How to become an IT Contractor - Becoming an IT Contractor

Specialist contractor accountants, Danbro, are advising recruitment agencies to be tentative with the way they manage their construction industry scheme (CIS) contractors.

The Construction Industry Scheme (CIS) sets out the rules on how payments to subcontractors for construction work must be handled by contractors in the construction industry. The majority of contractors under the CIS scheme are operating as self-employed, where the amount of tax deducted and paid to HMRC is just 20% of their gross payment if registered and 30% otherwise.

The main issue on which the Government aims to clamp down, is the fact that many of these self-employed CIS workers should be classified as employees, with PAYE and NICs being due on all the payments they receive.

The government has announced that they may tackle this issue of false self-employment in the next budget, with the construction industry being hailed as the primary area for concern.

The main benefit for the worker operating as self-employed is primarily driven by the differences in tax and NICs, which are as follows;

- Employers NICs is paid by employees but not on payments to those engaged on a self-employed basis.

- Self-employed workers pay NICs at a lower rate than employed; and

- The rules on expenses that can be deducted from gross income are more generous than those applied to employment income.

Due to these tax differences, many CIS construction contractors have a financial incentive to operate as self-employed via service providers that heavily promote their self-employed business model. At present many agencies outsource the administrative burden of managing and making the necessary CIS deductions to service providers. They simply pay over a gross amount, relying on the service provider to correctly deduct and pay the CIS tax due to HMRC and then the net amount to the contractor.
However, the agency has to be aware that:

1. In HMRC's eyes, the service provider is merely an administrator or nominee (just a vessel for payment to be made to the contractor). The ultimate responsibility for ascertaining the CIS status (0, 20% or 30% of gross) of each contractor, making the correct CIS deductions and sending payment to HMRC is still with the agency. Thus any tax shortfalls that need to be paid can fall back on the agency.

2. HMRC have made it clear that they do not like the self-employment model that is being promoted by these providers. The main reason is because many of the CIS contractors running through such schemes can actually be classified as employees and thus have avoided paying the correct amount of tax and NICs.

Following on from this, it is likely that if the new proposed legislation (which will classify whether a worker is employed or self-employed) comes into effect in April 2010, many service providers promoting their self-employed solution will have to re-assess their business model.

Furthermore, if agencies have relied on such service providers to administer the CIS deductions and payments to HMRC for their contractors, and the service provider has failed to make these payments, then the agency would be liable for any tax shortfalls, which could be a considerable amount.