HMRC Reclassification of Workers as Employees
The Risks in Detail
Significant bills for unpaid NI and penalties for non-compliance, plus future payroll costs increased by around 40%
Loss of flexibility – no longer able to match workforce to workload
Significant increases to you administrative and regulatory burdens
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.
What is the solution?
By engaging EEBS for the supply of your sub-contract labour, you create an unbreachable firewall that prevents HMRC from reclassifying your self-employed sub-contractors as employees. EEBS have many, many clients who have been inspected by HMRC whilst using our services, and our business model has never been challenged.
- Verify each sub-contractor with HMRC
- Calculate the sub-contractors CIS tax
- Inform the sub-contractor of the amount that they will be paid
- Include all of the engaged sub-contractors on our own status submissions to the Revenue
- Provide the sub-contractor with both a payment statement for each time they are paid, plus an annual CIS deduction statement
Other benefits of appointing EEBS to engage with sub-contractors on your behalf include protecting your business from Employment Rights claims, i.e. holiday pay, pension contributions, unfair dismissal, discrimination and parental rights plus a massive reduction to your CIS administration. You simply verify us with HMRC, and replace the sub-contractors that you previously reported on your CIS300 with EEBS.
“We are confident that we can rely on EEBS to keep us up to date with any changes and ensure we continue to comply.”
Christine Shearing, Kenwood Groundworks
"J&J Windows & Doors Limited have been using EEBS Limited to pay my colleagues and I for over 6 months and I can quite honestly say that the service EEBS provides is superb! It allows me to remain self-employed, they ensure that I'm verified with HMRC, that my CIS tax is calculated correctly and most importantly that my wages are always paid correctly and on time. I would without a doubt recommend EEBS to friends, family, and colleagues."
James Last, J&J Windows & Doors
“I can call on EEBS when required without the worrying of being tied into an agreement.”
Peter James, Pete’s Landscaping
"We have used EEBS for our wage processing for around 3 years now. We were unhappy with the previous company as they felt 'too big' and did not provide a personal service at all. I am extremely happy with EEBS and can honestly say all their staff are pleasant, conscientious and an absolute pleasure to deal with. I cannot recommend EEBS enough, they thoroughly earn their (reasonable) fees and enable us to focus on more commercial and day to day aspects of running our company."
"We have used EEBS for 7 years now and we cannot fault their service. They keep us up to date with new legislation and regularly carry out compliance reviews. Their staff are friendly and knowledgeable and the processing rates are fair."
"We have used EEBS for 4 months now and what a delightful team. Toni & Colette have been nothing but "BRILLIANT" They have bent over backwards to resolve queries and are always at the end of the telephone... Thank you EEBS for being FANTASTIC!"
"Would highly recommend EEBS, we have used a few payroll companies in the past but by far these guys are the best. Always so helpful and very knowledgeable, such a great company to work with."