Sub contractors The definition of a sub-contractor is someone who provides services to someone else in the construction or building industry either yourself or by supplying other people.
Status The main advantage to the worker is the reduction in national insurance and the ability to claim expenses such as, wages to family members, use of home, travel costs etc.
This is from the different wording of the act.
Allowable expenses for the self employed need to be "wholly and exclusively for the purposes of earning the profits of the trade".
For employees they must be "incurred wholly, exclusively and necessarily in the performance of the duties of the employment".
There is also the cash flow advantage.
The self-employed do not suffer deduction of tax at source.
As with all planning it is necessary to commit all the figures to paper to completely understand the financial implications and result.
Neither employee nor sub contractor is defined in the Taxes Acts.
Common law differentiates on the basis that an employee has a contract of employment whereas a self- employed person works to a contract for service.
The difference can be explained by the example of your house being painted.
Who does the work? Is it the person who quoted or someone on his behalf? The person who quoted is clearly self-employed but is his worker an employee? Is he under the control of the man who quoted or has he sub contracted his services? To resolve this question you must review many aspects of how that person carries out his duties.
You cannot just run through a check list but you must paint a picture from the information gathered from that review.
Then review the picture and make a decision.
The indicia Opportunity to profit An employee is paid a set sum under his contract whereas a self-employed person can profit from his actions.
He may also lose money; an employee cannot.
Employees are remunerated for the hours they work whereas a self-employed person is usually paid for the job so the profit is in his own hands.
He can adjust overheads and time; also he can take on help to complete the contract.
Employees cannot and cannot influence their return and they take no risk.
Mutuality of obligations The length of a contract is not conclusive one way or the other.
Employees often enter short term employment contracts.
What is important is that the self-employed can decline work and in effect select the work they want to do.
Employees would be sacked if they declined work.
Make sure the contract is per job or for a fixed term.
This assumed importance in a recent case (Sp C 599 Parade Park Hotel) which is useful in determining the meaning of mutual obligations.
It means that so long as the contractor is not obliged to offer a new contract and as long as you can decline work, then mutuality of obligation does not exist.
This is confirmed in the case of Bridges and others v Industrial Rubber plc where the contractual absence of a promise to provide work and the counter promise to do it is inconsistent with a contract of employment regardless of the other conditions of the working relationship.
Tax Make it clear in the contract that the sub contractor is responsible for his own tax and national insurance and receives no benefits e g.
no sick pay; no holiday pay and no pension contributions are paid on his behalf.
It would be wise for the sub-contractor to register for VAT.
Tools A self-employed worker usually provides the tools necessary to do the job.
Employees such as tradesmen usually supply the necessary hand tools.
Larger items of equipment would be provided by the employer, the self-employed sub-contractor would provide them himself even if leased.
Work standard For any engager the standard of work performed is important.
An employer will require the employee to correct any unsatisfactory work but it is done in the employer's time.
A self-employed person must perform the contract to an acceptable standard according to the terms of the contract.
Any unsatisfactory work is put right in his own time and at his own expense.
Organisation It is important as to how workers are viewed by the neutral.
An explanation of this item is outlined by the following example taken from the HM Revenue & Customs web site.
"Someone taken on to manage a client's staff will normally be seen as an integral part of the client's organisation and this may be seen as a strong indicator of employment.
" Also you as worker should have overall control on how you do the job.
Try not to mention any supervision of your role.
One "employer" Most people explain that if you work for only one engager or contractor you cannot be self-employed.
I agree that the more firms worked for the more likely a person is to be self-employed.
Only one engager is not conclusive of employment.
You could have three concurrent employments.
A good example of one engager not preventing self-employment would be lorry drivers.
If you look at the driver's door of a lorry you will see an indication of what I mean.
It is clear that if you supply the major equipment you are more likely to be self-employed.
Nothing can be deduced from part time work as both an employee and a self-employed person can work part time.
