worker status

Worker Status Reviews & VAT: The Hot Topics for HMRC

Nick, this morning we’re talking about some of the activity that’s going on with HMRC, and particular points of interest for construction workers and contractors.

Yes, good morning. There are two areas of interest that I would like to focus on today regarding HMRC activity, the first centres on VAT. Now all of us in construction will be aware of the introduction of the VAT Reverse Charge Scheme, but not all of us will be aware as to why that was introduced in the first place, and that’s quite simply because across the economy 4% of VAT that is due to the Revenue never arrives in its bank account. It’s either stolen or misappropriated or companies go bust without paying the VAT due. However, before the Reverse Charge was introduced that figure for construction was 14% so almost four times more of the VAT that was due to be paid by the construction industry was never received by HMRC, and that is why the Reverse Charge Scheme was introduced.

However, the Reverse Charge Scheme does not apply to labour-only providers (in terms of agency type supplies), so there were a number of occasions where companies would set up as labour agency-type providers and continue to receive VAT payments, rather than simply account for VAT payments through the scheme. That then led to some unscrupulous providers disappearing with the VAT, much like they had done in the past, which led to HMRC investigating certain supply chains, ensuring that their labour providers within the supply chain were bona-fide. And if the suppliers have, in fact, disappeared with VAT, one of the approaches that the Revenue has taken is applying something called the “Kittle Principle”, which says that the company receiving the VAT credit knew, or should have known, that there was fraud in their supply chain, so much of the Revenue activity around VAT has focused on that.

So it’s vital for construction firms – if they are using suppliers who still charge VAT – to make sure that their suppliers are entirely compliant with VAT regulations and indeed are paying their VAT on time. Now, at EEBS we go as far as requiring certain suppliers within their supply chain to provide proof of the VAT being paid and that’s not a bad approach for many other construction businesses to take.

So even if you as a contractor are being diligent about what your own VAT implications are, it’s about the whole supply chain and all the way down? and this could be multi-layered as well?

Exactly, right. The Reverse Charge removes the opportunity for fraud unless the sub-contractors at the very bottom of the chain are supplied through an agency only, where VAT is still collected. That’s where the potential fraud now exists. So it’s always worth making sure that if a contractor is using one of those supply chains that they are compliant. Of course with EEBS, we are automatically compliant and we go far to demonstrate those links to the Revenue on an ongoing basis. There is a lot of security in our approach.

Let’s talk a little bit about Worker Status Reviews. We’ve been talking to partners and clients about Employment Status Reviews for construction companies, as it seems to be a buoyant topic. What’s the word on the street at the moment, Nick?

It’s the same old story to be perfectly honest; there is ongoing and continuous compliance activity from the Revenue in the construction sector. The Revenue has always seen the construction industry as a constant source of lost income across the industry. Apart from Performing Arts where virtually everybody is self-employed, construction has four or five times more self-employment than any other sector and the Revenue has always seen that as a potential for false self-employment, hidden employment and therefore no Employers’ National Insurance is collected. Now, in terms of their approach historically, the Revenue has always centred on four simple questions:

  • Is there a written contract in place that can be demonstrated to be working properly?
  • Is the individual paid a fixed- or day-rate?
  • Does the contractor provide all the plant equipment and materials?
  • Can the subcontractor demonstrate an active portfolio of other clients?

Generally, if most contractors don’t have a written contract in place, or pay a contractor a day rate, if they provide all the equipment and materials and the individual doesn’t have any other clients under those circumstances, the Revenue will say “sorry, that engagement is employment; you should have collected PAYE and you should have collected Employers’ National Insurance. Here’s your bill for unpaid tax and penalties.” So that’s what the activity is focused on at the moment, and the Revenue now looks at the degree of control that exists within that working relationship as a primary source of information for their decision making. If a significant degree of control exists between the contractor and tradesman then HMRC are extremely likely to view the engagement with suspicion.

But again without banging our own drum, we have systems in place that make sure we account for that at EEBS!

So when might someone expect an Employment Status Review? Are there particular times or could it be at any point?

To be perfectly honest there’s no set time scale but of course you can be proactive about these things and there is certain activity that can trigger a Compliance Review. We hear, anecdotally, lots of reasons that cause a review, but really it’s just one of the two certainties in life; death and taxes. So, at some point, you will get a Revenue investigation – and we all know what the consequences of the other one as well!

There is the HMRC CEST tool to refer to, isn’t there?

There is –

And if you’ve been seen to go through this CEST tool that’s a fair indication that you’re doing things correctly, is that right?

That’s absolutely correct! HMRC has, on a number of occasions, confirmed that as long as a contractor’s application of the guidance of CEST is correct – and it’s important to stay up-to-date with the recent changes, as we detail here – you are on the right side of worker status.


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Nick Pilgrim

M.D. | CIS Payroll Expert
01245 493832

Nick loves nothing more than chewing the fat over CIS payroll queries – actually that’s not strictly true; he likes playing golf and driving round Europe, but pick up the phone to him anyway!

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