Status symbols

Under the new Construction Industry Scheme (CIS), contractors will have to declare the employment status of each individual detailed on monthly returns to HM Revenue and Customs (HMRC). If HMRC later designates a subcontractor as an employee for tax purposes, the offending contractor’s declaration will no doubt be referred to.

It will remain the contractor’s responsibility to establish the employment status of workers. This obligation exists under the present scheme, but the new CIS will give more weight to this duty and the rules are likely to be strictly enforced.

Self-employment is not a choice that an individual can make for themself and it is not defined within tax legislation, therefore contractors have the difficult task of determining the employment status of their workers. The state of being ‘employed’ or ‘self-employed’ is a matter of fact that no amount of argument or posturing can change.

The following are indicators of self-employment:

• the worker can decide how and when work will be done;
• the worker supplies materials, plant and equipment;
• the worker takes the financial risk if the job costs more than their quotation;
• the worker hires, supervises and pays their own operatives;
• the worker is paid an agreed amount regardless of how long the job takes.

Indicators of employment:

• the contractor may control the worker as to where, when and how the work is done;
• the worker supplies only small tools for their own use;
• there is no possibility of the worker suffering financial loss;
• the worker does not have a business organisation;
• the worker is paid by the hour, week or month.

Getting employment status wrong can be a financial disaster for a contractor. The contractor will be held responsible for the worker’s PAYE and NI contributions as an employee and for any interest and possible penalties.

Under PAYE regulations a worker incorrectly designated as a subcontractor by the contractor can claim a credit for the PAYE that the contractor should have deducted and seek a refund of CIS deductions. The contractor would be left with the task of recovering its losses from the worker. It is more likely that the contractor would foot the bill for the PAYE and NI, which could cover several years of non-contribution.

Currently HMRC has an “offset concession” in place. This allows any tax deducted under CIS to be offset against the contractor’s liabilities for PAYE and NI; any balance is to be paid by the contractor. This is a logical way of applying the obligations but it is only a concession, which HMRC has threatened to withdraw should contractors fail to improve the accuracy of employment status.

The industry requires a pool of casual labour in preference to hiring and firing on a short-term basis. Various vehicles have been introduced to satisfy the need and purport to remove the risk of bogus self-employment from contractors.

Agency labour is possibly the most effective and most disliked by specialist contractors. An individual operative supplied through their own limited company was once a solution, but rules introduced in 2000 have removed most advantages. (See IR 175 Supplying services through a limited company or partnership). Other vehicles include composite and employment management companies. One of the largest, Gabem Management has lost its gross payment status and appeal and will have a hearing in October.