Construction industry scheme and IR35: are you compliant or at risk?

If you run a business registered as a contractor under the construction industry scheme (CIS), it is important to consider the employment status and IR35 regulations when engaging subcontractors. Failure to do so can result in fines and penalties.

Construction industry scheme and self-employed subcontractors

Under construction industry scheme rules, after engaging a subcontractor, the contractor is responsible for verifying the contractor with HMRC and deducting the relevant percentage of CIS tax from their payments. It also must be confirmed that the subcontractor is genuinely self-employed as part of the verification process.

I have the subcontractor’s unique taxpayer reference (UTR), so they must be self-employed?

Wrong!

A UTR merely indicates that an individual is registered for self-assessment. It does not necessarily follow that they are genuinely self-employed. It will be the terms of the engagement that dictate this. During the verification process, it is likely that no further consideration is given to a worker’s employment status other than the presence of a UTR.

This can leave contractors open to challenge from HMRC. In some circumstances, HMRC could determine the worker should have been treated as an employee. HMRC can then look to recover the unpaid tax and national insurance (NI) that should have been deducted to payments from the subcontractor. This will include employer’s NI (at 15%) and the whole liability will rest with the contractor.

Currently, the best way to check the employment status of a subcontractor is to use the HMRC check employment status for tax (CEST) tool. This uses a series of questions to determine whether a worker is employed or self-employed for tax purposes. It also provides a saveable determination that should be kept on record.

Construction industry scheme and limited company subcontractors

Similarly, when engaging a company as a subcontractor, you also need to consider the relationship of the engagement between the contractor and the workers provided by the subcontracting company. This will be relevant where the subcontracting company is a personal service company (one man band) i.e., Joe Bloggs Limited.

If workers of the subcontracting company are employees of theirs, you do not need to consider this further.

The rules that need to be considered are the off-payroll working rules, an extension to the IR35 rules. This came into effect in April 2021 and take precedence over the CIS rules.

The IR35 regulations were introduced to prevent individuals from avoiding paying taxes by using limited companies to disguise their employment status. The rules apply to contractors and subcontractors who provide services to clients through an intermediary, such as a limited company.

If a subcontractor is deemed to be inside of IR35, the contractor will need to deduct income tax and national insurance contributions from their payments. The subcontractor will not be entitled to claim expenses and may be subject to PAYE (pay as you earn) tax and national insurance contributions on benefits provided. Again, HMRC’s CEST tool can be used in the first instance for this purpose.

Summary

It is important for businesses registered as a contractor under the CIS to consider the employment status and IR35 regulations when engaging subcontractors. The CEST tool is currently the best way to check the employment status of a subcontractor. Seeking the advice of a qualified accountant or tax specialist can help businesses avoid costly fines and penalties.

Discover everything you need to know about the construction industry scheme (CIS) in this blog post.