New measures coming into force in March awarding greater powers to Companies House could catch out some unscrupulous payroll suppliers, but will not replace the need for sector regulation, says Paul Newsham, CEO of Payroll Compliance Authority (PCA), an accreditor in the outsourced payroll sector.

From 4 March 2024, Companies House, which maintains the public register of companies in the UK, will have greater enforcement powers to verify the identity of company directors, remove fraudulent organisations and invalid office addresses, and share information with law enforcement agencies.

Paul welcomes the changes and says they will create a stumbling block for some outsourced payroll suppliers, known as umbrella companies, that are acting fraudulently, but will not inhibit the larger, more sophisticated operations.

Paul, who became CEO of the PCA in 2023 and is a Chartered Accountant of more than 30 years, says: "It has been too easy for fraudulent companies to register and operate in a seemingly legitimate way using unverified physical addresses and false names.

"The move towards cleaning up the register with greater checks and powers to remove inaccurate information can only help in the fight to halt the array of tax-avoidance schemes rife in the outsourced payroll sector.

"Powers to share information with law enforcement agencies is also a step in the right direction."

Billed as the greatest shake-up at Companies House in its 180-year history, the powers, introduced under the Economic Crime and Corporate Transparency Act, come alongside several new requirements for all companies, such a providing a verifiable email address and the complete removal of PO Box addresses.

"Nonetheless", adds Paul, "lack of regulation has provided the perfect breeding ground for illegal schemes to flourish that place workers and recruitment firms engaging these unscrupulous umbrella companies at extreme risk, both in relation to HMRC and employment law.

"Moreover, it tarnishes compliant and ethical umbrella companies by association. Whilst the new measures will help, they are not a replacement for much-needed sector regulation." 

According to Paul, anecdotal evidence suggests that there are between 600,000 and 800,000 UK workers across multiple sectors who are currently paid by umbrella companies. Less than a third of these are administered by payroll providers that have been properly audited by trade bodies. Fraudulent schemes and activities by some umbrella companies include incorrect tax deductions, pay skimming, and withholding of holiday pay.   

The sector has been calling for central regulation, with a consultation on options carried out by government over the summer of 2023, but currently no plans announced.

Paul concedes: "The issues that regulation needs to address are extremely complex. Even the definition of what an umbrella company is in legal terms is not straightforward, and if regulation does not get it right, it would be a wasted, frustrating and costly exercise.

"In the meantime, these new powers will place some obstacles in the way of fraudulent payroll suppliers and, over time, the improved communication with law enforcement may flush out some of these operators that are profiteering from workers and putting them at risk."