In 2008, Castle Construction was taken to tribunal by HMRC over the employment status of their subcontractors.
HMRC believed 314 of their subcontractors should be reclassified as employees.
Some of the arguments put forward by HMRC included:
- Subcontractors were paid at an hourly rate
- Subcontractors wore hi-viz vests with the Castle Construction logo on
- Castle Construction provided tools and materials for subcontractors to use
Guess what?
Castle Construction won the case.
And they won it by presenting the facts. They had genuine business reasons for working with subcontractors the way they did, and the judge agreed their subbies were genuinely self-employed.
Case background
Castle Construction supplies building work to a variety of main contractors and developers. At the time of their case, most of their work was bricklaying services.
Although they had employees – head office staff, surveyors and trainee bricklayers – most of their work was delivered by subcontractors.
In 2002, HMRC determined that Castle Construction’s workers were correctly classed as self-employed. However, in 2006, HMRC notified Castle Construction they would be conducting another review, and these subcontractors – 321 in total – would likely be reclassified as employees.
When Castle Construction told the subbies they would have to go “on the books,” many of them walked out. As a result, Castle Construction decided to challenge HMRC’s decision.
Fortunately for Castle Construction, the judge ruled that 314 of the subcontractors were genuinely self-employed, saving Castle Construction from a huge tax bill, which would probably have led to insolvency.
What factors went in Castle Construction’s favour?
This case wasn’t straightforward – the judge even said he found it very difficult to reach a decision. However, several factors helped Castle’s case.
The contract
The first thing of note is that Castle Construction had a contract between themselves and their subcontractors. Although the contract was very basic, the judge considered some key aspects.
He determined that the presence of the contract clearly showed there was a shared understanding between the parties that “the worker is meant to be a self-employed subcontractor.”
He also concluded that the contract “accurately reflected the joint expectation as regards taxation on the assumption (confirmed by HMRC in 2000) that the subcontractors were indeed properly classified as subcontractors.”
And finally, he concluded there was a clear understanding between parties that subcontractors would only be paid when they actually worked. They would not be paid for illness or holiday, or when jobs were called off due to bad weather, or if they were unable to work for any other reason. If they were company employees, they would be paid in all these instances.
Did the contract reflect reality?
The judge heard evidence that backed up the contract. One subcontractor, for example, said he was not paid when he had to take time off to take his son to hospital appointments.
The judge also analysed numerous timesheets and found variations in the number of hours each subcontractor worked. This backed up the claim that subcontractors were free to choose how many hours they worked.
Although there was no mention of notice periods in the contracts, Castle Construction said there was no requirement for a subcontractor to work a notice period. They could go and work for another client at any time.
Most of the subbies who gave evidence confirmed they understood this to be the case, although some thought there was a requirement to provide a week’s notice.
The judge concluded there had been several instances of subbies leaving with no notice, which backed up the claim that there was no notice period.
Genuine business reasons
Castle Construction could put forward genuine business reasons for why they worked with subbies the way they did, countering much of HMRC’s “proof”.
For example, Castle argued it was reasonable to pay bricklayers by the hour rather than on piece work. Due to the volume and nature of the work they carried out, it was unrealistic to calculate how many bricks each individual subbie had laid. Castle also argued that paying by brick often resulted in work being rushed and not carried out to a high standard. The judge agreed with these arguments.
The issue of subbies wearing hi-viz vests with Castle Construction’s logo on them was also determined to be reasonable. The main contractors wanted it to be clear which workers were engaged by which firms – issuing subbies with branded vests made it clear they were contracted by Castle.
The judge also noted that subbies were expected to bring their own tools, except for a Hilti gun and Stihl saw provided by Castle. As only one of each of these was required on site, the judge concluded it made sense for Castle to provide them.
Comparisons between employees and subcontractors
Another factor that worked in Castle’s favour was having employees. The judge could see evidence that employees and subcontractors were treated differently.
Firstly, in the hours they worked – subbies had flexibility in start and finish times and which days they worked as they were paid by the hour. Employees had set hours.
Subbies got paid a higher hourly rate than they would as employees but did not get paid for holidays, illness or when work was called off due to weather. Employees got paid whether they worked or not.
Subcontractors would also be expected to rectify any mistakes or poor workmanship in their own time without pay.
Hi-viz vests, tools and transport were supplied to employees. In contrast, subcontractors had to pay for hi-viz vests, supply their own tools and make their own way to and from site.
There were also social events (e.g., Christmas party) arranged for employees, which subcontractors were not part of.
What can we learn from the case?
This case proves you can work with subbies how you want for as long as you want without using a payroll company. But you must have genuine business reasons, and you must demonstrate that your relationship with subbies is one of contractor and subcontractor, not employer and employee.
Contracts are essential
Despite Castle Construction’s contract being very basic, having one definitely worked in their favour. The judge accepted it as evidence there was a shared understanding between the parties that “the worker is meant to be a self-employed subcontractor.”
Contracts must reflect reality
Neither HMRC nor the courts will take contracts at face value – they must match up with reality. There’s no point getting an off-the-shelf template if it doesn’t match how you work with your subbies. In the Castle case, there was plenty of evidence supporting Castle’s contract and claims.
Bespoke is better
Castle Construction might have won the case, but it wasn’t an easy win. Some elements of their contract could have caused them real issues.
For example, the judge deemed the clause relating to the right to substitution to be “nonsense” and believed it was only included “to diminish the impression that the relationship is one of employment”.
Fortunately, he deemed the point irrelevant since Castle had such a large network of subcontractors, they were in a position to find cover when they needed it so they wouldn’t need subbies to provide substitutes. Therefore, no subbies had ever had reason to enact the clause. It could have been a different story if Castle had been a smaller firm.
There were also many rules, policies and terms that were spoken or implied but not documented.
The notice period was not documented, which led to confusion – some subbies said no notice was required, while others thought it was a week. Had Castle had a more robust contract, there would have been no confusion – which would be good for their case and their subbies.
Bespoke contracts don’t just protect you from HMRC enquiries or the courts, they also keep everything clear between you and your subbies, making life easier for both parties.
Have you got a contract in place?
If you haven’t got a contract between you and your subcontractors, you could leave yourself open to risk. Not just from HMRC, but from disgruntled subbies who might decide they want to claim back paid holiday pay.
The good news is getting a robust, watertight contract is easy. You tell us how you work with your subbies, and we’ll do the rest. All you have to do is be honest with us, get all your subbies to sign a contract and pay your invoices on time.
You’ll have complete peace of mind that HMRC can’t misinterpret your subbies as employees – we even offer an insurance-backed guarantee on all our contracts.
You can find out more about how it works here, or better still, book a call to get started.