“The construction industry is seen as an easy target by HMRC.”*
During the 2014 to 2015 tax year, the HMRC’s revenues from investigations went up by around £20 million. Apparently, a lot of this was due to the challenging of many self-employed contractors statuses.
According to Ray Maughn, a tax partner at accountancy firm UHY Hacker Young, the industry has been “subjected to increasingly intense investigations in the last few years.”
He explains that this is because “construction typically has a far higher proportion of self-employed workers and subcontractors than most sectors, and they will often move jobs more frequently.”
“When this happens it’s more likely that mistakes or omissions might be made to paperwork or a worker’s tax status.”
Therefore, a “crackdown” was pledged on those “disguising employment as false self-employment.”
Plus, recent changes to both government legislation and HMRC policy now make this issue more difficult for contractors than ever before. Both the Treasury and HMRC are hungry for a higher tax take. Contractors continuing to engage self-employed tradesmen, directly or indirectly, face aggressive reviews of their tax arrangements. They need to be aware of the risks and potential liabilities associated with these arrangements.
Therefore, we asked Nick Pilgrim, the Managing Director at EEBS Limited. He explained more on how contractors are at risk and provided suitable solutions to the issues. EEBS are leading payroll specialists that alleviate the risk of contractors being taken to court by the tax man. Therefore, Nick was able to provide us with an insight into the world of taxes and how to avoid the risks.
How does the Revenue decide if my tradesmen should be employees?
“The HMRC tends to look at how you work with sub-contractors. If:
- You use self-employed tradesmen without a written contract
- Supply the majority of the materials, plant and equipment
- Pay them an hourly/daily/weekly rate
- The sub-contractor cannot demonstrate that he can make a loss as well as a profit
- The sub-contractor cannot demonstrate that he has an active portfolio of other clients
Then the HMRC are extremely likely to find that these tradesmen are your employees. And that they are not genuinely self-employed. Instead, they should have paid more tax. And that YOU should be liable for their back tax (and penalties)!”
How does the HMRC pick who to investigate?
“Each year the Revenue target specific industries for investigation. Construction is always on this list. Now, using the new monthly online CIS returns, they are able to ‘data mine’ submissions in real-time looking for ‘hallmarks of employment’. These include:
- Sub-contractors with only one “employer”
- Sub-contractors who are paid regular amounts
- Sub-contractors receiving few payments for materials
- Sub-contractors who pay no other Sub-contractors
Any contractor engaging these types of sub-contractor is flagged as a potential target.”
So what will it cost me if I do what they want and convert my tradesmen to employees?
“It is generally reckoned that the additional ‘payroll burden’ for employing as opposed to contracting is an increase in payroll costs of between 28 -40%. This is made up of, amongst other things:
- Employers National insurance costs
- Holiday pay
- Additional admin costs for dealing with PAYE and employment rights legislation
- New pension contributions
- Paternity and maternity leave costs
This estimate does NOT include any additional cost incurred through the reduced ability to vary your workforce to match your workload.”
Is there an alternative?
“Yes! In spite of HMRC’s ongoing attempts to limit the employment arrangements for contractors, it is still entirely possible to outsource your sub-contractors to specialist intermediary suppliers.”
Is it safe to use an intermediary?
“In our industry, as in any other industry, not all solution providers are equal. Yes, it is safe provided you take advice from a reputable, audited and compliant supplier. (Ideally one who has never had their model challenged by HMRC, who are audited by the Aspire Partnership (the UK’s leading Construction Tax Specialists) and whose compliance is backed by a comprehensive guarantee).”
So there you have it! To make sure you’re compliant take the free compliance health check now! eebs.co.uk/compliance-health-check
Does this help? Let us know what you think in the comments below.