In the UK construction industry, there has been no single way of engaging individuals, which may well be to its benefit as we experience a downturn. Any site or works package is likely to comprise individuals who are:
- directly employed;
- self-employed, whether directly or indirectly engaged, usually within the scope of the Construction Industry Scheme (CIS);
- umbrella employees;
- running their own small personal service company (PSC); and
- engaged by other intermediaries, such as an agency
The blend described generally grants flexibility to the engager, particularly as construction tends to be project-based. Subcontractors, be they a self-employed sole trader or freelancer, are free to work without the constraints that direct employment with the engager can bring. The subcontractor is free to move around from site to site (whether to service multiple projects or chase better rates) – hence the considerable popularity and widespread preference to work and fall within the scope of the CIS scheme.
That being said, it is unfortunately not a simple matter of choice as to whether or not an engagement would be one of self-employment. To fully comply with the CIS scheme, it remains the responsibility of the contractor to ensure that they have correctly determined the employment status position of the subcontractors they engage. Employment status is not a matter of choice for either a business or the individual they engage - it is a matter of fact, based on key terms and conditions of the working relationship between both parties.
Then throw into the mix other statutory legislative considerations such as the agency legislation contained at s44 ITEPA 2003 (as amended) which looks to consider if the manner in which an individual personally provides their services is subject to (or to a right of) supervision, direction or control (SDC) by anyone. The result is there are a number of areas that constantly need to be addressed to ensure that the appropriate tax and national insurance requirements are being met.
It is worth noting that the SDC test is much narrower than the normal employment status tests, meaning that individuals could be caught under the agency legislation requiring the engager to operate PAYE tax and Class 1 national insurance contributions. Whereas, if you were considering all the employment status factors rather than just the agency legislation, the individual could well be self-employed if they were working directly for the end client.
HMRC has a powerful weapon in its hands when it comes to the recategorisation of subcontractors. Add to this the changes introduced into the public sector from April 2017 under the off-payroll working rules, which are expected to extend to the private sector from April 2021, and it’s clear that, more than ever, a diligent approach to compliance including employment status by engagers is paramount.
Trade union sentiment tends to be that the CIS scheme is abused or that mass self-employment in the construction industry is an unfair practice. The Guild takes a balanced view. It is likely that a small percentage of self-employed people have been pushed into an arrangement or otherwise misunderstand what they have signed up to. It is HMRC’s responsibility to police the system and ensure that non-compliant parties are identified and dealt with appropriately.
The balance of subcontractors working within construction are not victims but instead enjoy the flexibility that comes with working for themselves.
A qualified tradesperson has autonomy – hence The Guild only deals with skilled and experienced subcontractors. Satisfying the requirements for self-employment status and, where s44 ITEPA 2003 legislation does not bite, can only be realistic once unskilled and inexperienced workers have been identified and dealt with appropriately by the relevant engager.
Subcontractors in the UK construction industry will continue to be needed to sustain the sector and help ensure survival. As sites reopen and projects are re-invigorated by lead contractors, calls will need to be made and subcontractors will continue to choose whether to make themselves available. Projects will ebb and flow like the tide. When utilised correctly, those subcontractors do not attract the additional costs of employment or redundancy considerations when there is a downturn in the work available, which would otherwise occur where you have a permanent workforce.
This article is not a call to self-employment in favour of employment. Employing people offers the kind of control that many businesses prefer. However, the UK is now struck by economic hardship. Logically, businesses will be looking for ways make essential savings, in order to maintain profitability and to enable them to sustain a viable and competitive trading business. Subcontractors engaged on a compliant footing can undoubtably provide the engager with the opportunity to benefit from a flexible workforce whilst managing their overhead costs.
Some commentators will question a departure from employed models in favour of the kind of flexible engagements described. However, if the correct employment status of subcontractors is secured and HMRC are satisfied that the engagement is one of genuine self-employment, would those same commentators not desire the survival of more construction businesses in these hard times?
The question of survival is already in play and will be key over the next six months.