Assessing contract status
In theory, assessing contract status is nothing new. No subcontractor should engage with a contractor without first considering his or her status (whether the contract is consistent with employment or self employment). Unfortunately, this is not a matter to be agreed between the subcontractor and the contractor, it is a matter of law, depending upon the terms of the engagement (the contract).
A clean definition of status is that:-
employment is a contract of service
self-employment is a contract for services.
Broadly speaking, an employee;
- Is paid by period (weekly/monthly).
- Is paid holiday and sick pay.
- Has their working hours, time and methods set by the contractor.
- Has materials and often tools provided by the contractor.
- Is covered by the employer’s liability insurance.
Whereas a sub-contractor;
- Is paid to complete a particular task or set of tasks often by a specified date with a financial penalty incurred for work not completed on time.
- Decides which individual(s) will do the job – may be himself or another member of his firm or someone subcontracted to him (this last not paid directly by the main contractor).
- Sets their own working hours, time and methods.
- Has their own tools and may supplies materials.
- Rectifies faults at their own expense.
- Carries their own liability insurance.
A limited company cannot be an employee. (If a contractor thinks you should be an employee and you are not happy to agree with this then one way to avoid this is to form your own limited company but before embarking on this please take professional advice about the advantages, disadvantages, obligations and costs involved).
Why is status important?
The main reason it is so important to HMRC is NI.
Self Employed: National Insurance is paid by the self employed at Â£2.10 per week for Class 2 NI plus 8% Class 4 NI on the profit from self-employment above a set threshold (equal to the tax free personal allowance)
Employed: Employees pay NI at 11% on all employment income above Â£100 per week and an employer at 12.8% on all wages above Â£100 per week paid to each employee.
Although there may be other advantages for the self-employed which also tend to reduce the amount of tax they pay, NI is THE big issue.
There are other good reasons for being subcontractors. These include:-
Freedom to accept or reject work
Ability to negotiate price
Ability to set own hours and time of work (within reason)
However a subcontractor:-
Has no guarantee of being offered work
Does not receive holiday or sick pay
May have to bear the cost if work is not completed on time or to an acceptable standard
Under the new scheme…
Contractors are going to have to sign each month to say that they have assessed the status of their workers.
To make it easier for the Contractor, there is software available on the HMRC website designed to help contractors decide whether a contract is one of employment or self-employment. Also there is a phone help line (the call centre workers will ask questions and enter your answers into the same piece of software).
Beware – this software has a strong tendency to tell the user that the contract is one of employment, and that PAYE should be operated.
Verifying the sub-contractor
The contractor must verify you with HMRC before making the first payment to you (preferably before taking you on). This can be done by phone or by internet.
Every contractor should now have a list of their pre-verified subcontractors including every one they have engaged and paid over the last 2 years. This means that when you work for a contractor after 6th April that you have worked for in the previous 2 years they will not need to verify you.
In order to obtain verification from HMRC they will need your:-
- 10 digit Unique Taxpayer Reference (UTR)
- National Insurance Number
HMRC will give your customer (the contractor) the rate of deduction to apply to you and will provide them with a verification number.
Rates of deduction
Under the new system there are three rates of deduction:
- 0% – (No deductions) – Equivalent to the old Gross Payment Certificate
- 20% – This is in place of the old 18% deductions (CIS4 holders)
- 30% – This rate applies to anybody who is unrecognised by HMRC
If a customer tells you they have to deduct tax at a rate other than the one you are expecting ask them for the verification number they have been given for you. You can then call HMRC to find out why deduction is being made at that rate.
No person or company that has arrears of tax or is in dispute with HMRC will be allowed to be paid without tax being deducted (not allowed to be paid gross). Subcontractors with arrears of tax may well be put on the 30% deduction rate.
If a sub-contractor’s rate of deduction changes, HMRC will inform you 90 days prior to the date the change comes into effect. They will also inform any relevant contractors 30 days prior to the change. This gives you 60 days to appeal any such decision.
Statement of payment and deduction
The ‘statement of payment and deduction’ is the new CIS equivalent to the old CIS25 vouchers. HMRC requires the contractor to provide you with a statement each month showing the following information:
- Month ending date
- Your name and address
- Your employer’s reference
- Sub-contractor name
- Sub-contractor UTR
- Verification number (If deductions are at 30%)
- Gross amount paid (Excluding VAT)
- Less cost of materials
- Amount liable for deduction
- Amount deducted
- Amount payable
Unlike with the old CIS vouchers there is no set template for these statements so potentially, as long as all the above information is present, every customer could have a different statement layout.
You really must make sure that you get a copy of this document each month from each contractor you have worked for – without it you will have no right to the tax deducted by them for that month.