At the end of 2022, one of our clients was in discussions with HMRC about a VAT repayment. As is usually the case with these things, there was a back and forth of emails, and at one point, HMRC decided to casually drop in the following query:
“Please explain why (name) and (name) are driving company vehicles bought by the company and using company fuel cards, considering that they are not employees of the company.”
For many construction firms (and their accountants), this kind of question would cause panic. After all, we’ve all heard the horror stories of contractors being forced to pay hundreds of thousands in back taxes and fines because HMRC suddenly decided to reclassify their subbies as employees.
Our client, however, didn’t panic because he knew we had his back.
We know exactly how to handle this type of query, and it’s not by sending responses along the lines of:
“We like to promote a good and clean image for the business, that’s why the subbies drive our vans,” or, “It’s impossible to get the workforce if we don’t provide vans because all our competitors do it.”
Because while those statements might be true, they aren’t going to cut it with HMRC. HMRC doesn’t give a toss about your company image or struggle to source reliable subbies.
What HMRC cares about is whether you are disguising employees as subbies to get out of putting them on PAYE and being liable for tax, NI and pension contributions, and holiday or sick pay.
So how did we explain the van thing to HMRC and ensure it didn’t turn into a full-blown enquiry into employment status?
Our response was simple: “Any use of company vehicles is reflected within the rate paid to the subcontractor.”
And do you know how we made it 100% bulletproof? It was reflected in the contract our client had with his subcontractors.
The benefits of transparency
It’s not surprising that so many contractors are cautious about how they work with subbies, what with all the misinformation that gets spread around the industry.
You’ve got the hearsay – “I heard about this firm that got fined £500k because they had subbies wearing their uniforms” (probably never happened)
Then you’ve got the misinterpretations – “I checked on CEST, and my subbies are outside IR35” (IR35 is irrelevant if your subbies are sole traders and the CEST tool is shit anyway).
And then there are the blatant lies – “If you want to work with subbies long-term, you have to use a payroll company” (complete bollocks).
You can work with subbies long-term and keep HMRC happy without using a payroll company. What’s more, your subbies can drive your vans, wear your uniform and use your tools. You can pay for their fuel, their training and even their lunch (if you’re feeling particularly generous).
Full transparency. If your true working relationship is documented clearly and concisely in your contracts, you aren’t leaving anything open to misinterpretation.
If you can demonstrate a legitimate reason for why you work the way you do, then HMRC will usually lose interest pretty quickly.
What you need to know about HMRC
Despite what it might feel like, HMRC hasn’t got it in for construction firms. HMRC just want to ensure they are paid every penny they are owed in taxes. And that’s understandable really – why should some people do things by the book while others cheat the system?
Unfortunately, their enthusiasm for uncovering dodgy dealings often results in legitimate businesses getting caught in the crossfire.
But it’s not like there’s a squad of HMRC employees wandering around construction sites looking for subcontractors wearing your uniforms.
Most enquiries into employment status come off the back of something else – an enquiry into VAT, CIS or corporation tax, for example. This is exactly what happened with our client – an issue over a VAT repayment led to HMRC asking why their subbies were driving company vans.
And that’s how it starts.
Luckily, we were able to explain this and prevent any further questions. But if you don’t have a satisfactory response and your contracts aren’t watertight, then you could end up with an enquiry on your hands.
And even if there’s nothing for HMRC to find, you don’t really want the extra hassle of dealing with their questions.
How do you protect yourself?
The easiest way to protect yourself is to work with us. We know you’ll probably think we’re biased, so let us lay out the other options so you can see why we think ours is best.
Option one: Put your subbies on PAYE. If you treat them like employees, they act like employees, and they are employees in all but name, then why not stick them on the payroll? Employing your best subcontractors certainly has some benefits. However, if that’s not an option, there’s always option two…
Option two: Use a payroll company. This is one of the most common solutions. Let payroll companies worry about subcontractor contracts and HMRC enquiries. And in theory, it’s great. Until you realise that those contracts payroll companies use are designed to protect them, not you, and their requirement for you to pay CIS and VAT on every invoice can have a huge impact on your cash flow.
Option three: DIY contracts. We’d recommend you avoid off-the-shelf templates, but it is possible to create your own bespoke subcontractor agreements – our free book even teaches you how. This gives you the protection you need – as long as you get it right and keep it up to date. But if you haven’t got the time, legal knowledge or inclination to sit and create contracts, you’ll probably find option four more appealing…
Option four: Work with HardHats. We create bespoke watertight contracts for you. And we get all your subbies to sign them digitally using our fancy software. Plus, we protect all our contracts with an insurance-backed guarantee. We handle any HMRC enquiries, and should HMRC ever reclassify your subbies (unlikely when you work with us), we’ll cover any associated costs.
So there you have all the options – you just need to decide which is right for you.
Of course, you could do nothing. Carry on as you are. Just make sure you’ve got some great responses lined up in case HMRC ever do want to know why you’re working with your subbies the way you are.
But if you’d rather not run that risk and options one, two and three don’t work for you, get in touch.