Over the coming weeks we are putting together a series of the key pitfalls common to many construction businesses which we hope will be of interest to you.
Here are 4 common questions we are often asked:
- Are my workers genuinely self employed?
- Construction failures are on the increase- how can I protect my business?
- There is never any cash in the business. How can I improve it?
- CIS! VAT! The book-keeping is so complicated – how do I get it right?
Below is our first article which we hope you will find of interest. The rest will follow in the coming weeks.
Are my workers genuinely self employed?
Pitfall number 1- are your subcontractors genuinely self employed?
This old chestnut has been around for years but we still find that many business owners remain unsure of the rules. Others take a blasé attitude to this and simply say, “let the tax man find it out”.
Maybe you will get away with it as HMRC are under-resourced, but with new powerful computer programs such as “Connect” and huge investments in IT infrastructure, the net is closing. Making sure you get things right for the future will be essential to guarantee your business’ survival. The risk doesn’t just lie with HMRC, but with your subcontractors as well.
What defines a worker as an employee?
There are many factors to consider, but the following are the main signs of employment:
- The worker has been with you for a long period of time,
- The worker is paid a day rate or hourly rate,
- The worker is closely supervised,
- The worker has no real financial risk.
If all of these apply then there is a good chance your worker is actually employed. If this is the case and you are treating them as self employed then your company is liable to the additional tax and national insurance due. You are also exposing yourself to a potential claim from the worker for unpaid leave and other employment benefits (Pimlico Plumbers Ltd and another v Smith (Supreme Court)).
The Pimlico case is worth a closer inspection. Despite the fact that Mr Smith filed tax returns on the basis that he was self-employed, was VAT registered, was entitled to reject work and was able to take outside work, the Supreme Court held that the Employment Tribunal had been entitled to find that he was a worker with a number of employments rights- the case did not definitively say he was an employee but went someway towards this. Significant factors in its decision included:
- Mr Smith was required to wear a Pimlico branded uniform and to use a Pimlico branded van leased from Pimlico.
- Mr Smith had to carry a Pimlico identity card and closely follow the administrative instructions of its control room.
- The contract referred to ‘wages’, ‘gross misconduct’ and ‘dismissal’, and included a suite of restrictive covenants concerning Mr Smith’s working activities following termination.
- While Mr Smith was able to swap assignments with other plumbers already working for Pimlico, this was more akin to swapping a shift between workers than providing a substitute. Providing a substitute is a key indicator of self employment and it is where the self employed individual has the right to send any suitably qualified person to carry out his work in his place without the agreement of the contractor.
The Supreme Court’s decision enabled Mr Smith to proceed with claims of disability discrimination, unlawful deduction from wages and holiday pay against Pimlico.
So are your subcontractors affected?
One way to find out is to simply use the HMRC employment status toolkit.
We have used the toolkit on numerous occasions to confirm a subcontractor’s employment status. If the toolkit states the “worker” is self employed then you can print out a report and keep it as protection for you in the event of a future HMRC enquiry. If the result states the “worker” is employed then you need to take immediate action.
Here are several things which will go some way to help ensure your subcontractor is genuinely self employed:
- If they paid rent for a lock up or building to keep tooling and stock.
- If they had professional indemnity insurance- this should be a must have.
- If they have the ability to increase income by working more efficiently- price work is great to prove self employment.
- If they have a website and market their services through advertising and have other customers.
- If they themselves engage subcontractors.
- If they have a business plan with cash flow forecasts and business bank account.
- If their invoices can go bad.
- If they bear the costs of putting right mistakes- another must have. It doesn’t look good if they get paid irrespective of the quality of their work.
- If they can negotiate payment terms and invoicing for work.
- If they have the right of substitution and substitution has happened in practice.
- If they are an expert in their own field and their work is undertaken independently and without supervision.
- If they have the right to pick and choose what work they do and the contractor also has the right to pick and choose what work they give the subcontractor- this is called mutuality of obligation and is a key indicator of self employment.
There is no silver bullet. The taxman will view the contract and working practices and will take an overview of everything to decide whether on balance your worker is employed or self employed.
We would strongly recommend all construction clients review the employment status of subcontractors using the toolkit. Where there is any ambiguity, (the toolkit may say there’s insufficient information to determine the employment status), you should take corrective action to strengthen your position by improving your contract with the worker and ensuring a number of the working practices detailed above are actually put into practice.
We would recommend you speak to your adviser or call one of the team to discuss this further. Email us here.
The content in this blog is correct as at 26/11/19. See terms and conditions.