Why is the construction industry the only industry in the UK where the self-employed have tax deducted at the source?
It sucks.
And then there are all these rules about how long you can work with subcontractors and how to pay them, right?
Well, actually, that’s not strictly true. In fact, a lot of the ‘rules’ you might have heard are total bollocks.
There aren’t any laws preventing you from working with subcontractors long-term. It’s how you work with your subbies that determines whether they should be employed or self-employed.
The problem is there’s a lot of false information floating about.
Some of it is scaremongering by payroll companies who want your business. And some of it is simply misinformation being passed from contractor to contractor.
So to help you get to the truth, we’ve put together this brief history of CIS and the facts you need to know if you work with a subcontractor long-term.
A brief history of CIS
Up until the early 1970s, contractors mostly paid subbies in cash, only requiring their signature in return. Unfortunately, many of those subcontractors ‘forgot’ to register as self-employed, which meant they avoided big tax bills.
HMRC (or Inland Revenue as it was at the time) introduced the Construction Industry Scheme (CIS) to tackle the problem. Subcontractors were given vouchers that essentially acted as official receipts – the idea being it would create a paper trail for Inland Revenue.
It worked to a certain extent, until organised crime groups figured out how to use it to their advantage by forging vouchers. It’s estimated that by the early 90s, these groups were swindling Inland Revenue out of around £50 million per year.
As you can imagine, this didn’t go down too well, so the scheme was revised. In 1999 CIS cards were introduced. But this created a new problem.
People viewed these cards as an automatic indicator of self-employment, which meant contractors weren’t classifying their employees correctly.
Yet again, HMRC was worried about being out of pocket. And so they started investigating companies to ensure they weren’t disguising employees as self-employed contractors to avoid paying the correct tax and NI.
The fear of being investigated led to the problems we have today. Payroll companies started cashing in on that fear, offering to ‘protect’ contractors from HMRC. And rumours around what was and wasn’t allowed began to circulate…
Myth: It’s up to subcontractors to decide if they want to be self-employed or not
Nope. The responsibility is on you, the contractor, to determine the employment status of your workers.
And as the saying goes, if it looks like a duck, if it walks like a duck, if it quacks like a duck, then it’s a duck.
Same goes for your subbies. If you treat them like an employee, they act like an employee, and they are an employee in all but name, then you should probably put them on your PAYE.
Unless…
There is a legitimate business reason for them being self-employed.
And as long as you can prove there is a legitimate reason, you can continue working with them for as long as you want.
Myth: You can only work with subcontractors for 13 weeks at a time.
Sounds legit. But it’s actually a load of crap.
HMRC doesn’t set a time limit on how long you can work with a self-employed subbie.
They never have. And they probably never will.
As for the “13-week limit”, it’s the oldest lie in the book
It’s an abused bit of legislation (from the Agency Working Regulations 2010) that’s often misquoted to make you think you can’t use subbies long-term.
The Agency Working Regulations 2010 (AWR) protect employed agency workers, entitling them to the same rights as PAYE staff. It has absolutely nothing to do with self-employed subcontractors.
It’s the way you work with subcontractors that matters, not how long you work with them.
Myth: You’ve verified a subcontractor’s UTR number, so that makes them self employed
Unfortunately, it isn’t as straightforward as that.
Nor does it matter if they raise invoices every week. Or if you pay them price work.
It goes back to the whole walking like a duck thing. If HMRC could misinterpret your relationship as employer-employee, then verified UTR numbers and weekly invoices aren’t going to mean shit.
Myth: You can’t pay your subbies an hourly rate
This is a relatively new rumour that’s circulating.
But it’s complete bollocks.
You can pay your subbies however you want – by the minute, quarter-hour, half-hour, any bloody hour. Paying subbies on an hourly rate does not make them employees.
So why on earth have payroll companies started saying it does?
Maybe it’s because HMRC recently brought in Onshore Intermediaries (Agency) Legislation to clamp down on payroll companies
We won’t bore you with the details, but the crux of it is if a payroll company is paying subbies on an hourly rate, it implies they are an agency. And as an agency, they would have to pay more tax.
So what’s the best way to get around that problem? Pass it on to contractors (you) and get them to change the way they work. So much for great customer service.
Myth: If you want to keep subbies long term, you have to use a payroll company
Wrong again.
Using a payroll company does have its advantages, but it’s not the only solution.
It is possible to work with subbies long term and retain control of your payroll and cashflow.
Think about it. If a payroll company can keep subbies on a long-term basis without upsetting HMRC, why can’t you?
You can. We help our clients do it every day. How? Using the same process payroll companies use to protect themselves.
Myth: Subbies can’t drive your vehicles or wear your uniform
Bollocks.
You can work with your subbies however you want as long as you can prove there is a valid reason why you work with them that way.
And that means they can drive your vehicles, use your tools, wear your uniform. You can even dictate when they’re on-site and what they do while they’re there.
Fact: You can work with subbies however you want for as long as you want, but…
There is a catch.
You have to convince HMRC there is a legitimate business reason for why you work with your subbies the way you do.
It’s not about how long you work with them or how you pay them. It’s how you work with them that matters.
The chances of an HMRC enquiry might be slim. You might think you can blag it if they ever do come calling. And maybe you can.
But what if you can’t?
Wouldn’t it be better to have complete peace of mind that you’re protected, even if they do reclassify your subbies as employees?
And that’s where we come in.
We are the only company to offer a self-employed subcontractor guarantee specifically for construction firms.
In other words, we take on responsibility for your subcontractors’ employment status so you can use them for as long as you want.
We’re not going to go into a huge amount of detail on how it works (you can read more about that here). But if you do want to keep control of your payroll and cashflow and want peace of mind that you’re not going to upset HMRC, let’s talk.
If you’d like to have a chat about how to work with subbies long-term and keep HMRC sweet, schedule a call here. If our services aren’t right for you, we’ll be completely honest – we’ll even help you figure out the best option for your business.
[LS1]Link to how it works page