Practical Guide to Subcontracting

A PRACTICAL GUIDE TO SUB-CONTRACTING

Detail advice on 714 and 715 tax exemption certificates and Payroll Procedures

By Bob Jones, FCCA, FCIS, MIMC of Building Management Consultancy Ltd.

International Thomson Business Publishing London NW3 3TP

Published 1986

This edition published in the Taylor & Francis e-Library, 2004. © International Thomson Business Publishing

ISBN 0-203-21511-7 Master e-book ISBN

ISBN 0-203-27149-1 (Adobe eReader Format) ISBN 1 85032 012 8 (Print Edition) A “Building & Construction” Book

Contents Page Introduction

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Chapter 1: Employment rules and regulations

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Chapter 2: Sub-Contractors tax deduction scheme

12

Chapter 3: Sub-Contractors procedures

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Chapter 4: Payroll preparation

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Chapter 5: Costing direct labour

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INTRODUCTION With modern building procedures many builders will find themselves operating as sub-contractors at one time or another. Also many sub-contractors will find themselves employing operatives directly. A thorough knowledge of the employment regulations relating to direct labour, labour only sub-contracting and/or supply and fix sub-contracting is vital in order to keep within the law. If the rules and regulations relating to direct employment or sub-contracting under the Inland Revenue Tax Exemption Certification regulations (714 and 715 exemption certificates) are not adhered to it could result in severe penalties—stiff fines or imprisonment. Indeed, over the past few years the Inland Revenue has been cracking down heavily on tax avoidance within the building industry. The laws relating to sub-contracting are complex and very detailed, and they require that special weekly and annual returns are made to the Inland Revenue. Unlike any other Government body, the Inland Revenue is entitled to visit a contractor’s premises at any time unannounced, to ensure that the contractor is carrying out correctly the requirements of the tax deduction scheme. The chapters contained in this book will guide you through the complex legislation, and if followed should keep you the right side of the law. The procedures for engaging a sub-contractor are fully detailed with examples of certifying documents, sub-contractors certificates and record sheets.

EMPLOYMENT RULES AND REGULATIONS

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Chapter 1 EMPLOYMENT RULES AND REGULATIONS All builders, even most one-man builders at times, employ direct Labour, “Labour-only sub-contractors” and/or “Supply-and-fix sub-contractors”, and there are rules and regulations to be followed by a builder for each of these categories which could result in severe penalties if ignored. The rules and regulations regarding sub-contractors are provided in Chapter 2. The Direct Labour rules and regulations include: PAYE National Insurance The Working Rule Agreement for the building industry Apprenticeship Statutory Sick Pay Working Rule Sick Pay Redundancy Dismissal notices The construction industry holiday pay scheme.

PAYE The following are the principal books and forms issued free of charge by local Inland Revenue Offices: P.8 (1986) pages 1 to 8 on plastic sheets (there are two pages No. 2). These cards set out how the system operates P.7, “The employer’s guide to PAYE” Taxable Pay Tables B to D Free Pay Table (Table A) P.11 the “Deduction Working Sheet” (see Chapter 4) P.45, the form which should be brought with him by a new employee, or given to an employee by the builder when he leaves P.46, the form to be sent to the Inland Revenue in respect of an employee who has not previously been taxed (e.g. school leaver) or who is unable to produce a P.45

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EMPLOYMENT RULES AND REGULATIONS

P.11D, the form to be completed at the end of March of each year by all directors (with more than a 5% shareholding) and members of staff earnings more than £8,500 per annum, requiring particulars of benefits they have received, such as motor cars, petrol, accommodation, etc. An example of PAYE calculations is given in Chapter 4 and in Figs 1 to 9.

