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How in-house payroll solutions help agencies meet Off-Payroll obligations: part 1

Agencies tasked with calculating, reporting and paying tax on payments made to ‘inside IR35’ contractors under the Off-Payroll legislation should not be deterred by the prospect of running their own payroll.

With the measures set to take effect in the private sector from April 2021, some recruiters are exploring arrangements that would negate their compliance obligations, due to fears over tax liability risk, excessive costs and administration.

However, with modern payroll software typically processing individual payments within seconds at a maximum cost of £1 per payslip, establishing an in-house payroll will likely provide the most straightforward and cost-effective solution to agencies. By providing a simple means of achieving Off-Payroll compliance, it can also effectively help mitigate the tax liability risk.

In-house payrolls could offer safe haven to agencies

Calculating and deducting employee taxes from payments made to contractors deemed within scope of IR35 is a new responsibility for agencies and firms, and one that many will view as necessitating additional resources. This, coupled with perceptions of unmanageable staffing and running costs, has seen some agencies seek to offload the responsibility for payroll processing without breaching the legislation.

The most prominent alternative option is the insertion of an umbrella company into the supply chain to act as the contractor’s employer while operating Pay As You Earn (PAYE). But although this option feasibly diminishes the workload required of the agency, the element of risk remains.

The emergence of tax avoidance scheme providers operating under the guise of umbrella companies has warranted much recent media coverage and can pose a threat to the rest of the supply chain, with non-compliant providers often difficult to discern.

This issue is compounded by the Off-Payroll legislation’s tax liability transfer rules, which permit the taxman to pursue the agency for any perceived outstanding tax liability where non-compliance in the supply chain has resulted in a loss of tax and HMRC has been unable to retrieve the sum from the offending party.

Ultimately, HMRC can target the hiring firm if it cannot recoup this amount from the agency, which has prompted some hirers to insist that ‘inside IR35’ contractors be engaged strictly via an agency payroll, or to blacklist the involvement of unregulated umbrellas and payroll companies.

“The best way a firm or agency can make sure the tax is paid to HMRC correctly is to pay it themselves,” comments ContractorCalculator CEO Dave Chaplin. “Thousands of people do their own tax returns each year and send the money directly to HMRC. They don’t give the money to someone else to do so, on the promise that it will be okay.”

Agency payroll offers simple solution

Though there are certain benefits to enlisting the assistance of compliant umbrella companies, namely for the workers involved, the prospect of minimising future tax risk will inevitably encourage many companies to favour the agency payroll option. This is a solution that will likely come at a negligible cost and administrative overhead if the agency adopts a payroll solution from a software provider.

“The beauty of operating a payroll for contractors affected by the Off-Payroll rules is that so many of the typical payroll considerations don’t apply to you,” notes Duane Jackson, founder of Staffology Payroll.

“You don’t need to worry about pension contributions or auto-enrolment because they don’t apply to the engagement in question. Neither do you need to factor in holiday pay, sick pay and so on. Instead, it’s a lot simpler.

“Ultimately, you’re looking to establish the worker’s net pay following income tax and National Insurance (NI) deductions from the gross amount, a simple calculation that can be carried out in seconds using a software solution.”

How to set up an in-house payroll

Much like the tax calculation, setting up a payroll is a straightforward affair. The first thing agencies need to do is register as an employer with HMRC to access PAYE Online, the Government online service enabling employers to send payroll reports to HMRC, monitor their own account balance and access employee tax codes.

After selecting a payroll software provider and syncing the account up with their HMRC credentials, much of the remaining work for agencies should be automated, as Jackson explains:

“Having registered as an employer and received the necessary credentials, you’ll be required to maintain records of payments made and the relevant tax deductions. Fortunately, the necessary data is stored in your payroll software and sent as a Full Payment Submission (FPS) to HMRC each month.”

HMRC also requests that each worker newly added to the payroll be registered, with certain details shared with the taxman. Again, the relevant details will be stored in the payroll software and shared with HMRC via the first FPS within which the worker in question features.

How can payroll software mitigate errors and tax risk?

Agencies concerned about tax liability risk are warned that mistakes can occur but can be reassured that quality payroll solutions include features designed to identify and address inaccuracies in-house long before HMRC intervenes.

“It can definitely happen in temporary recruitment, and human error is typically the main culprit,” comments Ben Noden, managing director of payroll provider Merit Software.

“Our software handles PAYE, the Construction Industry Scheme (CIS), limited company ‘outside IR35’ engagements and ‘inside IR35’ engagements. If an individual’s payment is processed incorrectly, our software will allow data to be re-entered and will automatically reissue the payment, as should any good software. Another common scenario is where a different contract rate is agreed after a timesheet has gone through, which is also easily remedied.”

Jackson adds: “Our software generates a variance report which compares the payroll for one month to that of the previous month. This typically uncovers any glaring inconsistencies, which can therefore be swiftly addressed at this point.”

When might agencies take the umbrella option?

For both Noden and Jackson, the decision between incorporating payroll in-house and outsourcing to an umbrella or payroll company is a relatively straightforward one.

“At Merit, we provide a tailored solution that minimises the necessary administrative overheads,” says Noden. “Particularly considering the availability of products designed to assist with Off-Payroll compliance, I think it would rarely be the case that an agency couldn’t accommodate an in-house payroll.”

“The only scenario I can really envisage where it would be advantageous for an agency to enlist the assistance of an umbrella company is where the end-client or the worker insists on it,” adds Jackson. “In which case, it may be easier for the sake of the contract to do so. Otherwise, setting up an in-house payroll seems a much simpler option than going down the umbrella route, at least from the agency’s perspective.”

Published: 09 November 2020

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