The combination of myths, mistruths and misunderstandings surrounding how you can and can’t work with subcontractors is causing unnecessary headaches for construction firms. That’s why we’ve made it our mission to share the truth behind the bollocks so construction firms can make decisions based on facts, not hearsay.
A common subject that causes confusion is the rules around supervision, direction and control (SDC). There’s a whole load of misinformation about when SDC applies and how it affects a subcontractor’s employment status. So let’s take a look at what construction firms need to know about the subject of supervision, direction and control.
Agency legislation on supervision, direction and control (SDC)?
Supervision, direction and control (SDC) was introduced as part of the Onshore Employment Intermediaries legislation. This legislation relates to workers contracted through employment intermediaries and agencies, and aims to tackle false self-employment.
This legislation is sometimes referred to as the Agency Legislation and is covered in the employment status manual.
What is SDC in IR35?
The reason SDC legislation is largely irrelevant to the construction industry is that it only relates to agency workers, contractors paid through an umbrella company, and limited companies or personal service companies affected by IR35. IR35 does not apply to sole traders.
What is the difference between supervision, direction and control?
HMRC guidance defines supervision, direction and control as follows:
Supervision: “Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge.”
Direction: “Direction involves making a person do his/her work in a certain way by providing them with instructions, guidance or advice as to how the work must be done. Someone providing direction will often coordinate how the work is done, as it is being undertaken.”
Control: “Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.”
How does SDC affect construction firms?
If your subbies are sole traders and they are paid by you (rather than through an agency, umbrella company or payroll company), then it’s unlikely they are subject to SDC rules under the agency legislation. But that doesn’t mean you don’t need to worry about SDC at all.
HMRC do not like construction companies disguising employees as self-employed contractors. And if they suspect a contractor is doing this, they may open an enquiry to determine employment status.
There are three areas HMRC and the courts look at when there are questions about self-employed status (regardless of whether a subcontractor is operating as a sole trader or limited company). These are known as the three tests:
Personal Service: Personal service is about whether you expect the individual to carry out the work personally – we cover this in more detail in our article about the “right to substitution” clause.
Mutuality of Obligation (MOO): MOO is all about implied obligation – do you have an obligation to keep offering your subcontractors work, and do they have an obligation to accept it? We cover this in more detail in our article, Mutuality of Obligation (MOO): a quick guide for construction firms.
Control: The control test is more of a grey area and this is where the subject of supervision, direction and control (SDC) is important.
If HMRC plans to open an enquiry into the status of your workers, the above criteria will be used as the starting point for their case.
What you need to know about the control test
The control test stems back to the case of Ready Mixed Concrete (South East) Ltd V Minister of Pensions and National Insurance in 1968. This was the first case to place importance on “control” when determining employment status and this case law is frequently referred to by the courts.
The judge determined that:
“A contract of service exists if these three conditions are fulfilled. (i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master (ii) He agrees, expressly or impliedly that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.”
So what the courts are looking for is evidence of whether the relationship between you and a worker is one of master and servant (employer-employee) or that of business to business (contractor-subcontractor). If they deem they determine the relationship to be one of employer and employee, you would fall foul of the control test.
How much control is acceptable?
If your subbies are genuinely self-employed, they are a business in their own right. And if they are a business in their own right, they should have a certain level of control over how they carry out the work.
However, it is generally accepted that there has to be some level of supervision, direction or control within construction. Architectural plans have to be followed. Client specifications must be met. Quality checks have to be completed. Health and safety policies and procedures must be enforced. And there will be a required standard of services.
It would be unrealistic and dangerous not to have some level of SDC – HMRC and the courts acknowledge this. They also accept there might be rational business reasons for telling someone when and where to work. Priorities change and you might need to reallocate workers to a different job.
What they are looking for is how much control the contractor has over how the work is carried out by the subcontractor. It’s the “how” part that’s important – does the worker have the freedom to choose how to do their work or are you insisting the job is completed a certain way or in a particular manner?
Example
Let’s say you contract a bricklayer to build a wall. You would tell them where to build the wall and give them specifications – length, height, width, colour, type of brick etc. No problem with SDC so far. It’s the next part that is important.
Once you’ve given the specifications, do you leave the bricklayer to complete the job however they choose and without supervision? If so, there’s still no problem with SDC.
But if you tell them what tools to use, how to lay each brick and in which order to lay the bricks, then you are controlling how they work. And if you control how they work, you’d fall foul of the SDC test.
What can you do to avoid issues around supervision direction or control (SDC)?
Supervision direction or control aren’t the only elements HMRC or the courts look at when they determine employment status but they are a key point.
The best way to protect yourself from an HMRC enquiry is to have a written contract between you and your subcontracts outlining how you work and why you work that way. Where supervision, direction or control is required, be clear about how SDC applies and why. If there are legitimate reasons why SDC is needed, then document it.
But be honest about where any SDC elements apply. HMRC won’t simply take your contract at face value. They will use real-world evidence to determine the employment status of any workers, which is why your contract must match up to reality.
How do expenses work under SDC?
It might seem strange to bring up the subject of expenses when talking about SDC, but there’s a reason we’re mentioning it. Agency legislation rules state that if a contractor is deemed to be working under SDC, they can no longer claim back travel and subsistence expenses.
Again, this legislation is not relevant if a worker is genuinely self-employed. However, since we’re on the subject of expenses, let’s take a quick look at how contractors can get caught out.
Should you cover your subbies’ travel and subsistence expenses?
If HMRC ever opens an enquiry, they’ll be looking at the nature of the relationship you have with your subbies. And if you’re letting subbies drive around in your vehicles while you cover all their travel expenses, they may see this as “evidence” that they are actually employees.
This is another reason it pays to have a contract outlining the way you work with subbies and who is responsible for what.
Are expenses subject to CIS deductions?
In 2021, HMRC redefined CIS rules to be explicit: the only thing that’s not subject to CIS deduction is materials. And materials are defined as what’s used on site.
So if you’re reimbursing your subbies for travel, fuel, parking or anything that’s not materials, you have to deduct CIS. This will affect their take-home pay.
Can subbies claim tax relief on expenses?
If a subcontractor registered under CIS pays for something they only use for work, they are usually entitled to reclaim tax relief on that item. They should claim expenses tax relief when they complete their tax returns.
There are rules around which expenses are eligible, so if your subbies are unsure what they can claim for, they should seek guidance and advice from an accountant.
Can a subcontractor be classed as self-employed if they only have one client?
Although not directly related to the subject of SDC, we thought we might as well clear this one up too.
Yes – a subcontractor can still be classed as self-employed even if they only have one client. Being self-employed isn’t about what services you provide or who you provide them to. The number of clients a subcontractor has does not determine eligibility for self-employed status.
The important thing is the nature of the relationship between the contractor and subcontractor. Is the subcontractor a business in their own right, or is the contractor just disguising employees as subbies to avoid putting them on PAYE? Contractors who fall into the second category are putting themselves at risk.
Protecting yourself and your subbies with HardHats
The rules around SDC are complicated, and this article is only intended to give contractors an overview of how they might be impacted by SDC rules.
The best way to protect yourself and your subbies from HMRC is to leave nothing open to interpretation. The best way to do this is to document the true working relationship in a watertight contract between you and your subcontractors.
At HardHats, we specialise in creating bespoke watertight contractor-subcontractor agreements. What’s more, all our contracts come with an insurance-backed guarantee. If HMRC ever opens an enquiry into the status of your subcontractors, we’ll handle it on your behalf.
So if you’re working with subbies long term and you don’t want to use an agency or payroll company, but you do want to protect yourself from HMRC enquiries, give us a call.