By Simon Hempsal Editor
In recent years it has become de rigueur for construction contracting companies to use the services of professional CIS compliant payroll intermediaries, a trend that continues to grow due to the obvious advantages such arrangements provide and the peace of mind that companies are working all within the rules and regulations as they currently stand.
My team and I have over time, monitored the growth and popularity of this sector with construction contracting firms that use CIS workers on a day to day basis and we recently concluded it was high time that a professional and independent industry analysis and evaluation was carried out.
By the way if you are in a hurry? No worries jump to the bottom of the page for a comparison of the top 4 service providers in this industry. Jump to comparison
For those of you that would like the meat on the bone………. read on!
To gain a comprehensive overview we researched the industry and looked at the full spectrum of providers from the bargain basement bucket providers to the all dancing, all singing, whistles and flute band leaders to get to a clear picture of which companies provide the best all-round provision, meeting the needs of the contracting firms, their workers, the compliance rules and regulations and the desired cost effectiveness that makes this service industry such good value for those that need and use its service.
The companies listed all offer CIS payroll processing, plus protection, insurance and legal services in the event that following a status inquiry by HMRC it is deemed that your company has falsely declared the workers to be self-employed rather than PAYE.
So, in short, if you get a status inquiry letter from the HMRC then this element of the service provision is intended to help save your arse!
The CIS compliant payroll industry’s main advantage to its customer the construction contracting firm, is that it allows them to continue to use a self-employed work force much in the same way that they have done since time in memorial, so effectively business as usual but within the CIS rules and regulations.
Enabling contractors to continue using workers that have in many cases worked for them for many years (more on this latter), workers they trust, and maybe even rely on, safe in the knowledge that should they be so unfortunate as to receive a status inquiry they are covered.
So clearly this is a no-brainer, contracting firms retain the flexibility they need to operate in an industry historically full of uncertainties. That said the question remains what do contracting firms actually need (i.e. how much of a service?) and at what cost? Read on…………
Let’s look at the obvious questions first……
Is this a problem construction companies need to worry about in the first place?
Why is it that construction companies are signing up in greater and greater numbers to use this service?
Ok some background research first……….
After several delays, the Construction Industry Scheme (CIS) was launched in 1999, its aim to prevent perceived tax evasion and the abuse of the previous tax system that was based on the old 714 gross payment status system, some of you may well remember that!
After a relative short period of time, concerns were raised about the scheme and in particular a belief that contractors were ignoring their responsibilities to consider the employment status of their workers and that it had become taken for granted that simply being in possession of a CIS certificate registration card was automatically accepted as a confirmation of self-employment.
So, in the eyes of the regulators “Something had to be done” Again!
2006 saw the then certificate-based scheme changed to a requirement for contractors to verify subcontractors (their workers) with what was now called HMRC after the 2005 merger of the Inland Revenue with Her Majesty’s Customs and Excise. Verification could be done either by telephone or, later online. A 2nd wave of strengthening of the requirement for contractors to show that employment status had been considered prior to engagement to work was introduced through the submission of their monthly returns.
So, all is now well eh? Err, not exactly.
The government had a perception as to the potential of lost tax income given it had the means to prosecute and collect it, however, in the early days it could never establish anything accurate as to how much was potentially floating around in the pockets of both the workers and the contracting firms of the construction industry. That changed with the introduction of more sophisticated and advanced technology and better upgraded systems. With such it was able to project with significantly greater accuracy just about how much extra revenue it was losing. And with that knowledge it set about introducing new measures specifically designed to rout out and clamp down on construction companies using CIS workers that the HMRC could deem should be classed as PAYE. It’s commitment to the cause was ratified in 2017 when HMRC created a new specialist team called the tax authority’s employment status and intermediaries team, giving the HMRC some teeth, with the sole objective of increasing tax revenues.
Also, in 2017 to address fraudulent acts related to VAT, after some delay due to Brexit the chancellor confirmed that the CIS VAT domestic reverse charge measure would apply to supplies of construction work from 1 October 2020
No genius needed to see that the HMRC seems intent on shining the spotlight on the construction industry, the introduction of new tax and legislative changes provides the HMRC with the means to exercise its desire to increase tax revenues. That said you should watch this space as no doubt more legislation is on the cards.
The need to self-declare the employment status of each worker on the CIS monthly return was intended to encourage construction companies to self-police the employment status of their workers; But as can be seen from the history lesson above clearly the HMRC don’t think this is working.
Viewed in this context we can see a clear objective, a plan and intent based on past and the muted future actions taken by the HMRC. Construction owners can decide for themselves if they need to do anything, but it should at least prompt some attention and thought as clearly things are set to get harder for companies using CIS workers.
If the HMRC’s objective is to recover and increase the tax revenues from the construction industry by driving self-employment down, with the continued introduction of tax and legislative changes as well as devoting more resources to allow an increase in status inquiries and prosecutions, then it makes sense that the use of services designed to offer CIS use protection are gaining in popularity.
