HardHats v Payroll Company: which is right for you?

by | Apr 11, 2022

If you follow us on social media or have read some of our previous blog posts, you might think we have it in for payroll companies.

We don’t.

Payroll companies provide a valuable service for a lot of construction businesses. And there are some bloody good ones out there.

Our issue with payroll companies isn’t about the service they provide. It’s about the blatant scare tactics some (not all) of them use to fool contractors into signing up.

We’ve heard (and seen) so many examples of where contractors have been deceived into believing:

  • They can only work with subbies long-term if they use a payroll company
  • They are way more at risk of an HMRC enquiry than they actually are
  • Using a payroll company will protect them against reclassification

And when we see this happening, we can’t help but get on our high horse. Because it’s absolute bollocks.

But, as we said, payroll companies can provide a valuable service. So, we’re going to play fair and provide a (mostly) unbiased comparison of our service and theirs to help you decide which option is right for you.

Who is responsible for determining the employment status of subcontractors?

Before we look at the pros and cons of using a payroll company and talk you through the alternatives, let’s look at employment status.

Who determines employment status, and why does it matter?

As the main contractor, you have the responsibility of determining the employment status of your workers. But determining employment status isn’t as simple as saying someone is self-employed just because they want to be or because you don’t fancy putting them on PAYE.

Employment status should be determined by the reality of the relationship. If HMRC or the courts decide you have been dishonest about the employment status of your subcontractors, you will be liable for backdated tax and employee benefits.

In other words, if your relationship with your subbies is one of employer and employee rather than contractor and subcontractor, then you should employ your subbies.

Tax, CIS and employment status

Self-employment means being a business in your own right – you are your own boss. It means you don’t have the same employment rights as employees. You aren’t entitled to employee benefits, sick pay, parental leave, holiday pay or compensation for unfair dismissal.

But despite all the benefits of being employed, many subbies would prefer self-employment. Why? For tax purposes. As a self-employed contractor, you are responsible for paying your own income tax and national insurance contributions, and the tax liability for self-employed people can often work out less than employee tax.

In contrast, an employee of a company will have their tax and national insurance deducted from their pay.

The construction industry works slightly differently from other industries because of the construction industry scheme (CIS). Contractors are required to make CIS deductions from the subcontractor’s pay and pass these on to HMRC.

Some construction firms prefer not to have to deal with payroll or CIS deductions, and so they outsource this to a payroll company.

How do payroll companies work?

A payroll company or employment agency sits between you and your subbies. They verify your subcontractors, figure out what they should be paid, send out payslips and CIS tax statements, and pay the wages.

All you have to do is confirm the timesheets are accurate and pay your invoices. Easy.

Pros of using a payroll company

Your payroll is completely taken care of – all you need to do is pay your invoice each week. It’s ideal if you don’t have anyone in-house to do all this for you and don’t want to do it yourself.

The payroll company sits between you and the subcontractor in the contractual chain, which (in theory) should protect you from any HMRC enquiries into CIS and employment status.

Cons of using a payroll company

If you use a payroll company, you’ll have to make CIS payments upfront, plus you’ll have to pay VAT on top of your weekly wage bill. This can have a huge impact on your cash flow. If you pay your subbies yourself, you can keep the CIS deductions and VAT in your own account until payment is due.

Payroll companies take a small fee from your subcontractors – usually around 2.5%. This might not sound much, but it can soon add up over a year. And it’s a little frustrating for your subbies to lose part of their income every week just so they can get paid.   

The other problem is that the contracts used by payroll companies are there to protect them and not necessarily you. In fact, there have been legal cases where contractors have ended up getting stung for unpaid tax, unpaid holidays and even unfair dismissal, despite using payroll companies.

Is using a payroll company the right option for you?

If you don’t want to manage your payroll in-house, using an agency will remove the headache.

How does HardHats employment status guarantee work?

HardHats was founded on the idea that if payroll companies can pay self-employed subcontractors long-term without the risk of HMRC reclassifying them as employees, then contractors should be able to as well.

And they can. We’ve taken the ‘secret sauce’ that payroll companies use and made it accessible to contractors who want to cut out the middleman and keep control of their payroll.

We create a bespoke written contract that outlines exactly how you work with your subbies and why you work that way. Your contract also comes with an insurance-backed guarantee which means if HMRC ever does open an enquiry into employment status, we handle it for you. And in the unlikely event they reclassify your subbies, we’ll pay any associated costs.  

In other words, we take on all your risk so you can work with your subbies for as long as you want.

Pros of using an employment status guarantee

You keep complete control of your payroll, so you can keep hold of CIS and VAT until it’s due, and your subbies don’t have any fees deducted from their pay. 

Our watertight contracts offer complete protection. Unlike off-the-shelf contracts, they are bespoke, so they accurately represent your true working relationship (as long as you are honest with us). Unlike the payroll company contracts, they are written to protect you, not us, so you can have complete peace of mind.

You can find out more about how it works here.

Cons of using an employment status guarantee

We don’t pay your subbies. You’ll have to manage your own payroll – verify your subcontractors, figure out their pay and CIS deductions, and make the correct payments to your subbies and HMRC.  

Is a HardHats employment status guarantee the right option for you?

If you want to work with subcontractors long-term but still retain control of your cash flow and payroll, then HardHats is the option for you.

What next?

Despite the many myths flying around the industry, you can work with subcontractors long-term. You just need to make sure you don’t leave yourself open to an HMRC enquiry into their employment status.  

Using a payroll company is a common solution, and there are plenty to choose from. If you do go down this route, do some research and pick one that offers you the right level of protection.

But if you’d prefer to keep control of your cash flow and have guaranteed peace of mind that you are protected, then book a call with us.

Frequently Asked Questions

Does HardHats deal with national insurance?

No. We don’t have anything to do with your subbies being paid, so we don’t deduct income tax, national insurance or CIS. You will be responsible for paying your subbies and making any CIS deductions. They will be responsible for submitting their self-assessment tax returns (and company tax returns if they are operating as a limited company)

Do you need to worry about off-payroll working rules?

No. If your subcontractors are genuinely self-employed, off-payroll working (IR35) is not relevant. IR35 was created to ensure subcontractors working through intermediaries (or their own limited company) pay income tax and national insurance in a similar way to employees. IR35 workers also have limited employment rights and protections under employment law. IR35 does not apply to sole traders.

You might not even need our help!

But if you use labour-only subcontractors long-term and want to continue doing so, let’s have a chat. If you are at risk, we’ll take that risk off your hands.

Related Posts