It has been going on for years!
HMRC have been talking about the need to create a level playing field in the construction industry for years and every so often they come up with yet another piece of legislation, supposedly designed to do that.
CIS payroll service schemes, where the worker was supplied to the construction company by the scheme provider, who paid the worker on a self-employed basis, worked well for many years, providing certainty to the construction company. However, the practice became so widespread, and across other market sectors (where self-employment of the worker could not really be justified), that legislation had to be introduced. The ‘false self-employment of the worker could not really be justified), that legislation had to be introduced. The ‘false self-employment legislation’ was introduced in April 2014 to stop what HMRC considered was giving an unfair advantage to those using that arrangement.
Restriction on Travel and subsistence expenses
The Budget 2016 introduced a restriction on travel and subsistence expenses where the worker operates through an intermediary. Again this is stated as being part of HMRCs attempt to create a level playing field in this case between an employee and someone who ‘looks like an employee’.
How level is the playing field now?
A genuinely self-employed contractor working direct for a construction company will pay tax on a self-employed basis (with no employer’s National Insurance payable) and will obtain tax relief for their travel expenses to site. However, if the worker does the same work for the same construction company, but through an intermediary (including a temporary staffing agency), then they are taxed like an employee and, if there is supervision, direction or control, will be denied tax relief on travel and subsistence expenses. That doesn’t seem like a level playing field, though to be fair to HMRC, it is difficult to word the legislation in such a way that it taxes the genuine situations properly but stops people from creating a position to gain a tax advantage.
Case Study
XYZ Building Company Ltd have 20 subcontractors on a regular basis. By any normal definition, all of these are “self-employed”, XYZ have, for many years contracted with ABC Ltd, a CIS payroll services provider to supply the workers. However, for all of these workers, there is an element of supervision (as to the manner in which they undertake the work).
As a result, the payroll service scheme provider ABC has, quite rightly, ruled that they cannot be paid by them on a self-employed basis. Instead, they have put them through an Umbrella Company.
These 20 workers are becoming increasingly disgruntled as their take home pay gone down from £600pw to less than £520pw.
They cannot understand why. When they are genuinely self-employed, their net pay should have gone down so much.
The workers hae heard that JKL Building Company Ltd are taking on workers on a self-employed basis and realise they will be much better off working for them.
XYZ are not aware that they are about to lose a substantial part of their workforce!
CIS Payroll Schemes have limited application
CIS Payroll schemes, where the construction company pays the scheme provider and the provider pays the worker, now only work where there is no supervision, direction or control of the worker. However, there are many situations where a genuinely self-employed worker will be subject to some element of supervision, direction or control.
Paying them through a CIS Payroll provider, is more expensive than contracting with them direct, due mainly to the employer’s national insurance payable and the scheme provider’s fee. (See the case study on this page.)
Declarations that there is no SDC don’t work – and are risky
Declarations that there is no (nor any right to) supervision, direction or control will largely be ignored by the HMRC, who will focus on the facts of the case. Indeed, providing such a declaration, fraudulently, can result in the liability for tax, which should have been accounted for, falling on the construction company. Where large numbers of contractors are concerned, this could be sizeable liability.
Further complications
CIS Payroll providers may have switched workers who ARE supervised directed or controlled into an Umbrella Company model. They are worse off under that model, and recent budget changes limiting tax relief on travel and subsistence expenses, makes them even worse off. Subcontractors are looking for other solutions.
Simple no, or low cost, solutions with Nopalaver
Nopalaver can advise on alternative payment solutions for contractors, including contracting direct with the worker, via a strong self-employed contract (one off cost of contract), workers operating through their own limited company, or using the little known exemption of the construction company’s own intermediary.