National Insurance: Class A There are various classes of National Insurance. Class A is the standard:

Contract-out Employment Employees’ contributions Earnings below £41 per week Earnings between £41 and £69.99 per week Earnings between £70 and £104.99 per week Earnings of £105 per week and over

Nil 5% of £41 plus 3% of balance 7% of £41 plus 5% of balance 9% of £41 plus 7% of earnings between £41 and £305

Employers’ contributions Earnings below £41 per week Earnings between £41 and £69.99 per week Earnings between £70 and £104.99 per week Earnings between £105 per week and £154.99 per week Earnings between £155 and £305 per week Earnings over £305 per week

Nil 5% of £41 plus 1.2% of balance 7% of £41 plus 3.2% of balance 9% of £41 plus 5.2% of balance 10.45% of £41 plus 6.65% of balance 10.45% of £41 plus 6.65% of earnings between £41 and £305 per week plus 10.45% of balance

EMPLOYMENT RULES AND REGULATIONS

9

Non-contracted Out Employment Employee Employer Contributions Contributions Nil Nil 5% 5% 7% 7% 9% 9% 9% 10.45% 9% of 10.45% of all £305 earnings Liability for National Insurance contributions commences at the age of 16 for both employer and employee. Employees contributions cease at the age of 65 for men and 60 for women, but the employer’s contributions continue. Weekly Earnings* Below £41.00 £41.00–£69.99 £70.00–£104.99 £105.00–£154.99 £155.00–£305.00 Over £305

Class 2 Class 2 contributions are payable by the self-employed at the rate of £4.05 per week, if their earnings, exceed £2,250 Class 2 also requires the selfemployed to pay Class 4 contributions and entitles the payer to pension, sickness and all other benefits except—unemployment and industrial injuries. Class 3 Class 3 contributions at £3.95 per week are a voluntary augmentation by Class 2 contributors who wish to embrace the benefits of unemployment and industrial injuries. Class 4 Class 4 contributions are payable by the self-employed on profits chargeable to income tax under Schedule D and at the rate of 6.3% of those profits between £4,750 and £15,860 (Maximum £699.93).

National Insurance Guides and Annual Returns The “Employers Guide to National Insurance Contributions”, NP.15, is obtainable from local offices of the Department of Social Security. A return of National Insurance conbributions is required by the Inland Revenue after the end of March of each year.

Monthly Payments to be made by the builder Tax collectors provide the builder with books of forms P.30CB(Z) which the

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EMPLOYMENT RULES AND REGULATIONS

builder must complete and send with a cheque each month; which should show separately how much relates to PAYE and how much to National Insurance conbributions (Employer’s plus employees); after deducting from the total of the above any Statutory Sick Payments made. The Working Rule Agreement The Working Rule Agreement (about 190 pages) is published about July of each year by the National Joint Council for the Building Industry. It can be obtained from the Building Employers Confederation, Publications Department, Federation House, 2,309/11 Coventry Road, Sheldon, Birmingham B26 3PL82. It contains details of the entitlements of both the employee and employer. A resume of the Working Rules and how they operate, is contained in the Building Trades Journal publication “A Practical Guide to Estimating Daywork Rates 1988/89” (see booklist at back of book for details). “Statutory Sick Pay” and “Working Rule Sick Pay” “Statutory Sick Pay” must be distinguished from “Working Rule Sick Pay”. Statutory Sick Pay is payable for up to 28 weeks by employers on behalf of the Government and is recoverable from Government as a deduction from the amount due to the Government for PAYE and National Insurance contributions. Working Rule Sick Pay is additional to Statutory Sick Pay and payable by and borne as a cost by the builder. The maximum is 8 weeks. Both “Statutory Sick Pay” and “Working Rule Sick Pay” are payable after three “Waiting days” i.e. normal working days (Qualifying days in the construction industry are Mondays to Fridays inclusive). Statutory Sick Pay is NOT payable to employees who are 65 years of age and who have contracted to work for less than 13 weeks—or to those under 18 years of age. The amount of Statutory Sick Pay payable per week is as follows: Gross earnings: Less than £41 ................................................................. Nil £41.00–£79.49 ............................................................ £34.25 £79.50 or more ........................................................... £49.20 *After 28 weeks the Nat. Ins. sickness benefits apply. The amount of Working Rule Sick Pay is £47.05 per week. Record sheets must be maintained, separately for each employee showing: Name and address of the employee Employee’s National Insurance Number *£31.30 single; £19.40 adult dependent. If over pension age, £39.45 single; £23.65 adult; £8.40 each dependent child.

