HMRC has intensified its interest in verifying the employment status of subcontractors within the construction industry, emphasised through a recent escalation of enquiries into contractors.
Many construction companies engage subcontractors under the Construction Industry Scheme (CIS), and with the determination of employment status being central to the scheme’s rules, this must remain a key consideration for contractors.
HMRC is currently looking at the past twelve months of CIS returns, launching investigations into contractors with the same subcontractors regularly appearing on their returns – an initial indicator of potential employment status.
Penalties can be charged when a contractor makes an incorrect declaration, reinforcing the importance of establishing the correct employment status from the outset.
Construction Industry Scheme rules
The Construction Industry Scheme was first introduced in 1972 to tackle widescale non-compliance within the industry. The scheme has evolved, yet its main purpose remains – to prevent a minority of businesses from abusing the rules to extract cash from the tax system and to falsely reduce their liabilities.
The Construction Industry Scheme puts the onus on contractors to make deductions for advance payments towards subcontractors’ tax and National Insurance bills, passing these payments directly to HMRC.
Contractors must register for CIS. Subcontractors do not have to register for the scheme but if unregistered, deductions are taken at a higher rate.
- If a subcontractor is registered to CIS, the contractor deducts 20% from their payments, unless they have obtained gross status whereby no deduction is made; or
- If a subcontractor is not registered to CIS, the contractor deducts 30% from their payments.
Correctly establishing employment status
The CIS rules only apply to those subcontractors who are self-employed and the contractors must include a declaration in each of their monthly returns that none of their listed subcontractors are employees.
This is why the primary consideration for contractors has to be whether their workers are employed or self-employed.
Registration to CIS is only one of the factors to be considered when assessing employment status and does not necessarily mean a subcontractor is self-employed. Recent court cases attest to the fact that HMRC can conclude a subcontractor is employed, even if there is an agreement otherwise and the CIS scheme has been used to process payments.
Establishing employment status is subject to several factors, and it is down to the contractor to decide on this when the subcontractor is first engaged. Each contract is unique, just because a subcontractor has been self-employed in one instance, it does not necessarily mean this is the case in their next contract.
Contractors could face a large tax bill if HMRC makes the decision that subcontractors paid through CIS are in fact, employees.
Indicators of employed and self-employed subcontractors
Should HMRC enquire into whether subcontractors are actually employees, it is then down to the contractor to make the case that they are truly self-employed.
Examples of the indicators of self-employed subcontractors are they:
- Use their own tools and provide their own transport;
- Do not have to accept the work that is offered;
- Can replace themselves with a substitute;
- Are paid per project, not per hour/week;
- Will rectify their own mistakes, without further payment;
- Pay for their own public liability insurance;
- Are not controlled by the contractor, ie. they are able to take other jobs and have a say in their working hours; and
- Have a contract (either written or verbal) that states the above.
Examples of the indicators of employed subcontractors are they:
- Have tools and transport provided for them;
- Are obliged to carry out the work asked of them;
- Cannot send a substitute;
- Are paid per hour/salary;
- Will be paid for correcting mistakes;
- Do not have their own insurance; and
- Are controlled by the contractor.
Please note determining whether someone is employed or self-employed is not a tick box exercise to determine if there are more ticks to employment verses self-employment, instead HMRC looks at the overall round to determine someone’s status.
How M+A Partners can help
For any help in interpreting the requirements of CIS and meeting your tax obligations, please get in touch with me using the details below or email enquiries@mapartners.co.uk
