David Sharp of Vantis reminds construction businesses that, despite recent developments, the Construction Industry Scheme (CIS) remains an ongoing issue of fundamental importance.
Those businesses within the construction industry that retain workers, particularly labour-only, on a self employed basis have not had things easy of late. First the new Construction Industry Scheme (CIS), launched just over 12 months ago, brought the issue back into the spotlight, and the new monthly status declaration – together with its swingeing penalty regime – was for many the final straw that saw them convert at least some of those workers into fully paid-up employees under PAYE.
Recently, however, construction businesses may have been forgiven for breathing a small sigh of relief at new legislation that removes the threat of a retrospective demand for up to 6 years deemed PAYE, even though the worker in question had submitted their Self Assessment Returns and paid their taxes. Changes to the PAYE Regulations mean that where a business is deemed to have failed to have operated PAYE, but the worker has submitted a Return including the income or else made a payment on account of an amount based on the income, then the deemed employer will be relieved of the obligation to account for PAYE. In reality, the only historical debt sought will be employer’s Class 1 National Insurance at 12.8% on all amounts paid in excess of approximately £100 per week.
So does this mean that businesses can afford to take more of a chance, now that the costs of getting caught have been reduced?
Whilst on the surface the costs may appear more bearable, the risk of HM Revenue & Customs (HMRC) challenging the status of workers has never been higher. Sophisticated risk assessment software analyses all monthly returns, highlighting subcontractors who work predominantly for one contractor, supply no materials or other workers, or who appear to receive regular payments of identical amounts. More Inspectors are conducting reviews of construction businesses, and the Revenue’s approach is becoming more hard line and also more consistent. The status declaration on the monthly return carries a maximum penalty of £3,000 per month and a business’ own gross payment status – often vital for both cash flow and credibility – could be at risk.
So is it all doom and gloom? Well, not necessarily. It is still perfectly possible for subcontractors to be legitimately self employed, based on rulings of the Courts and Employment Tribunals over the years. But there is no quick fix or magic wand. It is absolutely critical that proper contracts for services are put in place, that are genuine reflections of reality rather than a mere aspiration. Subcontractors have got to be prepared to meet businesses half way by adopting some of the features of running a business, such as invoicing and bearing a share of financial risks (and rewards).
HMRC has also shown that it is not afraid to litigate or legislate in this area. Last year also saw the introduction of the Managed Service Company (MSC) and Transfer of Debt rules, designed to counter many of the (until then, legitimate) solutions in the marketplace. Whilst many products can still be effective, the Transfer of Debt provisions mean that any business entering into arrangements with an organisation that may be an MSC, or might be seen by HMRC as an MSC, needs to be particularly careful and sure of the robustness of the package they are purchasing. Arrangements which rely on dispensations from the Revenue allowing significant monies relating to expenses to be paid tax-free can expect to be scrutinised closely, to ensure that the expenses are genuinely incurred and that the appropriate receipts and paperwork are provided to the business by the worker.
The advice that was given a year ago regarding status remains valid. Businesses should not assume that their workers must be changed into PAYE employees, and should explore whether, with a degree of change, the case for self employment can genuinely be made and defended.
If you need further information, please contact David Sharp using the online form below.