EMPLOYMENT RULES AND REGULATIONS

11

The employers account number with the National Authorities The dates of incapacity Dates and details of “Qualifying days” Details of payments made Evidence of sickness, such as medical certificates Suitable forms for recording Statutory Sick Pay are shown in the “Employer’s Guide to National Insurance” referred to earlier in this chapter. Redundancy Redundancy money is payable after two years continuous service, if the employment was for at least 16 hours per week, but it is not payable if a reasonable offer of alternative employment is refused. The rates of redundancy payments are: aged 18–21: Half a week’s pay for each year of service aged 22–40: One week’s pay for each year of service aged 41–64: One and a half week’s wages for each year of service. (women 41–59). For purposes of redundancy payment calculations, a week’s pay is limited to £164 with the maximum payment possible set at £4,920. Only employers with less than ten employees can now claim from Government a rebate of 35% of any redundancy payment they may make within the rules of the redundancy scheme. Dismissal Notices Employees are entitled to one week’s notice after one month of service, two week’s notice after two years of service plus an additional week’s notice for each further year of service, up to a maximum of 12 weeks notice. The Building and Civil Engineering Holidays Scheme The Holiday Pay Scheme is operated by The Building and Civil Engineering Holidays Scheme Management Ltd., Manor Royal, Crawley, West Sussex RH10 2QP from which stamps may be purchased and cards obtained. The stamp includes a Death Benefit, as well as pay for annual holidays. The death benefit is £6,500 and an additional £6,500 is payable if death is due to an accident at work, or whilst travelling to or from work. Membership of the “Holiday Pay Scheme” is an entitlement to a building worker under the Working Rule Agreement and he should have his holiday pay card stamped for every week of normal working, and take away his card on leaving his employment (To hand to his next employer). An employee is NOT entitled to a holiday pay stamp for any week during which he is absent from work for more than one normal working day without good cause, e.g. sickness or injury.

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Chapter 2 SUB-CONTRACTORS TAX DEDUCTION SCHEME Virtually every main contractor is also a sub-contractor under the Tax Deduction Scheme. Anyone employed in the construction industry is subject to either the Tax Deduction Scheme or PAYE, one or the other. This includes “Labour-only sub-contractors”, “Supply-and-fix sub-contractors” and any builder who supplies labour only, or labour and materials, to another builder. A builder is a “Main contactor”, but he becomes a sub-contractor when working for another main contractor. On such occasions he must present his Tax Certificate to that other main contractor. Therefore a main contractor must present his Tax Certificate to the following who are main contractors within the Tax Deduction Scheme: Local Authority Department of Government Quasi-Government organisation such as the Nationalised Industries Housing Association Commercial or industrial organisation which carriers out building work in excess of £250,000 per annum. In addition there are other listed in the Inland Revenue’s booklet on the Tax Deduction Scheme, I.R.14/15, which all main contractors and sub-contractors should have. The rate of tax deductions Unless a sub-contractor, or main contractor, no matter how large and seemingly important, can present a Tax Certificate, in respect of “Labouronly” and/or “Supply and fix” work carried out, tax must be deducted at the rate of 25% from every payment made (but not the materials used)—(27% until 31st October, 1988). Failure to operate the Tax Deduction Scheme can result in severe penalties. The penalties for failing to operate properly the Tax Deduction Scheme include tax which the builder should have deducted, but failed to do so, and which must be paid by him to the Inland Revenue, plus loss of the builder’s own tax certificate (Which means he could no longer work for any main contractor operating within the scheme or if he did he would have tax deducted from the payments made to him).

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SUB-CONTRACTORS TAX DEDUCTION SCHEME

When a Tax Certificate need not be produced to a client A Tax Certificate need not be produced to a client by a main contractor or a sub-contractor when that client is either a private householder or a business concern which is not a main contractor, i.e. which carries within its own business building work amounting to less than £250,000 per annum.

Types of Tax Certificate There are four kinds of Tax Certificate issued by the Inland Revenue: 714I … for the individual sub-contractor 714P … issued separately to each partner in a partnership 714S … issued to school leavers, or to those newly setting up a business 714C … issued to approved Limited Companies.

Obtaining a Tax Deduction Certificate To obtain a Tax Deduction Certificate an application should be made to the Local Inland Revenue Office but the applicant must have a good tax record, to the satisfaction of the Inland Revenue. (Usually for the past three years). A new company may succeed at first in getting only a 7141 certificate, based on the past tax records of the Directors (instead of a 714C certificate, which is much to be preferred).

