A USER’S GUIDE TO THE “CONSTRUCTION INDUSTRY SCHEME”
FAIA, FFA, FIPA, CME
The law relating to employment status will not change as a result of the new construction industry scheme.
However, the government’s stated aims behind the new CIS include helping construction businesses to get the employment status of their workers right!
The implementation of the new CIS is the biggest tax change to the construction industry since the implementation of the scheme on 1999. It follows on from a number of complaints from the trade unions that subcontractors are being exploited and a drive from the government to increase national insurance contributions.
One of the key changes to the scheme is the requirement to make a status declaration regarding all subcontractors 1.e. that the subcontractors are not employees. The declaration must be made on every monthly return to the Revenue.
The Revenue are making it quite clear to contractors under the new scheme that the onus is up on them to get status right. The Revenue says (Fact sheet CIS349):-
“We have has representations from members of the construction industry about some contractors not meeting their responsibilities on employment status. Industry representatives have complained that this creates unfair competition between those meeting their responsibilities and those that are not. The declaration on the monthly return emphasises the importance of getting it right.”
The requirement to make this declaration flags up quite clearly that HM Revenue & Customs regard the responsibility of determining status and, thus, complying with the associated tax obligations as lying squarely on the shoulders of the contractors.
2. Changes To The CIS Scheme
1. How will the company ensure compliance with the new status declaration?
One of the principal reasons for changes to the CIS scheme is the Revenue’s belief that many workers are incorrectly classified as self-employed. This has a consequential effect on the amounts of tax and national insurance paid to the Revenue. The Revenue therefore has an interest in classifying as many workers as possible as employed.
The new employment status declaration is one of the key changes to the CIS Scheme. Every month, in relation to all the subcontractors (“subbies”) listed in the monthly return; a contractor will be asked to declare that it believes that none of the subbies are employees.
There is a potential penalty of £3000 for each false declaration.
In order to provide a defence to any Revenue attack on this point, we strongly suggest that Contractors carry out their own status review which is monitored on an ongoing basis. Goddards Accountants can provide you with a status review and further guidance on carrying out this exercise.
We suggest that you allocate responsibility for this issue to one individual within your organisation so that any changes in workers circumstances can be picked up and acted upon if necessary.
We believe that if a Contractor can provide a paper trail showing that it has carried out such an exercise and monitor the status issue as an ongoing issue, then it will be more difficult for the Revenue to establish that a false status declaration has been made.
2.What do you tell him are the other principal changes to the CIS Scheme?
CIS Cards scrapped - there will no longer be CIS4, CIS5 or CIS6 cards.
Verification - whenever a contractor makes payments to a subbie it will need to “verify the subbie”.
The verification process can be completed online or over the telephone.
The verification process will confirm whether the subbie should be paid gross, net at standard rate or at the new higher rate of 30 per cent. A verification number will be provided at the end of the process and this number will need to be included on the monthly return. If several “subbies” are being verified then the same verification number may be used for all of them.
It will not be necessary to verify a subbie if:
a.)You have already included them in your monthly return in that year. Or
b.)You have paid them since 6 April 2005 and when you last paid them they had one of the following:
i.A CIS4 Card
ii.A temporary registration card CIS4T that expired after March 2007
iii.A CIS5 or CIS6 that expired after March 2007.
The aim of the verification process is to ensure that the Revenue is aware of all subcontractors operating within then CIS system. Those which it is not aware of will be those who will be charged at the higher rate tax.
By the 19th of each month a contractor must send a return to HMRC for the previous tax month, showing the details, verification numbers and payments and deductions to all subcontractors paid in the tax months. There are penalties for failure to comply, late compliance and falsification of the monthly return.
New online CIS service
There will be several new features online at the Revenue’s website when the new scheme comes into force. Check out www.hmrc.gov.uk for further information.
There is also a new online status review tool.
3. What Are The Consequences Of Getting It Wrong?
The status declaration is made in the monthly return. The penalty for filing an incorrect return is £3,000 (three thousand pounds) per return, i.e., £36,000 (thirty six thousand pounds) per year.
Carrying out a status review now and classifying correctly is vital.
