HMRC do not seem to like construction industry workers; they argue that at least 300,000 of the 800,000 self-employed builders and over 100,000 building firms are ‘falsely’ self employed believing that these builders enjoy beneficial tax rates without any of the usual risks attached to being self- employed.
Moreover, they claim that if every one of these 300,000 ‘falsely’ self employed builders paid standard rate tax and NIC under PAYE then the Treasury would be £350m better off each year.
Employment status is actually not a question of choice and the issue of whether a worker within the construction industry is employed or self employed has been covered in a number of court cases.
The tests currently applied by the courts include:
• The right of control as to how, what, where and when the work is to be done;
• Whether a substitute can do the work or must the work must be done by the named person;
• Whether any equipment is required to complete the job and who is required to supply that equipment;
• The intention of the parties involved – is the relationship intended to be one of employer/employee?;
• Mutuality of obligation – is the worker obliged to do the work if instructed?; and
• Financial risk – who takes the ‘hit’ if the customer refuses to pay?
Clearly, HMRC would prefer everyone to be an employee – not only is it costing them a lot in taking such cases to court (they keep losing!) but being taxed under PAYE means that more tax and NIC is collected by the employer to hand over to HMRC rather than having staff to do the collection for them.
HMRC’s Employment Status Indicator tool (http://www.hmrc.gov.uk/calcs/esi-01.htm) is biased towards this thinking.
They have therefore decided that the best way to address what they perceive as ‘false’ self employment is to pass legislation deeming workers to be automatically employed unless they meet one of the following three specific criteria:
1. Plant and equipment is purchased and supplied by the person engaged to undertake the work.
2. The person engaged provides all materials required to complete the job.
3. If other workers are required for the job then the person engaged provides those workers under contract and is responsible for paying them.
Loss of Status
Until legislation is passed implementing this new system, HMRC are concentrating their efforts on attacking the gross payment status of subcontractors who have not been fully compliant within the new CIS rules which were brought into being on 6 April 2007.
To remain a gross-of-tax sub contractor, a worker needs to have satisfied all obligations imposed for payment and submission of returns during the qualifying period and complied with requests to supply HMRC with accounts or any other relevant information.
There is no discretion or leeway – if a payment is made late it is late. Compliance is therefore vital as any one of the failures as described on HMRC’s factsheet no. 343 and outlined below automatically triggers loss of gross status unless the breach has been agreed in advance with the Business Payment Support Service:
• Three late submissions of the contractors monthly return CIS300 – up to 28 days late.
• Any employers end-of-year return or any self assessment return submitted late.
• Three late payment of CIS/PAYE deductions – up to 14 days late
• One late payment of self assessment or any late payment of Corporation Tax – up to 28 days late including where any shortfall in payment has attracted an interest charge but no penalty.
There is, however, effectively a ‘de minimis’ amount such that late or non payment of an amount under £100 is ignored and the number of failures is taken on a rolling 12 month basis.
How to Regain Lost Gross Status
Should a letter be received from HMRC withdrawing gross status you should:
1. Ascertain which breach triggered the loss of status; and
2. Write an appeal letter (if you believe there are reasonable grounds to do so) within 30 days of the date of letter from HMRC.
NOTE: The change in status does not take effect until the 30 days has expired or the appeal has been determined.
If the appeal letter route does not work, the impact on cash flow will be immediate and a possible disaster for the sub-contractor. Cash flow could be improved by incorporation of the business providing that the contractor has some sub-contractors or staff of his own.
This is because any CIS tax suffered can be offset against the CIS or PAYE tax due at the end of each month rather than having to wait until the end of the tax year.
CIS Penalty Refund Offer!
As if sorry for the additional restrictions placed for CIS compliance, on 17 October 2010 HMRC announced a new and less harsh penalty regime specifically covering late CIS monthly returns.
This ‘new’ regime, to be found in Finance Act 2009 (Sch 55), replaces the ‘old’ regime in October 2011 such that the first return to attract penalties under the ‘new’ scheme will be the return for the month of November 2011.
The main difference between the two regimes is that the ‘new’ one places an upper limit on the amount of fixed penalties charged as follows:
• Initial failure to meet the due date of 19th of the month – fixed £100 penalty.
• A return still outstanding two months after the due date - a further fixed penalty of £200.
• A return still outstanding six months after the due date - a ‘tax-geared’ penalty being the greater of 5% of any deductions shown on the outstanding return, or £300.
• A return still outstanding twelve months after the due date - a second ‘tax geared’ penalty.
• Most importantly, the total amount of fixed penalties cannot exceed a maximum of £3,000 if no previous returns have been submitted and these are the first returns filed late; the limit does not apply to contractors that have filed returns previously.
• The £3,000 limit does not apply to any ‘tax-geared’ penalty except that it removes the £300 minimum penalty that would otherwise be charged where the ‘tax-geared’ penalty is less than £300.
A month later HMRC took notice of appeals accepting that the late filing penalties levied under the ‘old’ rules may be unfair compared with those charged under the ‘new’ ones.
It has therefore been decided to allow any contractor charged penalties under the ‘old’ rules to request recalculation as if charged under the ‘new’ rules if beneficial to do so.
This ‘offer’ only applies to anyone who has suffered CIS late filing penalties charged for the late submission of contractor monthly returns for the period from April 2007 up to and including 5 October 2011.
The penalty under the ‘new’ rules may work out to be lower if:
• More than one penalty has been charged in respect of any one late monthly return.
• More than £100 has been charged in respect of any one late monthly return.
• You are a new contractor who has been charged penalties for more than one late monthly return.
If this affects you, you should ask HMRC to recalculate the charge using the ‘new’ rules, and, if less than the amount paid, agree that the penalties be reduced to this lesser amount.
By Jennifer Adams