Employees or Subcontractors under the Construction Industry Scheme?
SOURCE: INSIDER, OCTOBER 2007
Employers must know whether their workers are self employed or are employees, in order to apply the correct tax treatment. There is an additional complication where the employer is a contractor in the construction industry.
If the worker is employed under a contract of employment then the contractor is bound to deduct PAYE and NI.
However, if the worker is a self employed subcontractor, then the Construction Industry Scheme applies. Under this Scheme, before making payments to a subcontractor, the contractor must first verify its status under the Scheme. If a subcontractor is registered then payments will be made either gross or under deduction of tax at 18%, depending whether the registration is gross or under deduction. If the subcontractor is not registered, the contractor must deduct tax at 30%.
The first step is to establish whether the worker is an employee or a subcontractor. Employers cannot choose which treatment to apply; the circumstances dictate the employment status, but determining the issue is not always straightforward.
Indicators of employment are: a high degree of control over what work is to be done when; payment hourly, daily, weekly or monthly (with no risk borne by the worker); and the worker having no business organisation e.g. a yard, stock or materials.
Indicators of sub contractor status are that: (within an overall deadline) the worker decides how and when work is to be done; materials, plant and equipment are supplied by the worker; the worker can employ others to do the work; and the worker is paid an agreed amount regardless of how long it takes to finish the job and thereby bears a financial risk.
Each case requires to be considered carefully to ensure that the correct status is applied – so that the employer applies the proper tax treatment to the payments and thus avoids any problems with HM Revenue and Customs.
AUTHOR: ALISON GOW
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