In theory, assessing contract status is nothing new. No contractor should engage a worker without first considering his or her status (whether the worker is an employee or a subcontractor). Unfortunately, this is not a matter to be agreed between the worker 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;
Whereas a sub-contractor;
A limited company cannot be an employee.
The main reason it is so important to HMRC is NI.
Self Employed: National Insurance is paid by the self employed at £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 £100 per week and employers at 12.8% on all wages above £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 using subcontractors. These include:-
Relief from the burden of compliance with complex legislation on recruitment and employment (and the possible and costly effects of non compliance).
Ease of dismissal.
No responsibility for holiday or sick pay, pensions or other employee benefits.
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.
The contractor must verify the subcontractor with HMRC before making the first payment to them (preferably before taking them on). This can be done by phone or by internet.
You should have received a list of pre-verified sub-contractors in November. This should include all the sub-contractors you have engaged in the last two years and those on this list do not need to be verified.
In order to obtain verification from HMRC you will need the subcontractors:
......PLUS
HMRC will give you a rate of deduction to apply to the worker and will provide you with a verification number (you need a system to record these details).
Under the new system there are three rates of deduction:
If a sub-contractor's rate of deduction changes, HMRC will inform you 30 days prior to the date the change comes into effect.
The 'statement of payment and deduction' is the new CIS equivalent to the old CIS25 vouchers. HMRC requires you to provide every sub-contractor under deductions with a statement each month showing the following information:
Although it is not required that you provide sub-contractors with a gross status with a statement it is advisable to do so as they need to be entered onto the monthly return.
It is also recommended that you keep copies of each statement you issue.
You will receive a monthly return with pre-printed details of each verified sub-contractor.
If you have engaged a new sub-contractor in the month you will have to enter their details into the boxes provided.
If you have not paid a subcontractor in the month just leave the boxes blank.
As with the CIS25 vouchers, the monthly returns will run to the 5th of each month and they must be submitted by the 19th of the month. This can be done either by returning the paper form or you can file the return online (you have to be registered for this service or your agent, if registered, may do this for you).
If you have not paid any sub-contractors during the month a nil return must be submitted.
Payments of tax deducted must also reach HMRC by the 19th of the month.
If you wish to amend a monthly return that has already been submitted you need to contact HMRC via telephone and inform them of the amendment. You also need to keep a record of the amendment and details of the phone call.
If you are not an employer there will be no end of year forms to complete with regards to CIS payments (A CIS36 for the year ended 5th April 2007 is still due under the old system).
If you are an employer you will need to add together all 12 monthly returns and enter the total figure onto your P35.
If any monthly return is submitted late a £100 penalty will be charged per each 50 sub-contractors on the return. This penalty will then be multiplied by each due date it overruns (These penalties also apply to nil returns).
You may be charged penalties on incomplete or incorrect returns of up to £3,000. This may also be the case if you fail to produce records relating to payments made or you fail to provide any sub-contractor under deduction with a statement of payment and deduction.
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