Self-employment can be defined as false when the worker would be deemed directly employed by ‘normal’ legal tests. Characterised by a worker who is not in business on their own account, someone that comes under the control and supervision of their contractor, a person that is paid on an hourly rate, and someone that takes no financial risk or pays no consequences should things go wrong with the contract they are working on.
We found an employment status tool provided by the HMRC
https://www.gov.uk/guidance/check-employment-status-for-tax. Although maybe not the best idea in the world
to use it if you are worried about the employment status of your workers, the good news is that all the 4
providers we have identified below provide a way to check this safely if you have concerns or are just
curious. I got my friend Jake (a builder) to try it out as part of my research, he decided
NOT to use HMRC’s status checker tool and opted to use one of the listed providers tools.
The test asks 20 questions and took about 10 min, a report was provided with information on the risk associated with each answer provided specific to his situation. An overall risk rating between being 100% self-employed and 100% working under false-self-employment was also provided.
He told me he got the all clear and pleased to tell me he scored 92% likely to be self-employed and has little to worry about.
Further research concluded that the HMRC broadly assesses tests for employment status across 3 areas:
Risk – Do you run some financial risk exposure if the contract loses money?
Supervision Direction and Control – are you subject to management and direction by another?
Substitution - Can the individual concerned send someone else to perform their services?
Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do, and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate to develop their skills and knowledge.
Direction is someone making a person do their work in a certain way by providing them with instructions, guidance, or advice as to how the work must be done. Someone providing direction will often coordinate how the work is done, as it is being undertaken.
Control is someone dictating what work a person does and how they go about doing that work. Control also includes someone having the power to move the person from one job to another.
It is also worth bearing in mind that the HMRC point out that any investigation will look at what the reality is rather than on what the contractual relationship is between parties.
Chances of getting caught! Isn’t this what you all want to know! Well the HMRC now have the tools to track all projects that are run by a main contractor or client through their payments and submissions through to ALL the subcontractors in the chain of supply and services, this means that with their new big brain computer that came on line in 2018-19 they are able to run reports that tell them exactly what is going on in the industry. Their next challenge is to follow that up and they have added and keep adding to their specialist teams set up to run down all possible likely cases that the computer spits out. This means it is likely just a matter of time before they assess you. Clearly it is for you to decide if you will take your chances OR decide its money well spent to ensure you are protected. I guess it’s the old adage you “never need insurance until…. you need it!”
But first, what are the chances of getting a status enquiry letter?
There are about 300,000 construction companies in the UK covering all sizes of operation, the CIS system has been in place since 1999 with online submissions required since 2006 so for the last 14 years companies have been recording regularly who they use and what they pay them, as well as making the declaration they are self-employed.
In their fight against tax evasion and false self-employment HMRC has spent a number of years and more than £100m developing what has in some quarters been dubbed the ‘snooper computer’, but what HMRC has named the Connect Computer System.
This supercomputer has been designed to improve HMRC’s ability to identify those who are understating and underpaying their tax liability. The Connect system was fully deployed for the first time in 2017 and means that now, the preliminary work that once may have taken HMRC investigators weeks or even months can be completed in a matter of seconds. If you are a George Orwell fan google it, it is scary.
This huge resource linked to their CIS database showing a record of the CIS workers used on every site in the UK, gives them easy access to see which companies are using the same CIS workers week in week out over many months or years paying them roughly the same amount each month.
This short list analysed by their super computer could make high probability cases of false self-employment in seconds.
If you have workers on CIS paid hourly, who have worked for you for some time and it is clear you are their main employer then it may be worth doing your research and planning how you would deal with a status enquiry letter.
Of course, it doesn’t mean you will get a letter soon but with the increased use of services by the companies shown below it looks like more and more companies are worried and taking action now.
The penalty regime is supposedly based on the offence level committed but our research has found that it can be entirely arbitrary. Any final figure that HMRC decides to apply is often made up of penalties and fines when building it's final calculation and what it concludes as your liability. It is also worth noting that they can look back as many years as they wish to arrive at this calculation of liability. Liabilities will include recovering unpaid NI contributions and penalties include the option to fine up to £3,000 per monthly return submitted if the company recorded the worker as self-employed in their status declaration.
This is serious money
A baseline quick calculation showed the possibility of an £158K liability for just 10 workers across 2 years
But not only is the company who pays liable all the workers found to be working under false self-employment will also be required to pay back tax, NI and could be subjected to fines too.
On top of this, clearly if any workers are found to be false self-employed, they will of course be required to work under PAYE going forward with the additional costs associated with this being bourne by the company.
It paints a compelling case for anyone who has concerns based on their own research and maybe it is time talk to one of the providers below or others that provided similar services.
Below I have listed the big 4 players in this market for you to consider.
I hope you found this article useful, I enjoyed writing it and learned a lot.
Thank you for taking time out to read my article.
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