Note that in the Employer’s Guide CIS 340 at Para.4.42 the Revenue state that they will charge penalties for misclassifications “caused by negligence or intent on the part of the Contractor”.
Even if you had reviewed and classified incorrectly, provided you were not negligent therefore and the misclassification in not “with intent” the very fact of doing a review should prevent a penalty applying (although we do not yet know how the revenue will interpret this guidance).
1.Tax and National Insurance Contributions
If you have incorrectly categorised an employee as self-employed HM Revenue & Customs may seek to recover unpaid PAYE and Employee and Employer national insurance contributions (“NIC”) from you.
The Revenue may set off any tax already paid against the sums due under PAYE but there is no obligation upon HM Revenue & Customs to do that.
The Revenue can look back up to 6 years.
Interest will be statutorily due on underpaid PAYE and NIC.
Penalties may be awarded. The maximum penalty can be up to 100% of the PAYE and NIC outstanding. (Although we understand that the level of penalty is usually between 5% and 40% depending on how serious HM Revenue & Customs consider the incorrect categorisation to have been).
Finally, and importantly, if a contractor has made a wrong decision on categorisation but it is a decision which any competent person could and would have reached on the facts then they can obtain retrospective immunity from the back taxes and NIC. In those circumstances it is likely that the contractor would have to change status going forward.
Further, to achieve this I would recommend that the contractor does seek the advice of their accountants and/or lawyers to ensure that they are properly represented.
Going forward, for the individual, net pay would decrease because of the national insurance. For the contractor, the contractor will be incurring extra national insurance. By way of example, in the tax year 2005/06 employer’s national insurance for an employee earning gross pay of £30,000 would be in the region of £3,200 per annum.
2.More Legal Rights are enjoyed by workers and employees.
Rights applying to all
Sex Discrimination Act1975
Race Relations Act 1976
Disability Discrimination Act 1995
Employment Equality (Sexual Orientation) Regulations 2003 SI 2003/1661
Employment Equality (religion or belief) Regulations 2003
The new Age Discrimination Regulations 2006
Public Interest Disclosure Act 1998
Health and Safety
The Working Time Regulations 1998 (including holiday pay)
The National Minimum Wage Act 1998
Right to be accompanied at a disciplinary or grievance hearing
Unlawful deductions from wages.
Note: The anti-discrimination legislation even extends beyond both workers and employees. It protects those “in employment” which has been helped to extend to those in a profession or running a business.
3. Rights and obligations applying to Employees only include:
Right not to be unfairly dismissed
Right to receive redundancy payment
Right to particulars of terms of employment
Statutory minimum period of notice
Maternity and parental rights to time off
Benefits, such as sick pay and maternity and paternity pay
Time off for trade union activity and duties, etc.
Obligation to facilitate access to stakeholder pension if 5 or more employees
Vicarious liability for employees’ action (although see new case law on this)
Additional Health and Safety obligations
Implied terms in contracts
Employer’s Liability Insurance required
Benefits to a contractor of employment status
The employees are obliged to obey your lawful orders (including to turn up for work on their contractual days)
Obliged to work faithfully and with due diligence
To give you the contractually agreed or statutory minimum periods of notice to terminate the employment.
Pay tax by way of deductions under the PAYE scheme and employees National Insurance contributions.
4. How Do You Determine Status Classification?
First you need to know that it is not just a case of whether someone is self-employed or an employee. There is also now a third category, called a “worker”.
As you have seen above if an individual falls into that category then although they are self-employed, i.e. independent contractors, they do have some additional protection.
The reason the question can become so difficult is that there is no comprehensive legal definition of an employee. The employment legislation simply provides that an employee is an individual who works under a contract of service (i) (i.e. a contract “to serve”. A contract for services is “to provide” certain services).
The more recent further category created by statue, the worker, makes the distinction between self-employed and employed even more blurred. An employee falls within the definition of “worker” but so also do non-employees if they contract to “perform personally any work or services”. (Workers are entitled to paid holiday, national minimum wage and other provisions of the WRT apply).
We will not be dealing in detail with the question of worker status today, only employee/self-employed status but note that someone who is self-employed may still be a worker.
The leading cases on the question of worker status are Byrne Brothers (ii) and Redrow Homes (iii).
