Kev Smith is the hard-working owner-manager of a joinery contracting company in the North East and could be described as a specialist subcontractor. He founded his successful company a decade ago after learning his trade as a subbie on building sites across the North of England. He has built a good reputation for delivering projects on time and on budget and makes a decent profit every year, affording a nice house and good lifestyle for his wife and kids. The suppliers and subbies who carry out work for him are always paid on time and he always pays his taxes.
HMRC asked for details of all payments made
One day last spring, a brown envelope landed on his doormat. It was a letter from HMRC checking on his employer records to make sure his company was paying the right amount of tax and National Insurance contributions. The letter asked for details of all payments made to people off the payroll during the most recent tax year and a long list of documents including written contracts for his subbies, the type of services they provide, letters of appointment, staff handbook, job descriptions and at least one invoice per subbie. The clear intention was that HMRC wanted to reclassify the subbies he used as employees.
The costs of getting it wrong could be disastrous
Rather than panicking, Kev simply picked up the phone and called us at Hudson Contract, his provider of CIS compliance services, allowing us to step in and deal with the enquiry for him. The costs of getting it wrong could have been disastrous: Kev would be facing a payout of several hundred thousand pounds in backdated National Insurance contributions if HMRC decided his 10 self-employed operatives were non-compliant and that figure doesn’t include fines, interest charges or any legal costs. Kev knew this would not happen with him because we had contracted his subbies and as part of the deal assumed all liabilities backed by a 25-year track record and a written guarantee.
More than 100 follow-up questions
Our regional manager had a detailed understanding of Kev’s business and its arrangements because he had visited the company’s back office and building sites, he knew that all the right paperwork was in place and he was able to provide timely, accurate and effective records and advice. And when HMRC responded with more than 100 follow-up questions – yes, you read that right, 100 questions – having Hudson Contract in his corner meant that Kev wasn’t overwhelmed with paperwork, and spared him the anxiety of worrying about ruinous consequences.
Protected by Hudson Contract’s written guarantee
In Kev’s case the inspector chose to deal with the enquiry by email rather than interview, so we helped with every response. Another owner-manager with a similar business faced a compliance check and endured a three-hour face-to-face interview with several tax inspectors and a notetaker scribbling away. Whether by email or interview, these situations are far less intimidating when you have the right support and you know you are covered.
The main tests for employment status
HMRC’s follow-up questions to Kev focused on the main tests for employment status: mutuality of obligation, the right of substitution and control. Some seemed more loaded than others, perhaps designed to catch out unwitting owner-managers more used to solving problems on building sites than fielding questions based on complex law. Others seemed to be fishing for information about supply chain arrangements. The taxman wanted to speak to some of his subbies, look at labour providers and go through customer lists and contracts.
Saved from a tax investigation nightmare
Construction companies across the UK are receiving letters like this every day, causing nightmare tax investigations with months and sometimes years of stress and uncertainty. Unfortunately, the starting point for many tax inspectors seems to be that all self-employment in construction must be false and if they dig deep enough, they will find something wrong. There is no doubt that HMRC is starting to use new IR35 tools to pursue compliance checks and look beyond intermediary arrangements to scrutinise working relationships on building sites.
The triggers for compliance checks
The HMRC playbook does not cater for circumstances when you’ve just experienced a loss, suffered an illness or steered your company through the pandemic. Look at our liability calculator to see what you could be facing. A compliance check could be triggered by a tax return from a subbie with questionable expense claims. Or it could lead on from a VAT inspection. Company directors react in different ways but even the biggest and toughest of them can suffer personally from the pressure of an investigation. It’s like driving down the motorway and a police car comes up behind you. You haven’t done anything wrong but it makes you feel nervous.
Never had a case of status reclassification
Owner-managers like Kev Smith – we have changed his name and some details of his case – have continued trading successfully during the pandemic, delivering projects on time and on budget and developing the next generation of skilled tradespeople. Their contribution to the British economy really is underrated. There is a reason why they turn to Hudson Contract and it’s not just because we make sure subbies get paid on time, every time. It is because in more than 25 years of trading we have never had a case of employment status reclassification and that’s why Hudson Contract is the biggest payer of subcontractors.
This article was written and paid for by Hudson Contract