HMRC Reclassification of Workers as Employees

There has, for many decades, been conflict between the UK tax authorities and the Construction Industry over the Employment Status of tradespeople.

HMRC treats self-employment with suspicion, not viewing it as a legitimate choice but often as just a ruse for avoiding tax and National Insurance. This suspicion is amplified when they look at the construction sector because there are, quite legitimately, around five times more people working under self-employed contracts in construction than in any other industry – except the performing arts.

Especially in the post pandemic era, the focus by HMRC on the industry is greater than ever, with the legitimacy of the long-term engagement of tradespeople, particularly for the SME builder simply being viewed as illegitimate.

To back up their arguments for reclassification HMRC’s approach can be characterised by four simple questions, the failure of the majority of these suggesting that reclassification as inevitable:

• Does the sub-contractor supply his own materials, plant and equipment?
• Is there a valid contract in place, or does the sub-contractor employ other sub-contractors?
• Can the sub-contractor demonstrate that he can make a loss as well as a profit?
• Can the sub-contractor demonstrate that he has an active portfolio of other clients?

If the answer to the majority of these questions is NO then HMRC are extremely likely to reclassify the engagement as employment, not self-employment.

The impact of this on the employing contractor can be disastrous; back dated bills for unpaid National Insurance contributions, penalties and interest, plus the requirement to engage all future tradespeople as employees rather than as previously self-employed. This forces you to have a largely “fixed” workforce, and removes the ability to match your resources to the demands of your order book. The subsequent increase in payroll costs (which is usually significantly higher than 40%) plus the reluctance of skilled sub-contractors to lose their enhanced earnings, loss of expenses and reduced flexibility is effectively a death sentence to your business.