1.The work is done under contract; and
2.The individual, by that contract, “undertake(s) to do or perform personally any work or service”.
3.…………..for another party to the contract who is not a customer or client of any business undertaking which he carries on. (In deciding that the question is not whether the individual is in business on his own account but whether the other party to the contract is a client or customer of any profession or business undertaking carried on by the individual).
We have to rely on case law and, as different rights and obligations apply depending on the categorisation, there are policy considerations which underline the tribunal decision. Thus, the answer to the question “employee or not?” may depend on the purposes for which you want to know. Different tribunals have reached different conclusions on similar facts (iv).
To be pro-active and carry out a status review or to defend Revenue challenge you need/ your adviser need to know the law and be ready to quote it at the Revenue.
The Inland Revenue have developed, as part of their software package, a system called the Employment Status Indicator (“the ESI”). The tool is being promoted by the Revenue as a means of reviewing status of one or a group of workers.
When questioned, the Revenue have distinguished between an informal
5. The Case Law
The Ready Mixed Concrete Case
Case law on employment status is immense but the modern approach is to say that the base position is to look at three key questions. This was determined in the Ready Mixed Concrete case (iv).
In that case Mr Justice McKenna said:-
“A contract of service exists if the following three conditions are fulfilled:
(i)The servant agrees that in consideration of a wage or other remuneration he will provide his own work and skill in the performance of some service for his master. (Personal service/substitution and mutuality of obligations tests).
(ii)“He agrees, expressly or impliedly, that in the performance of that service he will be subject to make that master” (Control test).
(iii)“The other provisions of the contract are consistent with it being a contract of service”.
These tests now form the cornerstone of any status review. The first two numbered paragraphs are now said to enunciate the three essential elements of any employment relationship – Personal Service, Mutuality of Obligation and Control.
Note: it is clear from the Ready Mixed Concrete case that the “default” position in marginal cases is employment. In other words, the judge did not ask whether there were any factors inconsistent with a contract for services but whether there were any factors inconsistent with a contract of employment.
Personal service then is the essence of a contract of service (i.e. an employment relationship).If the individual does not undertake to provide his service personally then there can be no contract of employment.
In other words, if the worker is entitled to send along a substitute to perform his duties in his stead that will, on its own, usually be strong enough to demonstrate that the contract is not an employment contract but a contract for services (i.e. the individual is an independent contractor). However, it is not always enough:-
Even the idea that there must be personal service for there to be an employment contract has been eroded to an extent.
In the Byrne Brothers case (ii) it was held that although there must be an obligation of personal service for there to be an employment contract, a limited power to appoint a substitute (or delegate) is not inconsistent with that obligation. In a 2004 case (vii), the employment Appeals Tribunal distinguished between a limited power to delegate (especially where limited to instance’s of illness or other incapacity) and a general power exercisable at the individual’s will (which would indicate self-employment status).
The issue is whether the right to substitute is fettered. These cases are also indicative of the usefulness of relying on an express clause in isolation. Thus, just because there is a contractual right to delegate this does not mean there is no obligation of personal service. The question is whether it is really intended to be used. The Revenue will look at what happens in practice. Substitution clauses are thus probably the biggest headache for the Revenue and it will seek to argue that any such clause is a sham.
Work Sheet – Case Study 1 (Personal Service) (viii)
You enter into an agreement for services with you driver allowing that driver to substitute another third party replacement to provide the services. The Revenue investigates and finds that, indeed, the driver has, in the past, provided a third party replacement. You have provided him with a list of the replacements that the driver may call if he is unable to work.
Consider the various alternatives:-
1.Would it make a difference if the driver was free to find his own replacements?
2.What if the list is just supplied to all contractors to assist them in finding appropriate substitutes?
3.What if the substitute has to be “suitable to the contractor”?
4.Is there any difference if the list is to be used “if the subbie is unable to attend” or “if the subbie does not want to attend”?
5.Do you really need a list at all?
