Summary of Key Points
- Tax legislation imposes considerable administrative burdens on anyone in the construction industry who sub-contracts work.
- The tax authorities often seek to show that sub-contractors are employed and not self-employed. It is up to the contractor and sub-contractor to word their contract and operate their contract carefully if the sub-contractor is going to be classed as self-employed, with the tax and NI benefits that usually provides.
- A “self-employed” sub-contractor can help his or her position by careful wording of sales invoices, and taking other measures in the way the contract is operated to keep themselves out of the legal definition of being “employed.
The construction industry historically has a higher proportion of self-employed people (34%) than UK industry as a whole (11% average). As a result the “tax take” has been less than other comparable industries, with much lower PAYE and NI revenues. The aim of the CIS was therefore to increase the tax take by making it mandatory for more people working in this industry to be paid “net” and not at the gross value of their invoices.
There have been a number of test cases where Her Majesty’s Revenue and Customs (HMRC) have sought to show that construction contractors being paid gross should have been paid “net” under the CIS. The Courts have generally found that the people concerned were legally self-employed and not employees, so HMRC have lost most of these cases. Hence – being sore losers – they are now seeking to tighten up these rules even more in their favour. This is currently a consultation exercise but given the sorry state of the nation’s finances the Government will be keen to get it into law as fast as possible. This note is a summary of the current CIS rules which run to many pages.
Most of the burden of the CIS falls on contractors large and small. First, they need to consider – for every sub-contractor they hire – whether that person is an employee or self-employed. They need to take care over this because if they get it wrong they can face big tax bills and penalties. Also, they need to be able to demonstrate that they have considered this issue. Then if they are making 20% (for HMRC registered) or 30% (for non-HMRC registered) deductions from sub-contractors, there are all sorts of rules they need to follow and disclosures they need to make.
Employed or Self-Employed?
If this was a simple legal issue, a great many rich lawyers would have stayed poor down the years.
Common indicators of employment
- The contractor has the right to control what the worker has to do – where, when and how it is done – even if the contractor rarely uses that control.
- The worker supplies only his or her own small tools.
- The worker does not risk his or her own money and there is no possibility that he or she will suffer a financial loss.
- The worker has no business organisation, for example, a yard, stock, materials, or workers. (These examples are not exhaustive.)
- The worker is paid by the hour, day, week or month.
Common indicators of self-employment
- Within an overall deadline, the worker has the right to decide how and when the work will be done.
- The worker supplies the materials, plant or heavy equipment needed for the job.
- The worker bids for a job and will bear the additional cost if the job ends up costing more than the worker’s original estimate.
- The worker has a right to hire other people who answer to him or her and are paid by him or her to do the job.
- The worker is paid an agreed amount for the job regardless of how long it takes.
If you believe you are self-employed it is well worth following as many of the indicators of self-employment as you can – both in the wording of your contract and the way you execute it. For example, raise an invoice for “Plumbing installation at Building Site X” and not “To 100 hours work on the plumbing at Building Site X”. Also, always invoice for any materials you have paid for and used on the job as a separate line item on the invoice – the contractor will pay you gross for this.
Remember in Section 1 that HMRC’s view has generally failed in the Courts. So if you carry out your contract with as many of the indicators of self-employment as possible, then you give your accountant the best possible chance of fighting your corner should HMRC challenge your employment status.
Registering for Gross Payment Status
You need to register under the CIS scheme with HMRC whether you’re going to be paid gross or net. You can do this online and it’s advisable to if you can – then HMRC cannot apply penalties if anything should get “lost in the post”. If you plan to be paid gross, there are 3 tests they will apply:
Your business must:
- do construction work in the UK and be run largely through a bank account
- have a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and most companies)
- have complied with all its tax obligations
If the contractor is dealing with a business which has not met these tests then the default is to pay net and not gross.