Supervision, direction, and control – what construction firms need to know

by | Dec 23, 2022

Sometimes it feels like HMRC goes out of its way to cause confusion. Maybe they add new rules and regulations around employment status just to scare contractors into employing their subbies. Who knows?

What we do know is 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.

And there’s one fact all construction firms should be aware of – you can work with subcontractors long-term and keep HMRC happy without using a payroll company. Our free book will show you how. But for now, let’s look at the issue of control.

The three tests

We’ve mentioned the three tests hundreds of times, and no doubt we’ll keep mentioning them because they are such an important part of determining whether someone is employed or self-employed.  

The three tests we’re talking about are:

  1. Personal service
  2. Mutuality of obligation (MOO)
  3. Control

These are the three areas HMRC and the courts look at when there are questions about employment status.

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 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?

The control test is more of a grey area. And it doesn’t help that in 2014, agency legislation was updated to include rules around supervision, direction and control (SDC).

SDC is usually irrelevant when it comes to construction firms working with subbies, but it hasn’t stopped payroll and umbrella companies from using it as a scare tactic. 

A quick overview of SDC

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.

What it means is any ‘onshore intermediary’ whose operatives are operating under SDC should be taxed as PAYE.

For the purposes of the agency legislation, HMRC defines supervision, direction and control as follows:

“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 is someone 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 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.”

The reason SDC legislation is largely irrelevant to the construction industry is that it only relates to agency workers, subcontractors paid through umbrella/payroll companies and limited companies affected by IR35.

So if your subbies are self-employed sole traders and they are paid by you (rather than through an agency or payroll company), then the legislation doesn’t apply.

What you need to know about the issue of control

SDC might be irrelevant to you regarding the Onshore Employment Intermediaries legislation, but that doesn’t mean you should ignore it completely.  

There’s still that matter of the three tests. And HMRC’s definition of supervision, direction and control still apply when they are looking at the relationship between you and your subbies.

It all 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 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 is one of master and servant (employer-employee) or that of business to business (contractor-subcontractor).

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.

It is generally accepted that there has to be some level of direction and supervision 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.

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.

What they are looking for is how much control you have over how the work is carried out. It’s the “how” part that’s important – does the worker have the freedom to choose how to do their work?

In the most basic of examples, 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 so far.

It’s the next part that is the concern. Do you provide the brief and then leave the bricklayer to complete the job however they choose?

Or do you instruct them on what tools to use, how to lay each brick and in which order to lay the bricks?

In other words, do you control how they work? If you do, you’d fall foul of the control test.

Protecting yourself and your subbies

The best way to protect yourself and your subbies from HMRC is to leave nothing open to interpretation. And the best way to do this is to document the true working relationship in a watertight contract between you and your subcontractors.

Your contract should match reality. HMRC and the courts won’t always take the contract at face value. They will look for real-world evidence to back it up.

But as long as your subcontractors are genuinely self-employed and you have legitimate business reasons for why you work with them the way you do, HMRC can’t reclassify them.

At HardHats, we specialise in creating bespoke watertight contracts. What’s more, all our contracts come with an insurance-backed guarantee. If HMRC ever opens an enquiry into the employment status of your subcontractors, we’ll handle it on your behalf. All you need to do is be completely honest with us about how you work with your subbies.

So if you’re working with subbies long term and you don’t want to use a payroll company, but you do want to protect yourself from HMRC enquiries, give us a call.  

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