If a particular individual who is a subbie but has a very specific skill and you do not, in practice, allow for substitution then you are better having a contract which makes it clear. This is because, otherwise, the fact that all of your subbies have the same contracts allowing for substitution but, in reality, one of the subbies is not allowed to provide a substitute, could give the Revenue ammunition for arguing that express right of substitution where the reality is where you need the specific skilled of the individual contractor and will not allow substitution. In these circumstances the fact that the highly skilled independent contractor does undertake to perform tasks personally does not mean that he is not an independent contractor.
2. Mutuality of Obligation
In the employer/employee relationship there is an ongoing obligation for the employer to offer work and for the employee to accept it? If there is no obligation to offer work and no obligation to accept then there can be no employment relationship. (But see the agency cases which put less importance on this test) (viii)
Under this test Tribunal looks at whether the contractor can control how the individual performs his or her services, what control the contractor has over the type of tasks to be preformed and when, how and where the task must be preformed. A high degree of control is a strong indicator of employment status.
Historically, the control test was pretty conclusive but it has become less so now. It is still and indicator but the idea of control needs to be refined when it comes to the case of skilled employees. Many employees are so expert in their field that an employer could not tell them how to do their job. However, that does not mean that they are not employees. Furthermore, it is established that a subcontractor might agree to submit to the contractor’s reasonable orders but remain an independent contractor. This was a critical feature in the Ready Mixed Concrete case where a driver did agree to wear the company’s uniform, to drive exclusively for the company and to submit to all reasonable orders given, “as if he were an employee”. It was held, however, that notwithstanding these indicators of employment status he was an independent contractor. A critical feature of this case was that he could employ and pay a substitute driver.
More recent cases, however, have involved agency workers and in an effort to give agency workers more protection there has been a very clear emphasis on the fact that where the end user has control over the agency worker it indicates an employment relationship with the end user.
For the purpose of deciding whether or not an individual is a subbie the sort of factors that might indicate a high degree of control (and thus employment status) are whether he is expected to work set hours each day or week and be subject to the employer’s rules and policies relating to standards at work.
(The agency worker cases are indicative of a policy to protect what is considered to be exploitation of workers where the agency has an agreement with the individual that that the individual is not an employee of the agency. The contractor will then have a contract with the agency to supply the worker and receive payment direct. The agency worker was left in a situation where although he might work for the same organisation over many years and through the same agency he has no employment law protection. The conclusion is, then, if no one is contractually the employer then if anyone is the “employer” in an agency situation it is more likely to be the end user that the agency.)
Work Sheet – Case Study 2 (Mutuality of Obligation) (x)
You are a Haulage contractor. You employed Mr Fuller between 1989 and 1995. In 1995, My Fuller accepted a generous voluntary redundancy package and left. In January 1996 you decide to take Mr Fuller on as a casual worker (together with 8 other individuals.)
In your letter offering casual work to Mr Fuller, you make it quite clear that he would not be an employee but he would provide his services on an ‘ad hoc and casual basis’ with ‘no obligation on the part of the company to provide such work for you nor for you to accept any work so offered’.
Mr Fuller signed the letter and also another document headed ‘Temporary terminal Operatives Terms and Conditions of Engagement’ which included a statement “you are not an employee of the company ; your services being utilised only when mutually agreed, with no obligation by either party other than to honour a specific pre-agreed period of engagement’.
The facts are that from January 1996 Mr Fuller works for you for 3 years. He does not work for any other employer and he works for you on many more days than not.
You do engage casual about through an agency as well but under the rota system you operate you ensure that Mr Fuller is offered work in priority over the casual workers and he is penalised if he is offered to work and does not take it. He is also rewarded if he is available for work and not given it.
Is Mr Fuller an employee?
The above three tests are the essential tests. However, there are other factors which can be helpful in tending to indicate status:
In reality this test has become an adjunct to the control test.“Would the ordinary man say the worker was part and parcel of the organisation?”. Where the employee is a professional or highly skilled employee where the control test does not really work, the
organisational test becomes of greater importance (e.g. a surgeon).
(See xi and xii).
“Economic reality test/financial risk”
The economic reality test is still considered by the Revenue but it can be strongly challenged (having been criticised in Ready Mixed Concrete but also Lee-v-Chung).
