Can you pay subbies by the hour?

by | Jun 16, 2023

You might have been told you can’t pay subbies by the hour because it makes it look like they are your employees rather than subbies. But this isn’t true. Employment status has nothing to do with how you pay a subcontractor.

You can pay subcontractors by the hour, by the day, by the measure, per brick, per metre, on a schedule of rates, a flat rate, or at a fixed project fee – you can pay subbies however you want.

How you pay your subbies is irrelevant. What is relevant is whether your subbies are genuinely self-employed or whether you’re an employer disguising your employees as subbies.

What are the payment options for working with subcontractors?

If your subbies are genuinely self-employed, you can pay them how you want. The payment terms you agree with your subcontractors will depend on the type of services they are providing.

Payment by project: If you use subbies on an ad-hoc basis, using a fixed project fee can be a good option. You agree the fee before each new job. The subcontractor completes the work and then submits their invoice. You then make payment to the subcontractor (usually directly into their bank account).

Payment by the day or hour: If you use the same subbies on multiple projects or long-term jobs, it’s not always practical to pay at the end of the project. Instead, you might agree an hourly or daily rate with your subcontractors and pay them weekly or monthly.

Other types of payment: As we said above, the payment terms you agree with your subbies will depend on the nature of the work. In some cases, you might make payment by the measure, per brick, per metre, or on a schedule of rates.

How does the construction industry scheme (CIS) affect the way subcontractors are paid?

In the past, construction firms made a lot of cash payments instead of running everything through a bank account. This made it difficult for HMRC to keep track of payment information. Many subbies were not issuing invoices so they did not make the correct tax payments. To combat tax fraud, CIS was introduced.

Paying subcontractors under CIS

Under CIS rules, a contractor must make CIS deductions from a subcontractor’s pay before payment is made to them. The CIS deductions must then be paid to HMRC. Contractors must also file CIS returns and keep CIS records.

The rate at which CIS is deducted will depend on whether the subcontractor is CIS registered and whether they qualify for gross payment status.

A contractor is only responsible for making CIS deductions and monthly payments to HMRC. They are not responsible for managing other elements of their subcontractors’ tax affairs.

Subcontractors are responsible for meeting their own tax obligations and ensuring they are correctly registered. They must complete tax returns on an annual basis and make payment of tax and NI to HMRC. The money they have paid in CIS deductions can be used toward their income tax liabilities. If the amount of CIS they have paid is higher than the tax and national insurance they owe, they can reclaim the overpayment.

Can I pay a subcontractor without CIS deductions?

If you make payments to subcontractors for construction work, you must be CIS registered. Before you make the first payment to a subcontractor, you need to ‘verify’ them with HMRC. To do this you’ll need their unique tax reference number (UTR) and national insurance number. HMRC will then tell you whether they’re CIS registered and what rate of deduction to use.

For CIS-registered subcontractors, the rate of deduction is 20%. For non-registered subbies, it is 30%. You must deduct this amount from their gross pay. However, if a subcontractor has gross status, you do not need to make any CIS deductions.

A subcontractor can apply for gross status if they pass special tests. These include a minimum turnover test and a compliance test (based on their recent history of making tax payments on time). They must also prove their business does construction work in the UK and that they use a business bank account. If they qualify for gross status, they can be paid gross.

What if you pay subbies through a third party?

Some construction companies use third-party companies or umbrella companies to make subcontractor payments. The third-party company invoices the main contractor for any work carried out by the subcontractor. The contractor pays the invoices. The third-party company then deducts CIS and the subcontractor is paid.

These third-party companies typically take their fees from the subcontractor’s pay. In essence, a subcontractor is paying to get paid, which isn’t ideal.

Another downside of using third parties to pay subcontractors is the impact on cash flow. If you use a third-party company, you’ll have to make CIS payments upfront, plus their invoices will include VAT which you’ll have to pay on top of your wage bill. On the other hand, if you pay your subbies yourself, you can keep the CIS deductions and VAT in your own account until payment is due.

Making payments through third-party businesses won’t always protect you from HMRC enquiries into employment status. If your subbies are reclassified as employees, you will be liable for any unpaid tax as well as any other payments (such as unpaid holiday pay).

What are the alternatives to using a third party?

It is possible to work with subbies long-term, pay them an hourly rate and keep HMRC off your back. And it’s possible to do all this without using a payroll company.

The first option is to cross your fingers and hope for the best. Work with your subbies however you want and hope HMRC never looks at you too closely. We don’t recommend this – the cost of getting caught out can be substantial.

The second option is to hire your subcontractors, issue a proper employment contract and put them on PAYE. They will have tax deducted from their pay. But you will also have to account for holiday payments, sick pay, pension contributions and other employment benefits.

The third option is to create your own subcontractor agreement (aka contract for services) that makes it clear the relationship is one of contractor and subcontractor and that you and the subcontractor are separate businesses.

Or there’s a fourth option…

Work with Hardhats for complete peace of mind

When HMRC and the courts are determining employment status of a subcontractor, there are three key “tests” they use:

  1. Personal service – is the subcontractor expected to carry out the work personally?
  2. Control – do you tell them when to work, what to do, and how to do it?
  3. Mutuality of Obligation (MOO) – do you have an obligation to keep offering your subcontractors work, and do they have an obligation to accept it?

You can ensure you don’t fall foul of these tests by working with HardHats. We create bespoke, watertight contracts that accurately reflect how you work with subcontractors and give legitimate business reasons for why you work that way.

Not only that, but our contracts are underwritten by Markel – a multi-billion-dollar international insurance company that specialises in ‘hard-to-place’ risks. That means we’ll take care of any HMRC enquiries into employment status and cover any associated costs if they do reclassify your subbies.

Plus, we get all your subbies to sign the contracts electronically using our app (which you’ll also have access to), so you don’t even have to worry about the paperwork.

You keep control of your subcontractor payments and cash flow and have complete peace of mind that your business is protected. And your subbies don’t have to pay a fee just to get paid.

If that sounds good to you, book a call to get started.

You might not even need our help!

But if you use labour-only subcontractors long-term and want to continue doing so, let’s have a chat. If you are at risk, we’ll take that risk off your hands.

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