 2020, Appeal Court judge Lord Justice Underhill said; “Hudson is after all a sophisticated form of labour-only subcontractor, on terms that remove risk in relation to construction activity.”