This test suggests that you consider whether the individual is really a small businessman rather that an employee.This is a fundamental test according to the Revenue Manual.Under this test you look at such matters as:-
Are there opportunities of profit or loss for the individual
To what degree was he required to invest in the job in the way of provision of tools and equipment
The permanency of the relationship
Skills required for the allegedly independent work (thus, a highly skilled worker with skills independent of the contractor might indicate self-employed status
Employees generally do not tend to risk their own capital
Dose he hire his own helpers
Dose he take any responsibility for investment and management of his business
Dose he profit from sound management and performance of his tasks (see Lee-v-Chung at xiii)
Nature and length of engagement
Description applied by the parties
The following factors are those which tend to indicate the existence of a contract of employment:-
Remuneration by way of wages
Membership of company pension scheme
Control by way of disciplinary procedures
Prohibition on working for others
6. Identifying Some Of The Pitfalls Of The New Scheme Relating To Status
1.The information we will have to give to our sub-contractors is very similar to that contained in the payslips we give to our employees.Can I use the same payslips forms for the subbies?
Yes, you could and it may be more convenient and cheaper to put all employees and subbies on the same system but I do not recommend it - do have a careful look at your payslip forms – they usually refer somewhere to “employee” or “employer”.This would almost certainly be picked up by the Revenue as indicating employee status.Also you might want to use the opportunity to add other information, such as VAT details which would indicate self-employed status.We recommend you buy in or design forms specifically for the purpose.
As of yet, the Revenue does not have a recommended form of receipt for sub-contractors.However, they claimed they would introduce one before the scheme was to be implemented in April 2007.
If you are challenged by the Revenue then what you need to resist that challenge is good quality evidence.This can be provided by you in terms of:-
Evidence of the status review carried out by you
Written contracts for services with your subcontractors and written contracts of services for your employees
It is more important than ever that the relationship between contracts and sub-contractors is recorded in a written contract and that the terms of the contract are reflected in practice.
Contracts regularly reviewed and managed to reflect changing jobs and roles.
Working Practices to show employee or self-employed status, e.g., provision of expensive equipment by subbie
Equally, if the matter did go to a tax tribunal (or, indeed, an employment tribunal) this is the sort of evidence you would need to defend your position.
Finally, if you are challenged by the Revenue having written correspondence responding to their challenges will be good evidence.(And as our accountants have already said this also helps you keep in control of the process)
3.Who do you think will be targeted?
The Revenue are sure to go after those who are not well prepared first. If you are inspected and can produce all of this evidence they will more than likely to turn their attention away to those who have no contracts in place and have done nothing to prepare for April 2007.
4.Are the Revenue entitled to see documents in a status dispute?
Yes. The Revenue can issue a section 20 Notice under the Tax Management Act 1970.This is an order from the Commissioner requiring you to disclose documents.It may also order disclosure of particulars (answering questions and providing information).It will extend only to things in your possession.There is no right of appeal
7.Set Off Deductions
Companies who suffer CIS deductions from their income as a subcontractor can now set these off against their monthly or quarterly payments to HM Revenue & Customs. Companies can reduce their tax/National Insurance contributions or CIS payments by the amount of CIS deductions they have suffered.
Only companies are affected by this arrangement. It is not available to individual subcontractors or partnerships.
CIS deductions suffered in a pay period that cannot be fully set-off against payments for that period are carried forward and can be used for later pay periods within the same tax year.
When the CIS deductions available for set-off in a pay period do not cover the whole of the company’s payment for that period, the company must pay over the balance by the normal payment date.
Companies need payment statements for all the CIS deductions suffered and should have received these from the paying contractor(s). But if the statements have not yet been received a company can set-off the CIS deductions against its monthly or quarterly payments.
Companies must keep a record of the amounts set-off. You may use the table on appendix. If you use a form P21 Employer Payment Record or the table in your Payslip Booklet to record your tax/National Insurance contributions payments, leave columns 14 and 15 blank.
When HMRC have received the company’s P35 Employer Annual Return (with relevant CIS detail), any CIS deductions that have not been set-off during the tax year may be repaid. Or HMRC may set them against any outstanding tax, depending on the amount involved.
8. How We Can Help
We have developed a questionnaire and site audit checklist from which we will be able to establish whether the individuals you engage are independent contractors or employees.
