The Global Recruiter recently ran an article, “No Audit Trail, No Protection,” which argues for recruitment agencies to take responsibility for remitting PAYE liabilities to HMRC when umbrella companies employ workers and for them to use the umbrella company’s ERN.
On the surface, this might seem like a neat fix. In reality, it is impractical, dangerous for the supply chain, and would likely increase the very risks it aims to reduce.
A Fundamental Misunderstanding
The proposal could be described as agencies “taking over payroll.” In practice, the umbrella would still calculate PAYE liabilities, run payroll, and issue payslips. The recruitment agency would then be expected to remit the tax element to HMRC before passing the remaining funds on to the umbrella for payment to workers.
This approach almost doubles the number of financial interactions. Instead of a single clean flow of funds, agencies and umbrellas would be forced into a complex two-step dance that creates delays, disputes, and errors. This is not simplification, it is complication.
Nine Reasons This Model Fails
- “Option 3” was already rejected!The government itself considered and discarded this model during consultation (the so-called “Option 3”).
It was rejected because it is unworkable, impractical, and unfair. Re-introducing a failed idea doesn’t make it more valid. The policy direction has since shifted towards joint and several liability, where responsibility is shared but accountability remains clear. - From 600 experts to 24,000 generalists
Around 600 umbrella companies manage PAYE for hundreds of thousands of workers. They are specialists with systems, staff, and audit trails built for complex payroll. Passing responsibility to 24,000 recruiters, most of whom lack payroll expertise, fragments compliance oversight and multiplies HMRC enforcement requirements. Fraud becomes harder to spot, not easier.
- Not all recruiters are honest (although most are)
HMRC’s own deliberate tax defaulter list includes recruitment businesses with multi-million-pound defaults. Simply moving responsibility to recruiters will not solve non-compliance. - Proof becomes a minefield
If agencies are responsible for remitting liabilities, umbrellas must prove that HMRC has been paid. Agencies must prove that sums deducted match calculations. This creates endless reconciliations, duplicated checks, and a breeding ground for disputes. - Risk to umbrellas increases
If an agency fails to remit liabilities on time or in full, HMRC would naturally look to the umbrella for answers – after all it;s their ERN HMRC are looking at. Yet umbrellas have no direct visibility of payments. The companies most likely to lose control carry the reputational fallout with no way to demonstrate compliance independently. - Complexity is multiplied, not reduced
Temporary payroll already handles multiple assignments, statutory benefits, pensions, student loans, and holiday accruals. Introducing two parallel transactions for each payroll run doubles the potential for delay, error, or fraud and increases administrative overhead. - Agencies would need cash they do not have
Many recruiters rely on credit terms with umbrellas. Paying HMRC before reimbursing umbrellas would break cash-flow models, leaving smaller agencies struggling or resorting to non-compliant workarounds. - Real audit trails already exist
The claim that there is no audit trail is incorrect. Digital tools like veriPAYE allow real-time verification of payslips, RTI submissions, and HMRC remittances. Agencies, umbrellas, and end-hirers can access independent verification of tax deductions and payments. - It does not protect workers or compliance
Instead of reducing risk, this model increases opportunities for error, creates disputes over payments, and exposes umbrellas to reputational damage they cannot control. It does not strengthen compliance, it weakens it.
The Real Solution
The sector does not need more duplication and confusion. What is needed is clear accountability, enforceable regulation, and digital transparency:
- Licensing umbrellas so only compliant providers can operate
- Mandating digital audit trails like veriPAYE for real-time assurance
- Targeted enforcement against bad actors rather than burdening compliant operators
These measures address the problem without undermining a system that largely works.
Conclusion
The Global Recruiter article is correct that protection requires an audit trail. But shifting the responsibility for making of payments to HMRC to 24,000 recruiters is not the answer. Real-time payslip verification, HMRC reconciliation, licensing, and compliance standards already provide the protection the sector needs. The focus should be on strengthening these safeguards, not doubling the problem.