Could HMRC recategorise your subcontractors?

Same again

If you work in construction you’ll be familiar with HMRC’s construction industry scheme (CIS). Its main feature is that it makes businesses responsible for deducting tax from payments made to subcontractors unless they can show that HMRC has approved them for gross payments.

Applying the CIS rules to an individual doesn’t remove your obligations to consider whether they might be an employee for tax and NI purposes. If HMRC successfully argues that a subcontractor is actually an employee you will be liable for any lost PAYE tax and NI (employers’ and employees’), plus penalties.

First impressions

In practice, you probably prefer to use the same subcontractors for projects. This is natural, if the individuals are reliable and good workers. Using their services consistently, even over many years, will not by itself affect their employment status.

Don’t accept any suggestion from HMRC that using the same subcontractors regularly is an indicator that they are employees. Its own guidance makes it clear that employment status must be considered contract by contract.

Check employment status

Although offering repeat work to subcontractors isn’t a factor for employment status, HMRC refers to such arrangements in its “check employment status for tax” (CEST) tool and related guidance. Our understanding is that this is because incorrectly categorised employment status is more common where a worker accepts similar repeat work over a long period.

Employment status factors

Employment status remains one of the most disputed areas of tax. Consequently, there’s a raft of related information and guidance available. Therefore, we recommend you take several basic steps to protect yourself from HMRC scrutiny.

Continuous contracts. Don’t create written or oral contracts with the subcontractors which state or imply that you will offer future work to them. While they might anticipate getting work from you, you shouldn’t promise it.

Individual contracts. Provide a new contract for each job. This can, if appropriate, be the same contract each time but with places, names and dates etc. changed as required.

Realistic contracts. Don’t include terms in your contracts that you think will infer self-employment if in practice they won’t apply. For example, don’t include a clause in a contract that says a subcontractor can send a substitute worker for themselves if that isn’t true. It’s better to say nothing about substitutes than make a false statement.

Review and record. Keep an eye on working arrangements for subcontractors to ensure they remain consistent with your contracts and keep accurate records of each job.