Where the individual is clearly self-employed or in more borderline cases, we can help you to defend any attack on that categorisation by the Revenue and to prepare well in advance of April 2007.
We will look at your contracts (if you already have written contracts) and design one or more (a series of contracts may be appropriate) which will provide a first line of defence in the event of an investigation.
Remember, however, that the contract is far from conclusive.If the contract does not reflect of the situation then it will be no defence.
Other factors indicating independent contractor’s status
In cases which might be considered borderline we will work with you to identify factors which you and your subbies are able to implement which will be indicated of independent contractor status on investigation by the Revenue.
In some cases out advice may well be that you subbies have been wrongly categorised.In those circumstances we can help you to put in place employment contracts and policies to provide you with protection from the resulting additional liabilities.We can also help you in consultations with individuals on this.
Alternative approaches will also be considered with you.This would include, for example, engaging through service companies.
The Alternatives we will discuss:
Services companies/ Composite Companies
Contact with a payroll agency
9. Legal And Financial Implications
a.What is the likelihood of his claim for unfair dismissal succeeding?
For Dan’s claim for unfair dismissal to succeed, he needs to prove the following:
He was an employee;
He had more than one year’s service with the company;
The company wither did not have a fir reason to dismiss him or it had a fair reason to dismiss him but did follow a fair procedure in doing so.
The first hurdle is for Dan to prove he is an employee. An employment tribunal would consider the huge body of case law which deals with the issue of employment status.
The key employment status case is Ready Mixed Concrete South East Ltd. V Minister of Pensions and National Insurance 1968, 2QB 497. This case provides that a contract of service exists if three requirements are fulfilled.
a.The servant agrees that in consideration of a wage or other remuneration he will provide his own work and skill in the performance of some service for his master.
b.He agrees, expressly or impliedly, that in the performance of that service he will subject to the other’s control in a sufficient degree to make that other the master.
c.The other provisions of the contract are consistent with it being a contract for service.
In laymen’s terms, this test has been interpreted as meaning an employee is someone who provides personal service, is subject to the employers control as to how, when and where the work is done and is obliged to accept the work when offered. Over the years case law has highlighted other issues relevant to employment status so the following (non-exclusive) issues are now relevant:
Ability to substitute. Ideally this will not be limited.
Insurance – The self employed person should have his own insurance cover.
Tax – As elf employed person is more likely to be registered for VAT.
The company would allege that it had a fair reason to dismiss Dan as his ‘Monday Club’ absenteeism amounted to misconduct. This can be a potentially fair reason to dismiss.
The fact that Dan has worked for the company continuously since June 2004 might suggest he is an employee; however, other issues will be relevant. For example, has he substituted another to brick lay on his behalf? However, he is paid a day rate rather than on price which tends to suggest employment. There is a real risk he could be held to be an employee.
With effect from 1 October 2004, employers must follow statutory minimum dismissal procedures when carrying out a dismissal. These are procedures laid down by statute and include features such as writing to the employee to invite them to a meeting to discuss the issues which may lead to them either bring disciplined or dismissed; meeting with the employee and their companion to discuss the issues and providing the employee with a right of appeal against any decision taken following the meeting.
A failure to follow there procedures can result in a dismissal being deemed to be automatically unfair. In addition, a tribunal can award an increase in compensation where it finds an employer failed to follow the statutory minimum procedures.
This scenario highlights the risks of a common practice of asking individuals to leave a site when things are not working out. In this case, the company did not follow any procedure in dismissing Dan.
Assuming Dan is successful in proving he is an employee, the remainder of his unfair dismissal claim would almost certainly succeed.
b.What are the legal implications of Dan’s claim succeeding?
Employment status is not only relevant to tax treatment. If Dan is found to be an employee it has other legal implications.
Employees are given unfair dismissal and a myriad of other employment legislation. For example, only employees can claim a statutory redundancy payment.
Only employees can render their employer liable for their acts or omissions under the concept of ‘vicarious liability’.
Employees are preferential creditors in the event of their employer’s insolvency.
Employees are entitled to a greater range of security benefits if their employment is terminated.
Some health and safety provisions only apply to employees. Note this is also another key reason why there is pressure on contractors to take on individuals as employees rather than subbies.
c.What are the financial implications of Dans claim succeeding?
