Are your workers really self-employed?
If you work in the construction industry, big changes are coming from April when the new Construction Industry Scheme comes into effect. Contractors and subcontractors should be aware of the changes, as it will affect the way payments are made.
Most people in the construction industry comply with their tax obligations but some don’t. One of the aims of these changes is to help create a level playing field for all.
If your workers are self-employed from next April, registration cards and tax certificates will no longer be valid, and will be replaced with a verification service. With a quick telephone call to the department, contractors will be able to verify with HMRC whether the person or firm they are engaging is registered as a subcontractor and whether the subcontractor should be paid gross or have money deducted.
In most cases, verification won’t be necessary where your subcontractors have worked for you at any time in the two tax years before April 2007. You will also have to know that when you last paid them you saw a permanent registration card, or a tax certificate or temporary registration card that was not due to expire until at least April 2007.
But, if it’s the first time they’ve worked for you, you’ll need the name they used when they registered with HMRC, their National Insurance number (or company registration number) and their Unique Taxpayer Reference (UTR).
Providing these details will enable you to check whether they are registered for CIS and whether payments should be made gross, or have money deducted. If HMRC doesn’t have a record of your subcontractor, you will be told to withhold a greater percentage of their money – and that will continue until the subcontractor has registered with HMRC.
Each month, you as a contractor will have to file a monthly return of all the payments you have made to subcontractors working for you. You will have to declare that the details are correct and none of the payments were made under a contract of employment. There are penalties if you deliberately get it wrong or fail to take care. The monthly return replaces the vouchers and annual return. After 5 April 2007 subcontractors won’t get vouchers showing deductions from payments that are made to them, as at present. Instead, you will give them a statement showing how much you have paid them and what the deductions were.
The CIS scheme doesn’t apply to workers that are directly employed. So, getting their employment status right is important for you because if you get it wrong it could have severe consequences. It may mean you having to pay the tax and NICs you should have deducted, incurring a penalty, and losing your own gross status entitlement if you are registered for gross payment under new CIS. So, before you make the first payment to a subcontractor you will have to ensure you know their correct employment status, which depends on the contractual arrangements that you have agreed.
Workers are generally self-employed if they have their own business, and are responsible for whether their business succeeds or fails. They are generally employed if they work under the control of the contractor who hired them and don’t carry the risk of running a business. It is possible to be self-employed under one contract, but employed under another.
A useful resource is the interactive Employment Status Indicator (ESI) tool on the HMRC website. The tool can give you an HMRC view on whether the relevant subcontractors are engaged under employment or self-employment terms for tax and NICs purposes. In a minority of cases, where the engagement is complex or where conflicting facts have been given, the tool will not be able to supply a definitive answer. The tool can be accessed at www.hmrc.gov.uk/employment-status . If you need more information, call the Construction Industry Scheme helpline on 0845 366 7899.