In an ideal world, your subbies would turn up in their own van, pay for their own fuel, and bring their own tools. All you’d need to pay for is the cost of their labour and any materials used on site.
In reality, it’s not always as black and white – sometimes it’s grey. And it’s in those grey areas where you can get caught out.
If subbies drive around in your vans and use your fuel cards, HMRC could start questioning their employment status. But if you have to reimburse your subbies for these costs each week, you end up with more paperwork to worry about.
What qualifies as a reimbursable expense under the construction industry scheme?
Under the construction industry scheme, contractors make CIS deductions from a subcontractor’s pay and issue CIS statements. These deductions are then paid to HMRC. This money is held as advance payment towards the subcontractor’s tax and national insurance for that tax year.
The contractor is responsible for ensuring the correct CIS deductions are made. The rate of deductions will depend on the subcontractor’s CIS status, but the standard rate is 20%.
This deduction is made on the gross amount minus the cost of any materials incurred by the subcontractor.
HMRC are very clear on the rules around expenses: Materials used on site can be reimbursed at the full amount.
Any other expenses are subject to CIS.
This means any travelling expenses (including fuel costs) and subsistence paid to the subcontractor must be included in the gross amount from which the CIS deduction is made.
Which expenses are reimbursable before CIS deductions are made?
Any of the following items paid for directly by the subcontractor can be deducted from the gross amount before CIS is calculated:
- materials
- consumable stores
- fuel (except fuel for travelling)
- plant hire
- the cost of manufacture or prefabrication of materials
Once these deductions have been made, the rest is subject to CIS.
‘Plant’ includes items such as scaffolding, cranes, cement mixers, concrete pumps, earth-moving equipment and compressors. Subbies can also claim for any consumables (such as fuel) required to operate the equipment.
Only materials for the project you have contracted the subcontractor for can be included. You should not reimburse them for materials they will be using on other projects.
Also, plant and equipment can only be claimed if it has been hired from a third party. If the subcontractor owns the equipment, they cannot claim it as an expense.
Which expenses are subject to CIS deductions?
If you’re reimbursing your subbies for fuel, parking or other expenses that are not materials, you have to deduct CIS.
For example, let’s say they’ve left their fuel card at home and need to fill up the van. They put in £50 and expect you to give them £50 back to cover it. But that’s not right.
Instead of repaying the full £50, you need to give your subcontractor £40 and keep £10 back for CIS.
As ridiculous as it might seem, it’s not something you want to get caught out for.
If HMRC finds out you are trying to disguise reimbursements as materials or incorrectly reporting CIS, you could find yourself subject to an enquiry.
It might start with a phone call querying the reimbursed expenses on your latest CIS return. Then the conversation moves on to how often your subbies use your vans and equipment. How long have they worked for you? Do they have set hours?
Before you know it, you’ve got yourself in a hole, and HMRC thinks you’re disguising employees as subcontractors.
It sounds farfetched, but it’s not. Most HMRC enquiries into employment status stem from a query into a tax issue (CIS, VAT or corporation tax). So if you don’t want HMRC questioning you, make sure you and your subbies are not making any incorrect claims.
When are contractors responsible for reimbursements?
The costs you cover for your subbies will depend on the agreement you have with them. And this will depend on the way you work with them.
Materials used on your construction projects should be reimbursed at the actual rate paid by the subbies. Beyond that, you can decide who is responsible for what.
You might have been told your subbies can’t use your tools or drive your vans, but this is complete bollocks. Not only can they use your tools and vehicles, but you can also issue them with fuel cards, pay for their parking, and provide PPE.
As long as you have a legitimate business reason.
That’s what it all comes down to – why are you working that way?
If HMRC ever opens an enquiry into the employment status of your subbies, they’ll be looking at the nature of your relationship. And if you’re letting subbies drive around in your vehicles while you cover all their costs, they may see this as “evidence” that they are actually employees.
But if you have a contract detailing how you work with subbies and why – including who is responsible for covering certain costs – there can be no misinterpretation.
A contract also reduces the risk of waters getting muddied and sets boundaries between you and your subbies should anything go wrong.
What expenses are subcontractors responsible for?
If you are a subcontractor – whether operating as a limited company or a sole trader – you are responsible for keeping track of your own business expenses. This can include everything from office stationery to motor expenses to insurance costs to protective clothing.
Any cost you incur can be claimed as an expense as long as it is used for the business. So, for example, you can’t claim a mileage allowance for personal travel (such as doing your weekly shopping), but you can claim a mileage allowance for business travel (such as driving to collect materials).
Any receipts and invoices should be kept for tax purposes. The actual costs should then be recorded on your tax return for the same tax year so your tax and national insurance can be correctly calculated.
Limited companies record expenses on their company tax return whereas sole traders record them on their personal tax returns.
What can subcontractors claim back?
If you are a subcontractor you are classed as self-employed which means you are a business and should operate as a business. This means keeping track of any information required for accounting purposes and ensuring you can cover any tax liability.
Any cost your business incurs can be classed as an expense. This includes anything required for the business to operate – tools, equipment hire, fuel, computer equipment, materials, company vehicles, protective clothing, office costs and so on.
It is possible to claim back these costs when submitting a tax return for that tax year. You are only taxed on profits so any allowable expenses are deducted from income before tax is calculated. If you have paid more in CIS than you owe, you can claim a CIS tax refund.
How can Hardhats help?
The last thing you want is to get on HMRC’s radar because you’re cutting a few corners to save on paperwork.
If HMRC does decide to reclassify your subbies as employees, you’re liable for backdated tax and national insurance – that’s going to cause a far bigger headache than a few extra bookkeeping duties.
The important thing is documenting the way you work with subbies and why, so that if HMRC ever queries their employment status, you’ve covered your arse. And HardHats can take care of that for you.
We’ll create a bespoke, watertight contract documenting the true working relationship you have with your subbies so there is no confusion over their self-employed status.
And as if that wasn’t enough, we offer an insurance-backed guarantee, which means if HMRC ever opens an enquiry, we’ll handle it for you.
Find out how it works here or, better still, book a call with us to get started.