Firstly, Dan has a claim for compensation for his unfair dismissal. Compensation for unfair dismissal consists of a basic award (determined by reference to his age, length of service and a week’s pay capped at £310 (from 1 February 2007) a compensatory award. The compensatory award is made up of the actual loss Dan has suffered as a result of his dismissal. This award would depend on how long Dan was out of work for and whether he had made attempts to find alternative employment. The maximum compensatory award is currently £60,600 (as from 1 February 2007)
Secondly, there could be a significant liability for unpaid tax and national insurance were the Revenue become aware of this issue. The Revenue can claim up to six years unpaid tax and national insurance, along with interest and penalties.
d.What practical steps should the company take to limit its legal and financial exposure going forward?
Clearly, the company should be carrying out a status review of all workers to determine whether there are any other individuals incorrectly classified as self employed. If this is the case, then those individuals will need to be moved to directly employed status. Paqua Accountants can advise you further on this. Remember some individuals prefer self employed status for personal reasons and may be reluctant to move. It is therefore essential to handle this process sensitively and in consultation with individuals to ensure a smooth transition and avoid other legal disputes.
e.Can the company rely on the fact that Dan was reluctant to change to self employed status?
No, the parties’ views and intentions are irrelevant. Status is an issue determined by law not by contractors and workers.
10. Dealing With A Revenue Inspection
1.Are there any reasons why this company in particular might be the subject of a Revenue investigation?
The Revenue has said that it has increased the number of inspectors available to deal with the CIS status issues and so there now appears to be a greater risk of a status audit.
We are led to believe that the following may account for a particular company being targeted for an inspection:
Advertisements - It has been suggested that the Revenue looks in newspapers and trade press for companies advertising for ‘self employed’ persons. Therefore the company’s advert for self-employed labourers’ may have brought it to the attention of the Revenue
Competitors - It has also been suggested that ‘tip offs’ by competitors lead to Revenue inspections
Disgruntled ex-workers - In this case, Dan may have informed on the company. The Revenue also keeps abreast of employment tribunal decisions which can provide ammunition for an inspection where a worker has been held to be an employee.
2.Do you agree to the meeting? If so, what would your approach be?
Generally, no. You must of course be co-operative and if the Revenue wants to ask questions you should agree to this – but ask that the questions are put in writing and state that the company will respond accordingly in writing. We strongly suggest you take professional advice in such circumstances.
11. Terms Of Engagement
1.What changes would you make to Company practices regarding the use of Subcontractors?
Have two spreadsheets one for employees and one for subcontractors.
Every contractor must realise that it is the legality of the situation that dictates whether an individual is employed or self employed.
The starting point when engaging any subbie must be whether an individual satisfies the requirements for self employment rather than to be the case. We suggest using a pre-engagement checklist to determine whether the individual is self employed or not.
If you have established that an individual is a subbie, issue terms of engagement. We suggest these take the form of a cover ‘purchase order’ accompanied by a set of legal terms. The purchase order should provide personal details, project and pricing information. The legal terms will then cover issues such as substitution.
Every contractor should ensure that those issuing the terms of engagement are familiar with their terms and effects. They should be able to make minor amendments to ensure the terms reflect the reality of the situation.
2.What (if anything) is wrong with the extract clauses?
The substitution clause
The ability to provide a substitute is a cornerstone of self-employment. A truly self employed individual should usually have the right to substitute any individual (provided the individual is suitably qualified). The right to substitute should not be limited to those the client company agrees.
Hourly rates tend to suggest employment. A truly self employed individual should work on a ‘price’. It should be the self employed person’s risks as to whether that price is a fair one or not. The element of the risk is again key to self employment status.
3.What clauses would you not expect to find in the agreement?
a.Disciplinary and grievance procedures
b.Employment typebenefits – sick pay, private health insurance
c.References to employment legislation.
For further information about Goddards Accountants, please call us at our offices:
102 Acre Lane
High Wycombe Office
c/o Franklin James
Axis 40, Oxford Road,
109 Church Street
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Tel: 020 8941 2187
Skype: willconsult69 (Derek Williamson)