CIS is not an indication of employment status, which should still be assessed
The sheer number of construction companies engaging subcontractors under the Construction Industry Scheme (CIS) has brought the issue of employment status into sharp focus and in turn, the potentially very costly mistake that many firms are making.
This oversight is to assume that the CIS and employment status are related or worse, that simply because a worker is paid under CIS they do not need to have their employment status checked at all.
In this jargon-free guide, we’ll explain the difference between CIS and employment status, before focusing on ways that contractors can avoid facilitating something known as ‘false self-employment’.
It should be noted that ‘contractor’, as used by the construction industry and in this article, refers to the engager or end client and ‘subcontractor’ refers to the workers they engage
What is the CIS?
The CIS is designed to prevent tax evasion among self-employed construction workers. The scheme was introduced in 1971, with contractors tasked with deducting Income Tax and National Insurance contributions (NICs) from a subcontractor’s pay before passing this onto HMRC – in effect, making sure that the taxman receives the correct amount of tax from the subcontractor, who doesn’t need to worry about sorting this themselves.
What is employment status?
Employment status is the arrangement under which an individual is engaged to carry out their work. It defines the worker’s rights, the responsibilities of the company engaging them and the amount of tax that must be paid to HMRC.
All businesses should assess if an individual is self-employed, employed or whether they should be classed as a ‘worker’, meaning they sit somewhere in between self-employment and employment. For context, gig economy workers such as Uber drivers are a well-known example of those holding ‘worker’ status.
The difference between CIS and employment status
CIS status is not an indication of employment status. They are separate issues. CIS is an initiative for HMRC to collect tax, whereas employment status determines an individual’s rights, including their tax status.
While CIS workers by definition will hold self-employed status, that’s not to say their contract and working conditions necessarily should. And assuming that CIS workers are genuinely self-employed poses a big risk to contractors from a tax perspective.
What happens if a contractor gets employment status wrong?
If HMRC was to find that a subcontractor’s contract and working conditions are aligned with employment (not self-employment), then the contractor would be liable for missing income tax and national insurance – including 13.8% employers national insurance. These taxes should have been paid as part of the subcontractor’s perceived employed status – a situation known as ‘false self-employment’.
What is false self-employment?
Explained simply, when an individual is engaged as self-employed despite the working relationship reflecting employment. As a result of ‘false self-employment’, the business engaging the worker carries the tax liability.
What is the cost of non-compliance?
It depends on the number of subcontractors working under ‘false self-employment’ and the rates of pay. But given many contractors engage tens, if not hundreds, of subcontractors at any given time, the tax liability can mount up considerably. HMRC can also look at retrospective tax years and is likely to do so if it feels there is a potential liability. In addition to this, businesses must consider defence costs, along with potential interest and even penalties that might be included.
How can businesses ensure compliance?
Firms are advised to carry out rigorous employment status assessments prior to engaging a worker under the CIS. This is because if a subcontractor is deemed not to be genuinely self-employed (but employed), they shouldn’t be working under this scheme.
Additionally, if a subcontractor’s working practices were to change over the course of the engagement – which can easily happen – their employment status should be reassessed.
What is HMRC doing to combat false self-employment?
Following the introduction of private sector IR35 reform in April 2021, it’s expected that HMRC will also start to focus on the tax compliance of the wider self-employed workforce.
There is already a high-profile employment status tribunal ongoing, with HMRC pursuing the football refereeing body, PGMOL, for a staggering tax liability in the region of £584,000. The tax office is of the opinion that around 60 referees were falsely self-employed – a view that PGMOL continues to contest.
Qdos are industry-leading experts in employment status, for more information and to hear how Qdos can support your business with employment status, please email [email protected]
or phone 0116 478 3390