When is a sub-contractor an employee?
HMRC have the construction industry in its sights, in particular the employment status of sub-contractors. The regulations surrounding contractor status are complicated and it can be difficult to identify who should be an employee and who is a genuine sub-contractor.
This confusion in employment status and tax is affecting many sectors in the UK. Whether you engage someone as an employee or a self-employed contractor has an impact, particularly when considering National Insurance contributions. Hence the keen interest taken by HMRC.
Two people working side-by-side, doing the same job, on a construction site could be engaged under two separate statuses. One may be an employee, while the other could be a genuine sub-contractor. Simply observing how they work on a site doesn’t give clarity on their employment status.
Ideally, there would be clarity when deciding the employment status of people working in construction. Unfortunately, the rules surrounding this are complicated and don’t offer clear-cut definitions. There are a number of questions you should ask yourself before engaging somebody.
What would happen if a sub-contractor was off sick? Would you allow your sub-contractor to provide a substitute to perform the service while they were off? If the answer is no, then they are likely to be classed as employees.
Working for Different Clients
Are you happy for your sub-contractor to take on work with another client? Your sub-contractor may work on more than one site; and may provide a substitute for completing work for you. If this is not a situation that is acceptable to you, they should be engaged as an employee.
Control and Risk
Who decides how a particular job should be done? If things go wrong, who is responsible for putting them right? A true sub-contractor will have a large degree of autonomy in deciding how they deliver their service, and will be accountable for that service.
How credible is your sub-contractor? A formal business set-up and perhaps their own premises go a long way to giving that credibility.
Sick Pay and Holiday Pay
Do you offer sick pay and holiday pay as benefits? If you do, you should engage that person as an employee. A sub-contractor is not entitled to sick or holiday pay.
Was the person previously employed by you? Questions may be raised concerning their status if a former employee is re-engaged as a contractor.
Have you asked your sub-contractor to take part in your normal recruitment process? This could take the form of a formal job interview and perhaps an appraisal. While you would certainly want to meet a sub-contractor before engaging them, they wouldn’t expect to take part in any kind of formal recruitment process. This process should be kept for evaluating prospective employees.
Equipment and Travel
Does your sub-contractor provide their own equipment for the work? Do they cover their own travel costs? These can then be considered by the sub-contractor as tax-deductible business expenses. If you supply the equipment or offer travel expenses, you should engage them as an employee.
Are your sub-contractor’s work clothes supplied by you, or show your logo? Do they drive a work vehicle supplied by you? These outward signs can be taken as an indication that they are directly employed by you.
The onus is on you to make a judgement on what basis somebody is engaged, whether as a sub-contractor or an employee. It’s important you ask the relevant questions of sub-contractors, as well as being clear on what expectations you may have of the engagement.
There are resources available to help you, such as the HMRC online tool to check employment status for tax https://www.gov.uk/guidance/check-employment-status-for-tax.
This is an area that is quite complex and is constantly changing. If you have any doubts about whether somebody is a genuine sub-contractor, it’s worthwhile talking to our tax team. They are happy to provide clarity in a complicated and grey area of taxation.