What is under control and not under control at the same time? That’s not some Gollum-like riddle and you don’t win a magic ring for getting the answer right. But it’s a conundrum that recruitment agencies and umbrella companies need to become more familiar with.
Put simply, there’s a hidden risk for recruiters with workers in the UK Construction Industry Scheme (CIS) if those workers are also given insurance as a benefit. It’s an issue that could invalidate insurance cover or put recruiters on the hook for unpaid tax.
And like our riddle above, it’s about control and how two things that both can’t be true are often claimed to be true, with potentially damaging consequences.
What’s the issue?
Let’s take Fred, a self-employed sub-contractor who is placed with a construction client by a recruitment business. He’s paid by an umbrella company that, in this instance, essentially acts as a payroll facilitator. As a genuinely self-employed sub-contractor, Fred is paid under CIS, and deductions are handled by the CIS umbrella company payroll provider.
So far, so straightforward. But now we start getting into murkier waters. The umbrella company offers insurance cover to Fred as a benefit. It’s basically the same cover and in most cases is the same insurance policy they provide their own employed umbrella workers with, but with an extension to cover self-employed sub-contractors or CIS workers. Fred’s a sole trader and doesn’t have insurance cover of his own, so is grateful for the perk. The recruiter sees documentation – or has written or verbal confirmation – showing that CIS workers like Fred are covered by the umbrella company’s policy and assumes everything’s fine.
Spoiler alert: everything’s not fine.
What’s the risk?
The risk arises from Fred’s employment status. Now, Fred works via a recruitment agency. To be engaged via CIS, Agency Legislation (s44 ITEPA, 2003) must be tested first to show that Fred is not subject to (or the right of) Supervision, Direction and Control (SDC) by anybody in the labour supply chain. If it is shown that Fred is not under the SDC, he can be classed as self-employed for tax and is therefore eligible to be paid via CIS.
At the same time, Fred has public liability and/or professional indemnity insurance provided by the umbrella company. The problem is that insurance cover provided by somebody else is almost always going to be operative where the worker is under the supervision, direction or control of either the insurance provider or somebody else in the supply chain. Some insurance wordings even explicitly call this out.
When a claim is made involving a worker on-site, one of the first questions asked by the insurer is “who had control over the worker?”. This helps determine where liability sits and whose insurance may respond. For example, if the client had control over the worker, the supply chain may look to pass the claim to the client. While this may be explicitly covered in the policy wording, insurers will generally assume that parties within the supply chain exercised some measure of control over the worker’s activities – or the insurance may not react.
So now we have an answer to our riddle:
Q: What is under control and not under control at the same time?
A: A self-employed CIS contractor with umbrella company insurance.
What’s the potential impact?
The most obvious potential impact is that the insurer might simply refuse to pay up. We have seen examples of this.
Fred makes a mistake at work and the end client makes a claim against the recruiter. The recruiter has been told by the umbrella company that its insurance covers the worker. If the claim sum is small – say £15,000 – the insurer may not scrutinise it too much and pay up anyway. Alternatively, the recruiter and umbrella may cover the claim themselves.
But if the sum is larger – say £200,000 – the insurer is going to do a lot more digging before settling the claim. And one of the first things it will look at is who had control over the worker insofar as making them responsible for the workers’ actions.
That’s where things start coming apart. Fred has to be under some sort of control for the insurance to be valid, but claims to be under no control for tax purposes. At this point, the insurer may start asking some very difficult questions.
Where do recruiters come in?
Whether the insurer pays out or not, by making a claim against the policy, recruiters and umbrellas could be storing up trouble.
That trouble is likely to come in the form of an HMRC investigation. HMRC may note the insurance claim and put two and two together. If the claim is being made on the basis of assumed control, then HMRC may question if the claim of self-employment, based on the SDC test, is genuine.
Under Agency Legislation (s44 ITEPA, 2003), that could put recruiters on the hook for unpaid PAYE and Employer’s National Insurance. If Fred is subject to control in his work, then HMRC may claim that he is an employee for tax purposes. And they now have documentation – an insurance claim – which says he is.
And of course, HMRC might go on to reevaluate the employment status of everyone else placed by the recruiter into that construction client. By claiming a self-employed worker is under a degree of control for insurance purposes, you could be opening up a barn door for HMRC. It could all add up to a sizeable bill for unpaid tax and NI.
What can recruiters do about it?
None of this was such an issue five or six years ago, when many more self-employed contractors operated as limited companies. With limited companies, everyone recognises the need for business insurance, which is reflected in contracts.
But as the tax advantages of limited company status have been whittled away, sole traders are becoming much more common in construction labour supply chains. It’s been convenient for the industry to ignore this development or assume umbrella insurance covers sole traders but, as we’ve seen, that may not be the case. And it could cause complications with employment status for tax purposes.
The answer is to treat CIS workers as genuinely self-employed but insist they have the right independent insurance in place. That creates an extra administrative burden for recruitment agencies and an extra cost for workers. But in this case it’s worth it. Thankfully, this riddle has a simple solution.
Expert support that makes a difference
Navigating legislation, insurance and compliance can be challenging. Kingsbridge offers tailored support, including expert guidance on compliance strategies, risk mitigation and insurance solutions. Their team is dedicated to helping recruiters execute business operations compliantly – and with confidence.
If you’re still unsure or are looking for an expert to talk to, Kingsbridge can offer guidance on compliance strategies, and risk mitigation.
Speak to the Kingsbridge team – they’ll be more than happy to answer your questions.
Disclaimer: Any information in this article should be treated as general guidance. Always seek expert advice regarding your business’ specific circumstances.