A person can work for more than one engager.
He can have more than one employment; more than one engager but within the self-employed status.
An employee under a contract of employment can also be self-employed at the same time.
Materials If a subcontractor does not want to meet the cost of materials get the contractor to allow the sub-contractor to use his suppliers' accounts and enjoy the same discounts.
He will, of course, meet the cost from the recharge in the contract price.
Employment contract If a contract requires a worker to provide personal services and requires the person who engages that person to remunerate him for those services that is likely to be a contract of service and thus an "employment" contract.
Such a contract will go on to specify all the other conditions and requirements of the engager i.
e.
working hours, holidays, sickness, discipline, grievances etc.
So avoid reference to specific days or hours to be worked.
Substitution A clause that specifies that a worker can send a substitute in his place or engage other workers to help him fulfil his obligations under the contract is very important in considering the overall balance of the factors and in my opinion must be in every self-employed contract.
This is one of the strongest single indicia of self-employment.
Dr Avery Jones in the case Talentcore Ltd v Commissioners for HM Revenue & Customs found that the substitution issue was more important than the control factor.
Again I must stress that the actions of the parties must mirror the contract so it would be wise to ensure that substitution takes place during the life of the contract or that help is engaged.
The point is that under a contract of employment it is the worker that is employed and it is his labour that is pledged.
The labour of someone else must mean a contract for rather than of service.
HM Revenue & Customs acknowledges that it is the right of substitution that is important.
The fact that the substitution has not occurred during a contract is not necessarily relevant.
However, a contractual right will be ignored if in reality the worker must undertake the work personally.
Dragonfly Consultancy Limited v HMRC (2008) Payment Most employees are paid by the hour, week, month or are on an annual salary.
The self-employed are usually paid by the job.
I find no difficulty in turning a day rate into payment per job.
Take a bricklayer; he knows from the plans how long the job will take.
Let us say four days and assume his rate two hundred pounds per day.
He simply quotes eight hundred pounds for the contract.
Like all the indicia no one item is crucial.
It is the balance between them all.
HM Revenue & Customs place considerable reliance on the method of payment but as I have said it is only one item.
Make sure, for example, that he hires the necessary scaffolding!! Financial risk There is virtually no financial risk to an employee.
The self-employed risk their money.
HM Revenue & Customs indicate that "The risk of making a loss is a very strong indicator of self-employment and can be decisive on its own".
Make sure you take out all the necessary insurances to include public liability and professional indemnity.
If you undertake work at home make sure with your broker that your home insurance covers any risk.
The more people that know you are self-employed the better your case will be on any challenge.
Control An employee is usually subject to a large degree of control although not always exercised in practice.
He is also told how to do the job, although an expert such as a brain surgeon would be free of that control.
Also an employee's hours of work, the place where he carries out the contracted work and other practical items are controlled by the employer.
In the case of Market Investigations Ltd.
v The Minister of Social Security the Judge said "The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor" The self employed are free of this control.
See J and C Littlewood (T/a J L Window and Door Services) and Anor v R & C Commrs.
January 2009 for the importance of this subject.
Contract It is essential that a contract is in place to evidence the relationship be that employed or self-employed.
The contract should be written but it can also be verbal or implied.
The titles self-employed or employed are irrelevant to the decision as to your status.
What matters are the factors present and whether they on balance point to employment or self-employment? The contract is not sufficient on its own; the terms of the contract must be mirrored by the actions of the parties.
So take care to get a contract that states the facts as you want them and then ensure you work to those terms.
Also ensure there is a clause that states that the intention of the parties is to make it clear that the contract is one of self-employment.
Have the contract checked to see it gives the result you want.
Having a contract is very important and the judge in Narich Pty v The Commissioner of Payroll Tax said:- "The first principle is that, subject to one exception, where there is a written contract between the parties, a court is confined to a consideration of the terms, express or implied, in the light of the circumstances surrounding the making of it; and it is not entitled to consider the manner in which the parties subsequently acted in pursuance of such contract.
