Labour-only Contractors

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What happened to the labour-only subcontractor?

The CIS system was introduced in 1971 to reduce the wide spread tax evasion prevalent at the time in the construction sector.

It is therefore ironic that the CIS system has directly created another significant tax compliance issue that the HMRC are gradually beginning to address today.

In effect, the CIS system has led many users of the system into a tax compliance trap where they are paying individual contractors under CIS as self-employed, when the HMRC and the existing taxation laws would view many of these workers' tax status as being nearer employed, and therefore should be paid under PAYE.

Since the year 2000, the HMRC have launched very aggressive campaigns to clamp down on tax evasion by contractors claiming self-employment and enjoying significant tax-breaks, when to all intents and purposes the way they go about providing their services is indistinguishable from the employees they often sit next to who can pay significantly more tax under PAYE. It is perplexing why the construction sector has not be treated to the same HMRC attention as many other professions.

However, it is not the threat of an employment status intervention by the HMRC that has seen the demise of the labour-only contractor approach to engaging contractors.

The idea that hard-pressed boom-and-bust construction firms could dip into a large pool of self-employed, labour-only workers whenever they needed extra hands, and pay them under CIS to avoid the considerable extra costs of employing and paying them under PAYE was an arrangement made in heaven. It even worked for the workers who willingly sacrificed job security for the option to shop around and secure the best day rates they could get in a system where demand far outstripped supply most of the time. These workers didn't even need to run to the cost of paying for their own trade insurance cover. It remains the case today that many labour-only workers will enjoy the benefit of being covered by their engager's own insurance policies, and therein lays the problem.

Consider, the Insurance underwriter's definition of a labour-only worker still focuses on the degree of supervision, and level of control of the engager over the worker in directing when, where and how they go about their work. They don't mind if the worker is held out to be part and parcel of the engager's business, nor the frequency or length of the engagements.

Unfortunately, all of the characteristics of the employment status hallmark the engager's insurance underwriter wants to see in place to accept a worker under their policy, are diametrically opposed to the ones the HMRC would expect to see for recognising them as self-employed.

In other words the closer an individual becomes to satisfying the definition of a labour-only worker for insurance cover purposes, the less likely the HMRC will accept their employment status as being self-employed. It is in effect impossible in law to simultaneously recognise an individual as being insured and self-employed in these circumstances.

Why does it matter?

Consider a possible scenario where a firm hires a labour-only contractor who has the misfortune to cause a major incident that gives rise to a materially large claim against the firm. The firm thinks … OK … I am insured and it's payback time for all those years of paying extortionate premiums I really couldn't afford. The insurance investigator arrives on the scene, and quickly identifies the worker in question was processed and paid through the firm's CIS scheme. Oh dear they say. I am recommending to the underwriters they refuse to meet the claim on the grounds the firm must have recognised the worker as self-employed, which means they could not have satisfied the conditions the underwriter required to be accepted as insured under their scheme. The firm should have ensured the worker carried adequate insurance to indemnify the firm against the claim. Have a nice day and good bye.

Couldn't happen? Wouldn't happen? Wrong!

It is worth mentioning the HMRC could apply the same reverse logic to successfully challenge the self-employed status of a worker where the firm does not insist they carry their own trade insurance cover.

So, in summary, the legal nightmare that could ensnare a firm should the worst happen in either scenario means many firms are choosing to avoid the risks involved altogether.

Any contractor they take on where they are satisfied meet all of the self-employed criteria the HMRC expect to see, must carry their own trade insurance.

Any individual who not meet the HMRC criteria for being recognised as being self-employed, must accept a contract of service as either a full-time employee or a casual worker. No other option will be considered or accepted by the Finance team as they cannot legally process them through the CIS system each month.

Marisco Group

Head Office:
Unit J5, The Fulcrum
Vantage Way, Poole, BH12 4NU

Tel: 01202 474001

Email: accounts@mariscosouth.com

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