Working with your most reliable subcontractors long-term makes sense. You know them, you trust them, and they get the job done.

So why, oh why does HMRC make it so difficult. Why is the construction industry the only industry where the self-employed are taxed at source? Why is HMRC constantly making enquiries into the employment status of subcontractors? Why do they keep creating new hoops for contractors to jump through?

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It’s easy to see why so many construction firms feel like HMRC have it in for them. But the truth is HMRC doesn’t have it in for the construction industry. They aren’t trying to make life harder for legitimate businesses.

What they’re trying to do is prevent unscrupulous companies from dodging tax and screwing over their workers. Unfortunately, as they attempt to weed out dishonest companies, genuine businesses can get caught up in the crosshairs.  

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And if those genuine businesses don’t take measures to protect themselves, they can find themselves on the receiving ends of some pretty hefty fines.

So how exactly do you protect yourself?

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Why is HMRC so concerned with employment status?

As we mentioned above, there are two reasons HMRC are concerned about whether your subbies are genuinely self-employed.

The main reason is financial. Nobody wants to be scammed out of money, and HMRC is no different.

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In the 1970s, when most subbies still got paid in cash, HMRC (or Inland Revenue as it was then) realised that many of these subbies weren’t declaring their earnings. To combat this, they introduced CIS, which involved subbies being issued vouchers to create more of a paper trail.

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Unfortunately, crime gangs figured out how to forge these vouchers, and by the 90s, HMRC was being swindled out of an estimated £50 million a year. The CIS scheme was revised, and contractors became responsible for deducting tax at the source.

But this solution wasn’t foolproof. Contractors realised they could disguise employees as subcontractors by using CIS registration as “proof” they were self-employed.

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This meant contractors didn’t have to add subbies to their PAYE and cover income tax and national insurance contributions. And while the self-employed still have to pay tax and NIC on their earnings, it often works out less than if they were employed, meaning HMRC is left out of pocket again.

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So that’s why HMRC are so keen to identify those subcontractors who are really just employees in disguise. They want to ensure everyone is paying the correct amount of tax.

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But there’s another reason they don’t like contractors cheating the system – it’s unfair on workers.

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Employees are afforded certain rights – holiday and sick pay, redundancy, pension contributions, maternity and paternity pay, etc.

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These rights don’t protect the self-employed. If they take holiday or sick leave, they don’t get paid. If they want a pension, they have to take care of it themselves. And if the work dries up or the contractor decides to end the relationship, they aren’t entitled to notice, redundancy pay or unfair dismissal. They’re out on their ear.

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If HMRC weren’t on the lookout for employees disguised as subbies, more companies would take advantage of their workers by forcing them to work as self-employed.

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When is a subcontractor actually an employee?

You might be wondering if you should just employ all your subcontractors – stick them on your PAYE and never have to worry about an enquiry.

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But how do you know whether it’s the right move?

Well, firstly, take a look at the working relationship you have with your subbies. Is it one of employer-employee?

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Do you tell them how many hours to work each week, what days to work and what time to start and finish work? Do they have to give notice if they want holiday, and do you pay them for this? Do you supply vans, tools and uniforms? Do you pay for their training, licences and accreditations?

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Are you their only client? Do they have to personally carry out the work rather than send a substitute? Do you give them specific instructions on how to carry out tasks? Is there a sense of obligation for you to give them work each week and for them to accept it? If they make a mistake, will you pay them to come back and fix it?

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Answering ‘yes’ to one or two of the above questions doesn’t necessarily mean your subbies should be employees. But if you answered ‘yes’ to all of them, you might have a hard time convincing HMRC that they are genuinely self-employed.

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So if you know deep down that your subbies should really be employees, then employ them. You’ll remove the risk of ever getting caught out, and you’ll be treating your workers fairly.

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How do you protect yourself from an enquiry?

What happens if your subbies are genuinely self-employed, can prove they are a business in their own right, and you have legitimate commercial reasons for working with them the way you do?

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The good news is you might not even be at risk. If you only work with labour-only subbies on an ad-hoc basis, you’re unlikely to upset HMRC.

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But even if you work with them long-term, you still might not be at risk. Remember, HMRC are only trying to catch out dodgy companies – they aren’t going out of their way to destroy legitimate businesses.

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The best way to protect yourself is by being transparent. Have a clear contract documenting exactly how you work with subbies and why you work with them that way. As long as you can demonstrate commercial, financial or health and safety reasons for why you have the relationship you have, HMRC can’t reclassify your subbies as employees.

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You can work with your subbies long-term. They can drive your vans, use your equipment and wear your uniform. You can cover their fuel costs, training costs and even their lunch costs (if you want to). And you can ask them to be onsite at specific times.

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Want to know exactly how? We're working with Hardhats, get a free copy of their book where they explain it step by step!