" The one exception referred to by the judge is where the subsequent conduct of the parties amounts to an agreed variation of the contract.
The terms must always mirror the actual situation.
The view of HM Revenue & Customs In an attempt to be helpful HM Revenue & Customs have designed a tool to help determine whether someone is employed or self-employed.
It is known as The Employment Status Indicator and can be found at http// http://www.
hmrc.
gov.
uk/calcs/esi.
htm.
In the Status enquiry there is the following guide:- As a general guide as to whether a worker is an employee or self-employed; if the answer is 'yes' to all of the following questions, then the worker is probably an employee: ' Do they have to do the work themselves? ' Can someone tell them at anytime what to do, where to carry out the work or when and how to do it? ' Can they work a set amount of hours? ' Can someone move them from task to task? ' Are they paid by the hour, week, or month? ' Can they get overtime pay or bonus payment? If the answer is 'yes' to all of the following questions, it will usually mean that the worker is self-employed: ' Can they hire someone to do the work or engage helpers at their own expense? ' Do they risk their own money? ' Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves? ' Do they agree to do a job for a fixed price regardless of how long the job may take? ' Can they decide what work to do, how and when to do the work and where to provide the services? ' Do they regularly work for a number of different people? ' Do they have to correct unsatisfactory work in their own time and at their own expense? Registration If you work as a sub-contractor under the CIS scheme you must register with HM Revenue & Customs before you start working.
Once registered you are obliged to notify any change in the structure or ownership e.
g.
a sole trader becoming a partnership or limited company.
To register you need to attend upon HM Revenue & Customs in person and provide at least two of the following documents to confirm your identity.
Originals not photo copies.
' Birth certificate ' Council tax bill showing current address ' Any of the following utility bills showing current address; Gas, electricity or telephone If you are already registered with HM Revenue & Customs for self-assessment all you have to do is to telephone their CIS helpline.
If not you will need a valid national insurance number.
All you need to do is telephone 0845 600 0643.
If you do not register your contractor must deduct tax at 30%.
Earnings without tax being deducted You could be eligible to receive your earnings without deduction of tax but you must pass the qualifying tests.
The turnover test You as a sole trader need to show that your business has a turnover net of 30,000 from construction work in the 12 months before the application is made.
For a partnership there is an alternative test of net construction turnover of at least 200,000 in the same period.
The business test This is simply that the sub-contractor is carrying on the business of construction work in the UK and is carried on through a bank account.
The compliance test During the 12 months up to the date of the application the applicant and if a company all of the directors must have done all of the following:- ' Completed and filed all tax returns ' Supplied all the information about all applicants requested by HM Revenue & Customs ' All tax due must have been paid by the due dates, be it for the business, national insurance and PAYE and national insurance deducted from employees and sub-contractors HM Revenue & Customs will disregard during the twelve month period any of the following:- ' Late payments of CIS or PAYE, three in number, up to 14 days late ' Three late submissions of the monthly return, again up to 14 days late ' One payment late by up to 28 days of self-assessment tax ' The same for corporation tax ' Any late filed self-assessment return This test is applicable on an ongoing basis, so for example, if a contractor is late in paying his CIS or PAYE the gross payment status will be withdrawn.
HM Revenue & Customs now have the power to cancel registration for gross payment.
If this happens you will have tax deducted at 20%.
HM Revenue & Customs can also cancel registration for payment under the deduction of tax at the rate of 20%.
This will leave the sub-contractor facing tax deductions at the punitive rate of 30%.
If you appeal the withdrawal of the gross payment status you will be required to provide reasons for your appeal.
You will remain on that status until a decision has been made on your appeal.
If your appeal is not agreed your gross payment status will not be renewed until 12 months after the date of the decision.
Where HM Revenue & Customs cancels your registration for 20% deduction the Tax Tribunal has no power to review the position.
