WHAT IS A CONTRACTOR
The scheme covers companies, partnerships and self-employed individuals. The businesses can be contractors, subcontractors or both contractors and subcontractors. An employee cannot be part of the scheme. HMRC defines a contractor as a business or other concern that engages and pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as “clients”.
Payments made by a public body under a private finance initiative (PFI) arrangement are specifically excluded however and the scheme must not be applied to such payments. Businesses including construction operations are called mainstream contractors and this includes builders, labour agencies, gangmasters and property developers.
A subcontractor is a business that carries out construction work for a contractor.
Non-construction businesses or other concerns are counted as contractors if their average annual expenditure on construction operations over a period of three years is £1 million or more. These are known as deemed contractors and could include housing associations or arm’s length management organisations (ALMOs), local authorities or government departments.
Non-construction businesses or other concerns that spend less than this, or private householders, are not counted as contractors so are not covered by the scheme.
Many businesses pay other businesses for construction work, but are themselves also paid by other businesses. When they are working as a contractor, they must follow the rules for contractors and when they are working as a subcontractor, they must follow the rules for subcontractors.
If work is paid for by a charity or trust, or a governing body or Head of a maintained school on behalf of the local education authority, then CIS does not apply. If the work is on the subcontractor’s own property and worth less than £1000 excluding materials then he or she must call the CIS helpline (see above) to get an exemption.
With regard to a deemed contractor paying for work on property (that is not for sale or rent) for their own business use, CIS does not apply. The requirement to call the CIS helpline for an exception also applies to a deemed contractor paying for a construction contract worth less than £1000 excluding materials.
WHAT IS CONSTRUCTION WORK ?
As well as actual building work, this can include:
- the preparation of a site, e.g. laying foundations and providing access works
- alterations, repairs and decorating
- cleaning inside of the buildings after building work has taken place
- installing systems for heating, lighting, power, water and ventilation.
Work that does not require registration for the scheme includes:
- architecture and surveying
- scaffolding hire (with no labour)
- carpet fitting
- making materials used in construction
- work on construction sites that is not construction (such as running a canteen).
WHAT IS A SUBCONTRACTOR
Under the CIS, a subcontractor is anyone who agrees to do construction work for a contractor. Gang leaders paid by contractors are subcontractors. Labour agencies introducing subcontractors to contractors are not. A subcontractor may be self-employed, the owner of a limited company or a partner in a partnership or trust. Anyone who is in a partnership and wants to claim repayment of subcontractor deductions during the current tax year should use online form CIS41.
Similarly, anyone in business on their own who wants to claim repayment of subcontractor deductions during the current tax year should use online form CIS40 with the latest version available at www.gov.uk. Where the claim is made after the end of the tax year, this is to be made on the partner’s tax return.
EMPLOYED OR SELF-EMPLOYED
It is important for those working for somebody else to know whether they are working for that person in an employed capacity, or in a self-employed capacity as an independent subcontractor. It is the responsibility of the person taking on workers to correctly determine their employment status. To do so, they must determine, whether the person works under a contract of service (in which case they are employees) or under a contract for services (in which case they are likely to be a self-employed subcontractor or an independent contractor). For the purposes of tax and National Insurance contributions (NICs), there is no statutory definition of a contract of service or of a contract for services. What the parties call their relationship, or what they consider it to be, is not conclusive. It is the reality of the relationship that matters.
To determine the nature of a contract, it is necessary to apply common law principles. The courts have, over the years, laid down some relevant factors and tests and more and cases go to tribunals with differing rulings depending on the individual circumstances.
As a general guide as to whether a worker is an employee or self-employed, if the answer is “Yes” to all of the following questions, then the worker is probably an employee.
- Do they have to do the work themselves?
- Can someone tell them at any time what to do, where to carry out the work or when and how to do it?
- Can they work a set amount of hours?
- Can someone move them from task to task?
- Are they paid by the hour, week or month?
- Can they get overtime pay or bonus payment?
On the other hand, if the answer is “Yes” to all of the following questions, it will usually mean that the worker is self-employed.
- Can they hire someone to do the work or engage helpers at their own expense?
- Do they risk their own money?
- Do they provide the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves?
- Do they agree to do a job for a fixed price regardless of how long the job may take?
- Can they decide what work to do, how and when to do the work and where to provide the services?
- Do they regularly work for a number of different people?
- Do they have to correct unsatisfactory work in their own time and at their own expense?
If contractors need help to make a decision on a subcontractor’s employment status, they can use the Employment Status Indicator (ESI) tool on the HMRC website.
The information contained in this article is for general information purposes only and does not constitute advice, Whilst we endeavour to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose. We recommend that professional advise should be taken from a suitably qualified expert before undertaking any action.