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Sham contracts: Don’t get fooled

News and Views | 12th August 2015

Once upon a time, payroll companies used to contact our clients with the sales pitch, “We’re just like Hudson Contract, only cheaper.”  The fact was, that although they were cheaper, they were nothing like Hudson Contract and some were downright rogues.  And the moral of the story:  You get what you pay for.

Now the payroll companies are at it again.  Only this time, the come-on has changed.  “Hudson Contract’s got too complicated,” our clients are being told.  “Their compliance measures are designed to protect them, not you.  Whereas we can wind back the clock allowing you to engage anyone and everyone, including labourers under CIS, without worrying about stuff like supervision, direction or control.  Oh, and we’re still cheaper than Hudson Contract.” 

The premise behind an offer like this is that the payroll company is not a payroll company.  (Yes, you read that correctly.)  Instead, it is a ‘Commercial Contractor’, with contracts that give the appearance that its clients are sub-letting the entire works to them, rather than just the engagement and payroll of individual subcontractors. And as such, it is not obliged to comply with the Onshore Employment Intermediary legislation, or the OEI control test.

This of course is a sham, and everybody knows it – the client, the payroll company involved, and HMRC. They might call themselves something different, but HMRC know who the payroll intermediaries are.  It doesn’t matter how much window dressing they hide behind. 

A few clients told Hudson Contract the preparations were too much like hard work, and took the seemingly easy option, accepting an offer from a payroll company turned  ‘commercial contractor’. 

Ex-clients have put themselves at risk

In due course, the ‘commercial contractors’ will face penalties for failing to report under OEI, and our prediction is that many will fold. The issue then is that their clients will be left liable because they knowingly entered into sham contracts to avoid employer compliance.

Many building firms have been lulled into a false sense of security because OEI is more than a year old and HMRC have left them and their ‘commercial contractor’ payroll companies alone. But remember, HMRC is empowered to gather taxes retrospectively, so they are in no rush.

By way of example, HMRC is only now recovering lost taxes from those who five years ago used payroll schemes based in places like Gibraltar and the Isle of Man, under what was known as EBT schemes – and using Advance Payment notices to force payment now, argument later.

Imagine five years from now, HMRC has emptied your bank account, and you are borrowing money to pay lawyers to argue you should have your fine reversed and money paid back because the payroll company you used was in fact a builder like you... it doesn’t bear thinking about.

If you know of any contractors who have been tempted into sham contracts, please let them know they are now at risk.

Hudson Contract has engaged with HMRC during the roll-out of OEI and our clients helped us with auditing, and where necessary, used our new alternative PAYE service for operatives that failed the new control test.  As a result, they can rest assured that all OEI reporting and compliance is dealt with by us and any liability for getting it wrong is ours.