CIS Part 3 - Contractors
Status The main advantage to the worker is the reduction in national insurance and the ability to claim expenses such as, wages to family members, use of home, travel costs etc.
This is from the different wording of the act.
Allowable expenses for the self employed need to be "wholly and exclusively for the purposes of earning the profits of the trade".
For employees they must be "incurred wholly, exclusively and necessarily in the performance of the duties of the employment".
There is also the cash flow advantage.
The self-employed do not suffer deduction of tax at source.
As with all planning it is necessary to commit all the figures to paper to completely understand the financial implications and result.
Neither employee nor sub contractor is defined in the Taxes Acts.
Common law differentiates on the basis that an employee has a contract of employment whereas a self- employed person works to a contract for service.
The difference can be explained by the example of your house being painted.
Who does the work? Is it the person who quoted or someone on his behalf? The person who quoted is clearly self-employed but is his worker an employee? Is he under the control of the man who quoted or has he sub contracted his services? To resolve this question you must review many aspects of how that person carries out his duties.
You cannot just run through a check list but you must paint a picture from the information gathered from that review.
Then review the picture and make a decision.
The indicia Opportunity to profit An employee is paid a set sum under his contract whereas a self-employed person can profit from his actions.
He may also lose money; an employee cannot.
Employees are remunerated for the hours they work whereas a self-employed person is usually paid for the job so the profit is in his own hands.
He can adjust overheads and time; also he can take on help to complete the contract.
Employees cannot and cannot influence their return and they take no risk.
Mutuality of obligations The length of a contract is not conclusive one way or the other.
Employees often enter short term employment contracts.
What is important is that the self-employed can decline work and in effect select the work they want to do.
Employees would be sacked if they declined work.
Make sure the contract is per job or for a fixed term.
This assumed importance in a recent case (Sp C 599 Parade Park Hotel) which is useful in determining the meaning of mutual obligations.
It means that so long as the contractor is not obliged to offer a new contract and as long as you can decline work, then mutuality of obligation does not exist.
This is confirmed in the case of Bridges and others v Industrial Rubber plc where the contractual absence of a promise to provide work and the counter promise to do it is inconsistent with a contract of employment regardless of the other conditions of the working relationship.
Tax Make it clear in the contract that the sub contractor is responsible for his own tax and national insurance and receives no benefits e g.
no sick pay; no holiday pay and no pension contributions are paid on his behalf.
It would be wise for the sub-contractor to register for VAT.
Tools A self-employed worker usually provides the tools necessary to do the job.
Employees such as tradesmen usually supply the necessary hand tools.
Larger items of equipment would be provided by the employer, the self-employed sub-contractor would provide them himself even if leased.
Work standard For any engager the standard of work performed is important.
An employer will require the employee to correct any unsatisfactory work but it is done in the employer's time.
A self-employed person must perform the contract to an acceptable standard according to the terms of the contract.
Any unsatisfactory work is put right in his own time and at his own expense.
Organisation It is important as to how workers are viewed by the neutral.
An explanation of this item is outlined by the following example taken from the HM Revenue & Customs web site.
"Someone taken on to manage a client's staff will normally be seen as an integral part of the client's organisation and this may be seen as a strong indicator of employment.
" Also you as worker should have overall control on how you do the job.
Try not to mention any supervision of your role.
One "employer" Most people explain that if you work for only one engager or contractor you cannot be self-employed.
I agree that the more firms worked for the more likely a person is to be self-employed.
Only one engager is not conclusive of employment.
You could have three concurrent employments.
A good example of one engager not preventing self-employment would be lorry drivers.
If you look at the driver's door of a lorry you will see an indication of what I mean.
It is clear that if you supply the major equipment you are more likely to be self-employed.
Nothing can be deduced from part time work as both an employee and a self-employed person can work part time.
A person can work for more than one engager.
He can have more than one employment; more than one engager but within the self-employed status.
