The contractual chain is the chain of working hierarchy needed to complete a construction project. It begins with a customer, then goes onto a consultant, who assigns a contractor, who needs sub-contractors to complete a project. All parts of the contractual chain are important to ensure the project is completed to specification and on time.
A contractor is a construction company which is employed to carry out a construction project and must employ subcontracted workers to work on that project on an ad hoc basis. A contractor can choose a CIS Commercial Contractor such as Indigo CIS to allow them to be fully tax and employment law compliant, without any of the administrative burden.
Construction Industry Scheme (CIS)
CIS is a special tax deduction scheme, which sets out a framework for deducting tax at source relating to construction work. It is designed to counter the black economy and the construction industry’s apparent bad tax compliance. Tax should be deduced by the contractor at one of two specified rates depending on whether the sub-contractor is registered. All contractors should register for the CIS.
Certified Construction Industry Scheme (CIS) Commercial Contractor
Indigo CIS is a Certified CIS Commercial Contractor. A company such as Indigo CIS takes on the responsibility of CIS for construction contractors. It accepts the commercial, legal and tax responsibilities of a contracting service. It allows sub-contractors to remain self-employed and work for various contractors on different jobs knowing their tax, legal and insurance requirements are covered. Indigo CIS also allows contractors to employ sub-contractors on a long-term basis.
Deductions are what is taken out of your pay per month or per week, depending on how often you get paid. The deductions will include tax and national insurance and could also include pensions and student loan payments. The deductions are taken out of your wages, again depending on your employment status.
A direct link is a link that HMRC would make to reclassify a sub-contractor as an employee. Using a company such as Indigo CIS would mitigate the risk of a sub-contractor that a contractor is using on-site as being a direct employee. Indigo takes on the role of a commercial contractor and removes the direct link between a contractor and a subcontractor. It verifies the subcontractor with HMRC and engage the workforce under professionally vetted and bespoke contracts, considering the regulatory requirements of a subcontractor’s self-employment status.
An employee is someone who has a contract of employment. All employees are workers, but an employee has extra employment rights and responsibilities that don’t apply to workers who aren’t employees. Employees are entitled to statutory sick pay, maternity, paternity and adoption leave, and shared parental leave. They have protection against unfair dismissal and the right to request flexible working and to receive statutory redundancy payments.
Engage is a phrase used by employers to take on either sub-contractors or workers. They are usually engaged for work for a fixed period.
HMRC stands for Her Majesty’s Revenue and Customs. It is the Government body which collects tax in the UK.
Insure the Chain
This phrase means ensuring that everyone on a construction site has the required insurance. It is the contractor’s responsibility to ensure all the sub-contractors have the required insurance and that the insurance is valid for the duration of the project. Engaging with a company like Indigo CIS means that contractors can pass on the administrative burden of keeping track of the insurance documents to Indigo, as we insure all sub-contractors who use our services.
IR35 is tax legislation which applies to off-payroll workers who are paid through an intermediary. That intermediary could either be a limited company or a personal services company. IR35 is trying to combat tax avoidance by what the HMRC calls “disguised workers”. They are workers who would be deemed as employees if they were not being paid through an intermediary and can avoid paying national insurance payments by taking dividends from a limited company. There have been cases of people having to pay back thousands of pounds of back tax after a tribunal deemed that their earnings should have been covered by IR35.
Labour-only contractors are additional employees who can be brought onto the site if you are short staffed or need extra temporary workers to finish a job. They are not guaranteed work and aren’t employed on a project basis. They are still subject to the same health and safety regulations as a sub-contractor. Labour-only workers will use a contractors’ tools and materials and will work under the supervision of a contractor. Sub-contractors will work on a project and will work independently; they will also invoice for payment.
An employer has certain obligations to their employees under UK employment law. It must pay the employee the agreed amount, provide them with work, provide four weeks of paid holiday leave, observe health and safety laws and information about their rights and have reasonable opportunity to have any complaints about their employment heard.
Payroll is the mechanism by which wages are paid to employees, sub-contractors or contractors for their work or projects. Companies can have internal payroll, run through payroll specific software, or they can outsource to an external company such as FRS Payroll . The external company calculates the monies due to a worker or sub-contractor and will deduct tax, national insurance and any other deductions according to their employment status.
PPE stands for Personal Protective Equipment, which protects workers from health or safety risks while at work.
HMRC can reclassify a self-employed sub-contractor to an employee if the sub-contractor can’t prove things like they buy their equipment and safety clothing, that they employ other sub-contractors, or that they work for more than one contractor. HMRC would reclassify the person as employed as they would then be able to collect their VAT through PAYE, rather than through self-assessment or CIS (depending on which one the sub-contractor is using to pay tax). This would also have implications for the contractor employing the sub-contractor, as they would have more responsibilities for that employee, such as holiday pay and pension contributions, as well as the administrative burden of the PAYE.
A text or physical note of what a sub-contractor will receive in their pay and what deductions have been made for tax etc.
Being non-compliant for CIS has many risks, including the possibility of HMRC fining the contractor and sub-contractor for late submission of CIS, fines for the wrong employment status for sub-contractors, a full HMRC investigation and demands for payment of back taxes. Ignorance or misunderstanding of CIS is not an excuse for non-compliance and HMRC regularly checks CIS submissions.
Status is what is meant by a person’s employment status – for example, employed, self-employed, or worker status. A person’s employment status helps determine their rights and the employer’s responsibilities towards them. It also defines their tax status and how they should pay their tax.
A sub-contractor is a self-employed construction worker, who works on building projects on an ad hoc basis and is used by a construction contractor to finish a project. A sub-contractor can choose a CIS Commercial Contractor such as Indigo CIS to help them fulfil their tax and insurance requirements, allowing them to earn money on site.
Tax is a mandatory financial levy paid by people to the Government to fund public services such as schools, transport and the public infrastructure. The type of tax you pay depends on your employment status.
A tribunal is a panel of people which hears evidence from witnesses and decides on cases brought by employees who feel they have been discriminated against. The chair of the tribunal panel is usually legally qualified, while the rest of the panel will have areas of expertise in chosen areas.
A Unique Taxpayer Reference, or UTR number, will be issued to you if you registered to fill in a self-assessment tax form and are deemed as a self-employed person by HMRC. It is a unique 10-digit code.
In the UK, under the Right to Work Act, employers are legally required to check whether a person has the right to work in the UK before employing them. They must do this by checking the validity of personal identification documents and having them verified, either in person or by a software package, such as Indigo Group’s Credas. You can receive a civil penalty if you have not carried out the right checks and employ an illegal worker.
A worker is generally someone who has a contract (which does not have to be written) or another arrangement to do work for a reward. The reward can either be for money or a benefit in kind. They must turn up for work even if they don’t want to and they only have a limited right to send someone else to do the work (to sub-contract the work). Workers are entitled to the national minimum wage, protection against unlawful deductions from wages, a statutory level of paid holiday and rest breaks. They should not work more than 48 hours on average per week and have protection against unlawful discrimination.
Working Regularly and Diligently
Any construction contracts have a clause where they must “work regularly and diligently”, which translates as they must hit time targets. These targets can either be deemed as a start date, a completion date or hitting certain target dates for certain building milestones to be completed. Sub-contractors may also have similar contracts in place with contractors to ensure that a building project is completed on time.