The Taxing Issues of Employing Labour in the Construction Industry
Article Date: 15/05/2008
Making sense of the latest tax laws on payment methods in the industry
Personal Service Companies
This is the taxman’s way of describing workers who set up, on their own or in partnership, to trade as a limited company. Workers who are simply labour only subcontractors may not be in business on their own account if they rely on one company only to supply their work. IR35 or Intermediary legislation(1) forces those workers caught by IR35 to treat 95% of income under PAYE. In the firing line are workers who normally work for one construction company and are paid on invoice as a limited company rather than as an employee.
Recruitment Agencies
Companies supplying agency workers in the construction industry have been subject to agency legislation(2) since1997. To avoid the costs of employment which would push up charge rates, it has been common practice for agencies to pay workers via external companies known as composite companies. These companies were legislated against under Managed Service Company legislation(3) in April 2007 and agencies have since turned to CIS and PAYE Umbrella companies.
PAYE Umbrellas
These companies confuse the issue as composite companies once did, the reason being that PAYE umbrella companies do not take workers outside IR35, workers become employees of the umbrella company and so normal benefits & expenses rules apply. If a worker is genuinely outside IR35, each engagement can qualify as a temporary workplace. Then he/she would work via a personal service company and the cost of travelling to and from a temporary workplace can be claimed as an expense (subject to the engagement lasting less than two years etc.) If it is not a temporary workplace, the travel and other costs become normal commuting costs payable out of taxed income.
HMRC knows that many workers being paid via PAYE umbrella companies are agency workers, and that a large percentage of workers leave after completing just one contract. When this is the expected pattern of work, each place of work is not a temporary workplace for tax purposes. The PAYE umbrella should not allow the worker to claim any expenses against travel but normally do treat a substantial proportion of income as travel expenses.
CIS Umbrellas
When a worker elects to be paid via a limited company in which he has no interest, i.e. he is not the director, Intermediary, Agency and Managed Service Company legislation does not apply. If the worker and the company are both registered under the Construction Industry Scheme, payments to the worker can be made under deduction for CIS subject to the worker’s employment status being one of self-employment.
CIS umbrella companies take on the administrative burden of operating CIS and become responsible for processing verifications, statements and returns saving contractors from penalties and fines and loss of Gross Payment Status for getting it wrong under the new scheme.
Notes
(1) Part 2 Chapter 7 Income Tax (Earnings and Pensions) Act 2003
(2) Part 2 Chapter 8 Income Tax (Earnings and Pensions) Act 2003
(3) Part 2 Chapter 9 Income Tax (Earnings and Pensions) Act 2003
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