An employee under a contract of employment can also be self-employed at the same time.
Materials If a subcontractor does not want to meet the cost of materials get the contractor to allow the sub-contractor to use his suppliers' accounts and enjoy the same discounts.
He will, of course, meet the cost from the recharge in the contract price.
Employment contract If a contract requires a worker to provide personal services and requires the person who engages that person to remunerate him for those services that is likely to be a contract of service and thus an "employment" contract.
Such a contract will go on to specify all the other conditions and requirements of the engager i.
e.
working hours, holidays, sickness, discipline, grievances etc.
So avoid reference to specific days or hours to be worked.
Substitution A clause that specifies that a worker can send a substitute in his place or engage other workers to help him fulfil his obligations under the contract is very important in considering the overall balance of the factors and in my opinion must be in every self-employed contract.
This is one of the strongest single indicia of self-employment.
Dr Avery Jones in the case Talentcore Ltd v Commissioners for HM Revenue & Customs found that the substitution issue was more important than the control factor.
Again I must stress that the actions of the parties must mirror the contract so it would be wise to ensure that substitution takes place during the life of the contract or that help is engaged.
The point is that under a contract of employment it is the worker that is employed and it is his labour that is pledged.
The labour of someone else must mean a contract for rather than of service.
HM Revenue & Customs acknowledges that it is the right of substitution that is important.
The fact that the substitution has not occurred during a contract is not necessarily relevant.
However, a contractual right will be ignored if in reality the worker must undertake the work personally.
Dragonfly Consultancy Limited v HMRC (2008) Payment Most employees are paid by the hour, week, month or are on an annual salary.
The self-employed are usually paid by the job.
I find no difficulty in turning a day rate into payment per job.
Take a bricklayer; he knows from the plans how long the job will take.
Let us say four days and assume his rate two hundred pounds per day.
He simply quotes eight hundred pounds for the contract.
Like all the indicia no one item is crucial.
It is the balance between them all.
HM Revenue & Customs place considerable reliance on the method of payment but as I have said it is only one item.
Make sure, for example, that he hires the necessary scaffolding!! Financial risk There is virtually no financial risk to an employee.
The self-employed risk their money.
HM Revenue & Customs indicate that "The risk of making a loss is a very strong indicator of self-employment and can be decisive on its own".
Make sure you take out all the necessary insurances to include public liability and professional indemnity.
If you undertake work at home make sure with your broker that your home insurance covers any risk.
The more people that know you are self-employed the better your case will be on any challenge.
Control An employee is usually subject to a large degree of control although not always exercised in practice.
He is also told how to do the job, although an expert such as a brain surgeon would be free of that control.
Also an employee's hours of work, the place where he carries out the contracted work and other practical items are controlled by the employer.
In the case of Market Investigations Ltd.
v The Minister of Social Security the Judge said "The most that can be said is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor" The self employed are free of this control.
See J and C Littlewood (T/a J L Window and Door Services) and Anor v R & C Commrs.
January 2009 for the importance of this subject.
Contract It is essential that a contract is in place to evidence the relationship be that employed or self-employed.
The contract should be written but it can also be verbal or implied.
The titles self-employed or employed are irrelevant to the decision as to your status.
What matters are the factors present and whether they on balance point to employment or self-employment? The contract is not sufficient on its own; the terms of the contract must be mirrored by the actions of the parties.
So take care to get a contract that states the facts as you want them and then ensure you work to those terms.
Also ensure there is a clause that states that the intention of the parties is to make it clear that the contract is one of self-employment.
Have the contract checked to see it gives the result you want.
Having a contract is very important and the judge in Narich Pty v The Commissioner of Payroll Tax said:- "The first principle is that, subject to one exception, where there is a written contract between the parties, a court is confined to a consideration of the terms, express or implied, in the light of the circumstances surrounding the making of it; and it is not entitled to consider the manner in which the parties subsequently acted in pursuance of such contract.
