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The UK government’s proposal to shift PAYE responsibility from Specialist Payroll Intermediaries (SPIs) to employment businesses (EBs) is misguided and will cause more problems than it solves. This ill-conceived plan will undermine worker protections by stripping away essential benefits and increasing financial instability for workers. It will also lead to an increase in non-compliance, as oversight is dispersed across a much larger number of EBs compared to the current, well-regulated SPIs, making fraud and tax enforcement significantly harder.
The proposed regulatory changes will not only fail to address non-compliance but will also introduce new risks and complexities. The shift from a smaller number of expert SPIs to a larger number of EBs, many lacking payroll expertise, will increase opportunities for ‘payroll pirates’ to operate undetected. This will further complicate tax administration and create practical difficulties for workers, such as tax miscalculations and pension fragmentation.
The report recommends that to effectively tackle non-compliance and protect workers, the government should abandon the proposed changes and implement a licensing regime for payroll intermediaries. This would involve mandatory licensing, real-time digital oversight to protect tax remittances, and stronger enforcement using existing legislation. This approach would ensure compliance and prevent fraud, without harming tax revenues, worker protections, or the efficiency of the UK’s contingent labour market.
The government aims to close a £2.85 billion tax gap, but the proposed regulation may worsen the issue. By shifting responsibility from 600 well-regulated SPIs to 24,000 EBs, compliance oversight will be dispersed. This shift makes fraud easier and tax enforcement harder. Consequently, instead of closing the tax gap, these changes could cost the Exchequer over £7.5 billion due to increased tax avoidance and reduced contributions.
The proposed changes pose significant risks to workers. By removing the employment link with SPIs, workers lose crucial benefits like continuous employment rights, pension stability, and statutory benefits. This shift increases financial instability and insecurity for the workforce. The complexity of multiple employments will also create administrative burdens, uncertainty, and potential tax miscalculations, further jeopardising workers’ well-being.
Recruitment businesses stand to inherit substantial burdens and risks. By taking on payroll responsibilities, they face increased administrative work and potential legal liabilities. Lacking the specialist expertise of compliant umbrella companies, they are more susceptible to non-compliance and penalties. This shift also threatens established relationships and creates supply chain instability for recruitment businesses.
The proposed reforms threaten significant losses to the Exchequer. By shifting PAYE responsibility to a larger, less specialised group of EBs, the government risks increasing tax avoidance and decreasing crucial revenue streams. This transition from regulated SPIs to EBs makes oversight more difficult, creating opportunities for non-compliance. The potential consequences include a substantial reduction in National Insurance Contributions and Apprenticeship Levy payments, ultimately harming public finances
The government must scrap its Budget 2024 proposal. This plan jeopardises worker protections and fuels tax avoidance, introducing chaos rather than reform. A complete withdrawal is essential to prevent damage to the UK’s flexible labour market. This allows for the development of a genuinely effective regulatory framework, addressing the issues without causing further harm.
Mandatory licensing of all payroll intermediaries is advocated to provide a holistic solution to non-compliance. This system, combined with real-time digital oversight, would ensure accountability across the supply chain and safeguard tax remittances. Licensing offers a robust path to meaningful reform, unlike the government’s current, flawed proposals.
The government is urged to prioritise stronger enforcement of existing legislation against non-compliant actors. This targeted approach would be far more effective than the proposed overhaul, which risks penalising compliant businesses and workers. By focusing on those who break the rules, the government can tackle non-compliance effectively and efficiently.
There should be an immediate withdrawal of the current proposals and genuine collaboration with industry experts. The government must engage in a partnership to design and implement a suitable licensing framework. This collaborative effort will protect tax revenues, safeguard workers’ rights, and support the continued success of the UK’s flexible labour market through effective and balanced regulation.
© Freelancer and Contractor Services Association Ltd 2025
