The effect of tax policy on the property sector
The property sector has been seen as a cash cow by both HMRC and the Government for some time now. Over the past few years we have seen many attacks to extract more taxes, including:
- Reclassifying disposals as liable to income tax rather than capital gains tax;
- Denying principal private residence relief;
- The campaign for identifying previously undeclared property disposals;
- ATED – to collect additional tax for holding residential property within a company wrapper;
- SDLT – An increase in SDLT for companies and individuals purchasing additional residential property;
- The restriction of tax relief for buy-to-let landlords;
- The extension of capital gains tax to include non-resident owners of UK land and property.
While in isolation these measures all look sensible and in support of stated objectives, they are often introduced or extended, before the effect of previous interventions pan out. This casts doubt over the stated objectives and gives the impression that this is much more about increasing tax-take than addressing problems in the housing market.
Construction Industry Scheme (CIS)
We have seen increased activity by HMRC and several different attacks are underway in relation to CIS. The first one to discuss is the review of arrangements between connected parties.
CIS is sometimes overlooked in relation to transactions between connected companies and individuals and HMRC see this as an opportunity to recover additional taxes, interest and penalties.
In circumstances where an individual or company engages a connected company or individual to undertake work that is classified as being within the scope of the scheme, CIS usually applies in the same way as if engaging an unconnected business. Failure to operate CIS correctly on payments to connected businesses can lead to a substantial settlement.
In all cases, the paying entity should consider:
- Is the work within the scope of CIS?
- Am I classed as either a contractor or a deemed contractor under the scheme?
- If the answer to both of these questions is yes then CIS should be applied.
The recipient should also consider:
- Do I need to register with HMRC as a subcontractor?
- Am I able to apply for gross payment status to reduce the cash flow impact of CIS?
Construction Industry Scheme (CIS) - tax status of workers
HMRC have launched a new campaign which includes writing to all contractors that make labour only payments to subcontractors. These instruct the contractor to review the status of the worker to see whether they are actually an employee rather than a self-employed subcontractor.
“Status” has been a hot topic across all sectors for a while, but this is a concerted attack on what is seen as widespread non-compliance within the property sector. HMRC believe that a large proportion of workers in the sector should be subject to PAYE rather than CIS and are expecting a significant number of workers to be re-classified as employees.
HMRC believe that it is common for contractors to simply apply CIS rather than first consider whether they are actually caught for PAYE as an employee. For those that are genuinely self-employed at the start, there is also the issue of the relationship morphing into employment over time.
If you have received a letter, the following urgent action is required:
- DO NOT IGNORE THE LETTER;
- Review the status of workers (the HMRC tool will help);
- Take appropriate action based on the outcome of the review;
- DO NOT REGARD THIS AS AN AMNESTY (HMRC have not said that reclassifying as PAYE from now on will mean they ignore the past);
- Despite HMRC’s letter saying they will contact you, you should pre-empt this by letting them know you have undertaken the review and providing them with the outcome.
Self-employed but still liable to PAYE
In the previous article we covered the status of workers. Sadly, determining that the worker is self-employed may not be the end of the story because HMRC have another string to their bow in the form of the “agency legislation”. This is designed to ensure that labour supplied to a client is still subject to PAYE.
There are three aspects to this legislation and where all three apply then PAYE must be applied to payments to the self-employed individual.
- A provision of labour to a third party where PAYE is not already being applied; and
- Personal service; and
- Supervision OR direction OR control (SDC) are capable of being exercised on the worker by anyone.
This was originally seen as only applying in limited circumstances, but HMRC have changed their guidance. This worrying development means that HMRC are now arguing that the rules can potentially affect almost anyone that is not already being subjected to PAYE at present.
To explain, HMRC are arguing that test 1 is satisfied by anyone working on a contract for a client of the organisation that has engaged them, regardless of whether that client has seen them, or even knows who they are. Even more extraordinarily, HMRC argue that test 2 is satisfied if the work is done by a person, any person including a substitute.
If the interpretation of HMRC is correct then these two tests have no purpose and are satisfied in almost all circumstances for those working in the property sector. Consequently, test 3 is the only one that needs to be considered and if SDC are capable of exercise then PAYE applies.
Again, we have seen HMRC trying to push the SDC definitions beyond the limit by using the fact that there only needs to be a capability of one of these applying to satisfy the test. They do not have to show SDC has been applied. Engaging an experienced worker that can be trusted to do the work without involvement from anyone else is insufficient to demonstrate that SDC do not apply. HMRC have been testing this with theoretical questions along the lines of:
- If you engaged a new unknown subcontractor, would you check their work for quality?
- Do you mix more experienced and less experienced workers so they can learn from each other?
- Where you have more than one person on a job, who is in charge?
Businesses are also guilty of undermining their defence by using language such as supervisor and team leader. It is difficult to persuade HMRC that supervision is not capable of being exercised when you have a supervisor!
Other risks of engaging workers in the property sector
The previous sections have focussed on tax risks and while this one briefly covers another tax risk, the remainder of this section will focus on the increasing risk of employment right claims.
Materials and Plant
The last tax risk to discuss is materials supplied by subcontractors. HMRC think these costs are often exaggerated or have been charged when no materials have actually been supplied.
A contractor must apply CIS to the whole payment unless it is satisfied that the cost of the materials is genuine and reasonable for the materials supplied. Failure to do this can leave the contractor liable for the tax that should have been deducted, together with interest and penalties.
There is a particular risk with scaffolding companies because they are only entitled to deduct actual scaffold hire costs that they themselves incur. No deduction is available for them supplying their own scaffolding where the contract also includes erection of the scaffold because their own scaffold is regarded as plant rather than materials and there is no deduction for plant. Receipts should therefore be obtained to support any materials deduction, or CIS applied to the full payment.
Moving away from taxes, there is another major threat to businesses in the property sector in the form of entitlement to employment rights. Business owners need to understand that this test differs from the tax status test and it is not uncommon for self-employed workers to be entitled to employment rights while other self-employed workers are subject to PAYE, but not entitled to any employment rights.
Several high profile cases, such as Uber, are of concern, but the main risks to those in the property sector are Pimlico Plumbers and Sash Window Workshop. Both of these have found that the individuals are in fact “workers” and entitled to some employment rights even though they may have been paid a higher rate to reflect the absence of employment rights in their contracts.
As with all of the issues covered by in this series, it is crucial that businesses have adequate paperwork, procedures and working practices in place to provide maximum protection from any attacks or claims they are subjected to.