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13th Apr 2024
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Sorting out self-employed v. employed status

by The Editor at 10:24 16/11/06 (CIS News)
Much of the new Construction Industry Scheme (CIS) revolved around whether a sub-contractor is self-employed or not. While it seems a simple decision to make, the reality of the situation is that it is not. Neither is it a matter of choice or mutual agreement - and the financial penalties for getting it wrong could be significant.
Under the new CIS, which comes into force in April 2007, contractors must fill in monthly returns to explain whether their sub -contractors are deemed to be 'employed' or 'self-employed'. There are penalties if the monthly return is not submitted or if it is incorrect. Contractors need to be determine correctly the employment status of their current workers and anyone they take on it the future.

Whichever category HM Revenue & Customs agrees they are in, determines at what rate sub-contractors are paid - whether gross or net. But, as HMRC keeps reminding contractors "employment status is not a matter of choice.

HMRC advises: "People cannot simply decide to treat working arrangements as either self-employment or employment. It is the circumstances of the working arrangement that determine how it is treated. In most cases, deciding a worker’s employment status will be straightforward but sometimes it can be more difficult."

What wrong
Before looking at the complex procedure for establishing whether a sub-contractor is to be treated as an 'employee' or is 'genuinely self-employed', it is worth examining what is not considered to be of importance by HMRC.

  • We can decided between ourselves. No. It is not a matter of choice or agreement. It depends on the particular working arrangements and not upon the preferences of the people involved.

  • We don't have a written contract> It doesn't matter. If they have agreed to work in return for payment, a contract must exist – either a contract of service (employment) or a contract for services (self-employment). It can be written, spoken, implied or a combination of all three.

  • We changed our relationship part way through the contract If the change results in a sub-contractor becoming employed, the contractor should tell HMRC and begin to deduct tax and NICs from his or her earnings. If they fail to do so, they could be held liable for the deductions which should have been made, and may also be liable for interest and a penalty. If the change results in a worker becoming self-employed, he or she will be responsible for their own tax and NICs.

  • A former apprentice now wants to change to being self-employed status. It is not the worker’s choice. The terms, conditions and facts under which he or she is engaged should determine the employment status of the worker.

  • This only applies to some sub-contractors No. The same tests apply to all, including white-collar workers. It is important that contractors consider the status of the entire workforce, including managers, estimators, site supervisors and professional staff, as well as manual workers.

What's right
There are number of tests which can be used to measure a sub-contractors status. They are generally self-employed if they are in business on their own account and bear the responsibility for their business's success or failure. But it's not as straight forward as that. There is no 'black and white' rule, but the following factors are useful indicators whether or not a worker is self-employed.

Right of control
The degree of control or direction a contractor has over a sub-contractor is an important factor to consider. The greater the degree of control by the contractor, the more likely it is that the worker is an employee, so it is important to establish who has control over:

  • what work is done

  • when it is done

  • how it is done.

The contractor should consider not just the degree of control, but also their right to direct the sub-contractor if they wish.

Equipment
If a worker is required to, and does, supply any expensive or heavy equipment that is necessary to do the work, this suggests self-employment.

On the other hand, if a contractor engages workers to operate such equipment or plant that has been hired from another source, it is much more likely that the worker will be regarded as an employee by HMRC. This factor will be important in the case of drivers and operators of heavy plant, such as lorries, heavy tarmacking equipment, demolition plant and so on.

The supply by craftspeople of small tools, which are traditional and normal in the industry, will not be of the same importance. It is becoming increasingly common for both skilled and semi-skilled workers within the construction industry, to supply power tools such as drills, saws, nail guns, etc. HMRC believes that the provision and use of power tools is usually the personal preference of an individual worker and it can be common for workers to provide such tools irrespective of whether they are self-employed or employed.

While the purchase of power tools can vary in cost, and can, in some instances, represent a significant personal outlay to an individual, each case must be viewed on its own merits and HMRC claims that "no monetary figure should be attached to the provision of such tools solely as a means of determining this factor".

Financial risk
The greater the degree of financial risk for the sub-contractor, the more likely it is that he or she will be self-employed. The basis of payment and the surrounding financial circumstances of the arrangement will therefore be important.

One indicator is the difference between an 'hourly rate' and a 'fixed price'. For example, if a contractor pays a sub-contractor at an hourly rate, HMRC would consider that the worker faces little, if any, financial risk, and is therefore more likely to be an employee.

On the other hand, a sub-contractor may be contracted to carry out a defined task or activity at a fixed price. If the timescale to complete the task is a risk of delay, for example, because of bad weather or it proves more difficult than expected, and the sub-contractor bears the financial risk of such delays, it is more likely that the worker will be self-employed.

Substitution
If a worker has the right to substitute (freedom to hire and pay) someone else to do the work, that suggests self-employment. Consider a scenario with an employee, he or she is paid to turn up to carry out that task - they can't send someone else in their place. However, HMRC would view 'the right of substitution', ie a sub-contractor sending another person to complete the agreed work, as an indicator for self-employment.

Length of engagement
The length of engagement may be a factor, but will not be decisive. Contractors need to consider the terms of engagement even where a sub-contractor is engaged only for a day. Long periods working for one contractor may be typical of an employment, but even a very short-term engagement could amount to employment.

Regularly working for the same contractor, even under daily or weekly contracts, points to employment. The fact that a sub-contractor moves from site to site with the same contractor is also likely to suggest employment.

Other factors
Other relevant factors include the nature and degree of expenditure that the worker incurs on his or her own account, and whether the work contract was won as a result of a competitive tendering process.

Summary
As we said at the beginning - this isn't black or white - but getting it wrong could put you in the red. Here's a summary of common indicators to consider.

Common indicators of employment

  • The contractor has the right to control what the sub-contractor does - where, when and how it is done – even if the contractor rarely uses that control.

  • The sub-contractor supplies only his or her own small tools.

  • The sub-contractor does not risk his or her own money and there is no possibility that he or she will suffer a financial loss.

  • The sub-contractor has no business organisation, for example, a yard, stock, materials, or workers. (These examples are not exhaustive.)

  • The sub-contractor is paid by the hour, day, week or month.

Common indicators of self-employment

  • Within an overall deadline, the sub-contractor has the right to decide how and when the work will be done.

  • The sub-contractor supplies the materials, plant or heavy equipment needed for the job.

  • The sub-contractor bids for a job and will bear the additional cost if the job ends up costing more than the worker's original estimate.

  • The sub-contractor has a right to hire other people who answer to him or her and are paid by him or her to do the job ie 'the right of substitution'
  • .
  • The sub-contractor is paid an agreed amount for the job regardless of how long it takes.

For a contractor to make a decision on each sub-contractor, they will need to consider all the details and the overall situation.

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Susie Hughes
The Editor © Hardhatter 2006

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