The use of labour-only subcontractors in the construction industry is standard practice. You get a big project and you need extra hands, but you don’t want to employ, so you bring in some subbies. But as you start to work with those subbies more frequently, you find yourself creeping into some grey areas. And those grey areas could lead to HMRC questioning their employment status.
You might not want to employ them, and they might not want to be employed but that’s not really relevant. What is relevant is whether HMRC decides they should be reclassified or not. And if they do decide your subbies should be employees, you could be facing some hefty fines.
What is HMRC’s CEST tool?
The Check Employment Status for Tax (CEST) tool gives you HMRC’s view of a worker’s employment status, based on the information you provide.
You answer a series of multiple-choice questions about how you work (or want to work) with your subcontractors. After you’ve completed the questions, you get one of the following outcomes:
- Employed for tax purposes for this work
- Self-employed for tax purposes for this work
- Off-payroll working (IR35) rules apply
- Off-payroll working (IR35) rules do not apply
- Unable to determine
It’s worth noting that the tool was originally designed for public sector organisations to determine IR35 status. It was not designed for construction businesses to determine the employment status of their subbies. And, while it has now been updated to cover the private sector, it’s still far from foolproof.
Is the tool accurate?
Even though HMRC claims they will stand by all determinations given by the tool, this comes with a disclaimer:
“This would not be the case if the information you have provided was checked and found to be inaccurate.”
It doesn’t matter whether you deliberately give false answers or not – the issue is whether your answer is accurate. And if HMRC decides it isn’t, you don’t have a leg to stand on.
And there’s more:
“HMRC will also not stand by results achieved through contrived arrangements, designed to get a particular outcome from the service. This would be treated as evidence of deliberate non-compliance, which can attract higher associated penalties.”
In other words, entering sham contracts with a payroll company to make it look like you operate in a certain way won’t work either.
Why does employment status matter?
The status of workers is important because it affects the way people pay taxes and the amount they pay. Employees have income tax and national insurance contributions deducted from their wages by their employer via PAYE. Self-employed individuals are responsible for managing their own tax and national insurance.
They will need to keep accurate accounts and complete a self-assessment tax return each year and the information they include will determine how much tax is due. If they operate as a limited company, they will also need to complete a company tax return.
What does it mean by off-payroll working (IR35)?
IR35 is a set of tax rules designed to stop freelancers, consultants and contractors from avoiding taxby setting themselves up as a limited company or working under an umbrella company.
To be ‘outside IR35’ means that you are operating as a genuine business, and therefore operating outside of the IR35 rules. Working inside IR35 means that the service you provide is deemed by HMRC to reflect a service of employment and therefore you should be considered an employee for tax purposes.
IR35 does not apply to sole trader subbies.
You can find out more about IR35 and the construction sector here.
What if the HMRC’s CEST tool is unable to make a determination?
If HMRC’s CEST is unable to determine status, don’t panic. As we’ve mentioned above, the tool isn’t foolproof.
Regardless of what outcome you get from CEST, the thing that matters is your working practices. How do you work with subcontractors? Are they employees in all but name or are they genuinely self-employed?
The positives of CEST
Before you disregard the CEST tool completely, there are some positives. Completing the questions will help you understand a little more about what HMRC looks at when determining the status of your subbies.
You can also use the tool to provide a bit of guidance. For example, if you have been thinking about employing a subbie full-time and CEST determines them as ‘employed’, then it’s probably time to put them on your permanent payroll.
And if your result comes back as undetermined, that’s a good indication that you’re straddling a few grey areas and need to speak to an expert (like the guys at HardHats).
But you should only use the tool as a guide. Because as much as HMRC have tried to make it accurate, even they admit, it isn’t always reliable.
The problem with CEST
Part of the problem is that CEST only asks a limited number of questions and overlooks some of the key considerations used to determine employment status. For example, mutuality of obligation isn’t covered by CEST, despite being one of the things HMRC look at when they investigate employment status.
Another reason the tool isn’t reliable is the ease with which you can go back and amend your answers to get the outcome you want. What use is a tool that lets you manipulate your outcomes?
By all means, use CEST as a guide, but don’t rely on it too heavily. If you are unsure whether your contractors should be on your PAYE, don’t leave yourself open to risk.
How to determine employment status (and keep HMRC happy)
It is up to the contractor, not the subcontractor, to determine employment status. If HMRC decides to reclassify your subbies as employees, you’re the one liable for the costs.
Doesn’t matter whether you are contracting subbies through recruitment agencies, whether they have a CIS card, or whether CEST says they are self-employed. If your relationship is one of employer-employee, they should be on your PAYE.
But that doesn’t mean you should rush into employing all your subbies just to be on the safe side. If there is a genuine business reason you work the way you do with subbies, you can work with them however you want. But it’s important you accurately document your working relationship.
Is there another way to prove employment status?
There is no one specific thing that determines self-employment. Using umbrella companies or payroll companies won’t protect you from an HMRC enquiry if they suspect it’s all for show.
That said, there is plenty of case law to draw on and there are generally three “tests” used by HMRC and the courts. These are personal service, mutuality of obligation (MOO) and control.
The best way to protect yourself is to put a contract in place between you and your subbies that addresses these three tests and documents your working relationship.
While a written contract won’t mitigate the risk of an enquiry completely, it will go a long way towards demonstrating that the relationship is genuinely one of contractor and subcontractor.
Get a bespoke, insurance-backed contract with HardHats
If you have any concerns about the risk of contracting subbies long-term and you don’t want to rely on CEST, let us help. We specialise in creating bespoke subcontractor contracts for construction businesses.
We’ll document your working relationship so that if HMRC ever opens an enquiry, they won’t misinterpret your subbies as employees. And, in the unlikely event they do reclassify your subbies, we’ll cover any costs, including NIC, tax and penalties.
Plus we’ll do the hard work of getting your subbies to sign the contracts electronically so you don’t have to lift a finger.
You can find out more about our employment status guarantee here, or book a call for a friendly chat about how we can help.