" The one exception referred to by the judge is where the subsequent conduct of the parties amounts to an agreed variation of the contract.
The terms must always mirror the actual situation.
The view of HM Revenue & Customs In an attempt to be helpful HM Revenue & Customs have designed a tool to help determine whether someone is employed or self-employed.
It is known as The Employment Status Indicator and can be found at http// http://www.
hmrc.
gov.
uk/calcs/esi.
htm.
In the Status enquiry there is the following guide:- As a general guide as to whether a worker is an employee or self-employed; if the answer is 'yes' to all of the following questions, then the worker is probably an employee: ' Do they have to do the work themselves? ' Can someone tell them at anytime what to do, where to carry out the work or when and how to do it? ' Can they work a set amount of hours? ' Can someone move them from task to task? ' Are they paid by the hour, week, or month? ' Can they get overtime pay or bonus payment? If the answer is 'yes' to all of the following questions, it will usually mean that the worker is self-employed: ' Can they hire someone to do the work or engage helpers at their own expense? ' Do they risk their own money? ' Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves? ' Do they agree to do a job for a fixed price regardless of how long the job may take? ' Can they decide what work to do, how and when to do the work and where to provide the services? ' Do they regularly work for a number of different people? ' Do they have to correct unsatisfactory work in their own time and at their own expense? Registration If you work as a sub-contractor under the CIS scheme you must register with HM Revenue & Customs before you start working.
Once registered you are obliged to notify any change in the structure or ownership e.
g.
a sole trader becoming a partnership or limited company.
To register you need to attend upon HM Revenue & Customs in person and provide at least two of the following documents to confirm your identity.
Originals not photo copies.
' Birth certificate ' Council tax bill showing current address ' Any of the following utility bills showing current address; Gas, electricity or telephone If you are already registered with HM Revenue & Customs for self-assessment all you have to do is to telephone their CIS helpline.
If not you will need a valid national insurance number.
All you need to do is telephone 0845 600 0643.
If you do not register your contractor must deduct tax at 30%.
Earnings without tax being deducted You could be eligible to receive your earnings without deduction of tax but you must pass the qualifying tests.
The turnover test You as a sole trader need to show that your business has a turnover net of 30,000 from construction work in the 12 months before the application is made.
For a partnership there is an alternative test of net construction turnover of at least 200,000 in the same period.
The business test This is simply that the sub-contractor is carrying on the business of construction work in the UK and is carried on through a bank account.
The compliance test During the 12 months up to the date of the application the applicant and if a company all of the directors must have done all of the following:- ' Completed and filed all tax returns ' Supplied all the information about all applicants requested by HM Revenue & Customs ' All tax due must have been paid by the due dates, be it for the business, national insurance and PAYE and national insurance deducted from employees and sub-contractors HM Revenue & Customs will disregard during the twelve month period any of the following:- ' Late payments of CIS or PAYE, three in number, up to 14 days late ' Three late submissions of the monthly return, again up to 14 days late ' One payment late by up to 28 days of self-assessment tax ' The same for corporation tax ' Any late filed self-assessment return This test is applicable on an ongoing basis, so for example, if a contractor is late in paying his CIS or PAYE the gross payment status will be withdrawn.
HM Revenue & Customs now have the power to cancel registration for gross payment.
If this happens you will have tax deducted at 20%.
HM Revenue & Customs can also cancel registration for payment under the deduction of tax at the rate of 20%.
This will leave the sub-contractor facing tax deductions at the punitive rate of 30%.
If you appeal the withdrawal of the gross payment status you will be required to provide reasons for your appeal.
You will remain on that status until a decision has been made on your appeal.
If your appeal is not agreed your gross payment status will not be renewed until 12 months after the date of the decision.
Where HM Revenue & Customs cancels your registration for 20% deduction the Tax Tribunal has no power to review the position.
CIS Part 3 - Contractors