Construction companies beware…the taxman is on the prowl

Contractors within the construction industry are becoming increasingly under fire by HMRC compliance, whether it is a large business which engages hundreds of subcontractors or a new startup with only one of two subcontractors, self-employed status and CIS compliance are a headache that must be dealt with, getting either of them wrong can be a steep and costly learning curve.

As with most things in life prevention is better than cure, and tax is no different. Typically, contractors will turn to their accountants as their first port of call for advice and guidance in the event that HMRC starts asking questions. With HMRC seemingly increasing their activity in construction we recommend accountants and advisers carry out a Status and CIS health check for their clients.

Status Health check

The law on employment status has not changed. Unfortunately neither have the myths…providing tools or equipment, completing a tax return, invoicing or suppling own PPE does not make someone self-employed. Yes, these “badges of trade” are useful to show a subby is independent, but the law is clear – in business factors do not determine self-employment. Another common myth is that being registered for CIS automatically makes someone self employed. Just by being registered as a CIS subcontractor does not automatically mean that you are self-employed- employment status must be correctly considered and determined.

And if contractors get this wrong, they could be faced with unpaid tax. National Insurance and employers National Insurance going back 4-6 years plus interest and penalties. For many contractors such liabilities could have a significant impact upon their business, with many simply not being able to continue to trade.

What the law says

While the law on self-employed status is nuanced and can be difficult to navigate (because we are dealing with case law rather than legislation) there are three key deciding factors which determine whether someone is an employee:

Personal Service – is the individual obliged to provide the services personally?

Mutuality of obligations – is the individual under obligation to undertake work and is the contractor obliged to provide work?

Control – is the individual subject to control as to how they provide services?

If the answer to all three is “yes” then the individual is an employee for tax purposes in the eyes of the law. If they can answer no to any one of those then the law states they are not an employee.

While knowing this information is necessary, it is fundamentally vital that written contracts are in place which confirm the position. Contract is king in fending off an HMRC challenge, a correctly drafted written contract for every subby engaged, containing all the key case law fundamentals, signed and re-signed every 6-12 months (not simply gathering dust on a shelf).

A significant, and often overlooked thing to consider is the upper-level contract (which sits between the contractor and their client) – this contract must also show that the subbies engaged by the contractor are genuinely self-employed, if not it will provide HMRC an opening for attack.

CIS health check

The second biggest risk area for Construction contractors is CIS compliance, especially if the business holds gross payments status as failure to comply with the scheme will not only lead to taxed owed to HMRC but will almost certainly put their gross payment status at risk.

For any practitioners with construction clients we would again advise that proactive measures are taken and that a CIS health check is carried out to ensure compliance.

First and foremost it is vital that contractors verify and pay all of their subbies at the correct rate (20% matched, 30% unmatched). However one of the biggest target areas for HMRC currently is payments of expenses to subcontractors. Only a very few payments can be made by a contractor to their subby without CIS deduction. Over the last few months the three most common failings we have seen are:

Materials - These can be reimbursed without deduction, however, in order to pay the cost of materials without deduction the contractor must have evidence that the amount submitted for materials is correct and accurate. This means the subcontractor must provide a receipt to the Contractor to show the actual cost incurred by the subcontractor. If, on HMRC inspection, a Contractor cannot produce a receipt for the materials costs paid without deduction then HMRC will hold the Contractor liable to unpaid tax for the whole amount paid without deduction (plus interest, plus penalties).

Fuel - Only fuel for site equipment can be paid without deduction. Fuel for subcontractors to travel from site to site is not the same and cannot be reimbursed without deduction. Travel cannot be reimbursed without deduction.

Plant and machinery - If plant is hired in, this is allowed to be reimbursed free from deduction, however if plant is hired along with an operator combined, the whole amount must be subjected to deduction.

Getting any of these wrong would not only mean the contractor would be liable for the under deducted CIS tax due to HMRC, but it could also result in severe penalties (which could be significantly more than the tax itself) it will also mean significant failings to submit correct returns and remit correct tax to HMRC on time, resulting in potential loss of gross payment status.

Speak to our team to find out how we can help you protect your clients’ businesses against status and CIS risks.