You might think we’re pretty tough on payroll companies, and maybe we are.
It’s not that we don’t think there is value in what they do – we just don’t like it when they use sneaky tactics to scare construction firms into working with them.
It was this scaremongering that inspired us to set up HardHats in the first place. We wanted to let construction firms know they could work with subbies long-term and keep HMRC happy without using payroll companies.
But just because we offer an alternative doesn’t mean everyone should take it. Some construction firms will benefit from using a payroll company. And if you’re one of them, we want to help you make the right choice.
What does a payroll company do?
A payroll company serves two main purposes for construction firms:
- They take care of paying all your subbies, ensuring the correct CIS deductions are made and issuing CIS statements and payslips.
- They sit between you and your subcontractors in the contractual chain, offering protection against HMRC enquiries into employment status.
The first of these is beneficial if you don’t have an in-house payroll function, don’t want to worry about CIS deductions yourself, and don’t want to employ somebody to manage it all for you.
The second is a little more questionable. While payroll companies do have contracts in place, these are designed to protect them, which doesn’t necessarily mean they always protect you (our article – is your payroll company leaving you exposed – explains why).
If your only reason for using a payroll company is so you can use subbies long-term, you might find working with HardHats more beneficial.
When do you need a payroll company?
If you only use subbies on an ad-hoc basis, you might find it’s not worth working with a payroll company as the admin could be managed in-house.
But if you work with multiple subbies and you work with them long-term, a payroll company can take away the finance headache.
As the contractor, you have to make CIS deductions before paying your subbies and then pass these on to HMRC.
This isn’t as complicated as you might think, and there are some brilliant accounting software solutions that make it easy to manage. But if you don’t personally want to take care of it, and you don’t have anyone in your business who can manage it for you, letting a payroll company take care of it makes sense.
So how do you choose your payroll company?
There are loads of payroll companies to choose from, and some are better than others. The right one for you will depend on a couple of factors.
Reputation and recommendations – firstand foremost, ask around and do your research. Your subcontractors might already be working with a payroll company or have worked with one in the past, or other firms you know may be using one they recommend. Once you have a few recommendations, check out online reviews – if they look legit, make an enquiry.
Fees – most payroll companies will charge your subcontractors a fee, which is deducted straight from their pay. Ideally, you want this to be as low as possible so your subbies aren’t losing big chunks of their income every week. If your payroll company charges higher than average fees, your subbies might be tempted to take on other contracts over yours.
Ease of use – the whole point of working with a payroll company is to reduce admin time, so find out what systems your potential payroll company uses. How easy is it to submit information and make payments? What customer service support do they offer for you and your subbies? How easy is it to speak to someone if you have a question, query or complaint?
Contracts – check the terms of the contracts between your subbies and the payroll company and between you and the payroll company. If HMRC ever makes an enquiry into employment status, they will be looking at whether the contracts match up to reality. If those contracts say one thing and you’re doing something completely different, you could be in trouble. Who is liable for what? If your subcontractor makes a mistake, who is covering the cost of fixing it? Who is arranging a substitute or replacement if your subcontractor can’t work?
Disadvantages of working with a payroll company
Before deciding whether to use a payroll company, it’s worth looking at the downsides too.
The biggest disadvantage of using payroll companies is the impact they can have on your cashflow.
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. On the other hand, if you pay your subbies yourself, you can keep the CIS deductions and VAT in your own account until payment is due.
What’s the alternative?
If you can live with the impact on your cashflow, and you’re happy to hand your payroll over to a third party, go check out some payroll companies. Just make sure you do your due diligence before signing up.
But if you aren’t convinced a payroll company is the way to go, there is an alternative.
At HardHats, we create bespoke watertight contracts that allow you to work with subcontractors long-term, keep HMRC happy, and retain control of your payroll and cashflow.