Importance of engagers getting Employment Status correct

Whilst engagers may be concentrated on the upcoming changes to the off-payroll rules from April 2021 (which, in their simplest terms, are about employment status) it should be remembered that these new rules do not apply to the engagement of sole traders.

Ensuring that the correct employment status is applied when engaging an individual sole trader remains paramount for contractors. Employment status is a complex area and is not a matter of choice for either a business or the individual they engage. Getting the employment status of sole traders wrong can have serious financial consequences for a contractor.

Employment status compliance is one of The Guild’s specialisms and our in-house legal, tax and compliance experts have years of experience in dealing with all aspects of employment status queries.

If HMRC were to carry out a compliance review of a contractor’s records and judge that the sole traders were not genuinely self-employed, but rather that the terms and conditions of the working arrangement showed that they should have been employees, the Engager would be liable for the PAYE tax and National Insurance Contributions (NIC) considered due in respect of the payments made to the sub-contractors.

The starting point for HMRC will be to consider all the payments made to the sole trader during the period of the engagement and calculate the PAYE tax and NIC considered due. This is regardless of the fact that CIS tax deductions may have already been calculated, deducted and paid over to HMRC by the contractor. In addition to the liabilities assessed, interest and penalty considerations will also be due in respect of the duties outstanding.

Since HMRC can go back a number of years to recover the tax and NIC considered due, those liabilities can soon escalate. Whilst there are certain regulations which HMRC can consider to offset the PAYE liabilities due against the tax and NIC that may have already been paid by the sub-contractor, the contractor should not rely on this as being a solution to the liabilities due.

Furthermore, for contractors who are also sub-contractors holding gross payment status, such compliance failures could result in HMRC removing that payment status. This can have serious financial repercussions for the business, as this would mean their deduction status will change from 0% to the standard 20% rate. 

It is crucial that the correct employment status position is established at the start of the engagement. Getting this wrong can have disastrous consequences for a contractor’s business, should HMRC be successful in re-categorising their self-employed workforce as employees.

The Guild facilitates compliant solutions to the engagement of sub-contractors in the construction industry, thereby giving businesses the freedom to operate safely when using a self-employed workforce.