Forms required by a sub-contractor to operate the scheme Holders of Tax Certificates 714I, 714P and 714S also need forms 715. Forms 715 are issued in small quantities by the Inland Revenue to holders of Certificates 714I, 714P and 714S. A form 715 must be given by a subcontractor to a main contractor each time a payment is made to that subcontractor. A main contractor should refuse to make any payment to a sub-contractor without deducting tax, unless a form 715 is produced by that sub-contractor. It could be the case that although a sub-contractor has a valid Tax Certificate, the Inland Revenue has refused to issue to him any further forms 715 because of some failures in his tax dealings. Holders of Tax Certificates

714S also need forms 715.

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SUB-CONTRACTORS TAX DEDUCTION SCHEME

Forms 739 and their use with forms 715 Forms 739 are to be sent each week, along with all completed forms 715 received, to The Inland Revenue Construction Industry Processing Centre, Freepost, LIVERPOOL L69 4AB.

Other necessary forms Other necessary forms obtainable from the Inland Revenue are: SC11. The forms on which tax deductions are recorded. There must be a separate SC11 for each sub-contractor from whom tax has been deducted. The forms SC11 are to be despatched to the Inland Revenue at the end of each tax year (after 31st March) SC60. The receipt given by a builder to a sub-contractor for tax deducted SC35. The annual return (after 31st March of each year) to be sent to the Inland Revenue, showing details of all tax deductions made during the year 704 (Part 1). The annual return (to 31st March of each year) to be sent to the Inland Revenue detailing all payments made during the year to 714I, 714P and 714S holders 704 (Part 2) is seldom used. It is an annual return of “Labour-only” payments made to Limited Companies.

The conditions of issue of a 714S Certificate The 714S certificate, issued to school leavers and those starting up a building or sub-contracting business afresh, require that: earnings free of tax deduction must not exceed £150 per week and that tax is to be deducted on earnings higher than £150.

Holders of 714C Certificates 714C Tax Certificates can be issued to both main contractors and subcontractors who are Limited Companies. The holders do not need to follow the 715 procedures described above and also do not need to present their tax certificates to clients.

The Certifying Document Most well-established builders, including the national contractors and subcontractors, use “Certifying Document” procedures. Certifying documents can be issued only with Inland Revenue authority, i.e. the issue by the latter of

SUB-CONTRACTORS TAX DEDUCTION SCHEME

15

a Tax Deduction Certificate 714C. They must be in the form and contain the information prescribed by the Inland Revenue, and signed by a responsible official of the company, otherwise they will be invalid. They must also contain the information shown in Fig. 3 and can be photo-copied, stencilled or printed (dependent on the size of the organisation and the number of times they are required in a year). The cost of materials are not to be subject to tax deduction. When tax must be deducted from a payment, the sub-contractor will claim while the main contractor must decide the proportion within the payment due which relates to materials. Materials are not subject to deduction of tax. Assuming 15% of the value relates to general overheads, and 5% to profit, the apportionment might be as follows:

Fig. 1

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Chapter 3 SUB-CONTRACTORS PROCEDURES There are four important reasons why Sub-Contractors records should be kept distinct in the accounts system from other records. 1) The law in respect of the Tax Deduction Scheme requires special weekly and annual returns to the Inland Revenue. It is easier to prepare those returns is sub-contractors records are kept separate. 2) An Inland Revenue Inspector is entitled by law to visit a Contractor’s premises, to ensure that he is carrying out correctly the requirements of the Tax Deduction Scheme. It is easier for both the Inspector and the Contractor if sub-contractors records are kept separate from other records. 3) If sub-contractors produce invoices which are then processed through the Purchases Invoices system, the requirements of the sub-contractors legislation might be overlooked in respect of those invoices. This could lead to a contractor failing to deduct tax, and being required to reimburse the Inland Revenue or making wrong returns to the Inland Revenue. 4) There is special VAT legislation, applicable only to sub-contractors in the construction industry, which provides that they are not liable for VAT until they are paid. To obtain that privilege, a sub-contractor must not invoice the main contractor, but must be paid on a Sub-contractors Certificate issued by the main contractor. There is another important reason why sub-contractors records should be kept separate. This is to obtain prompt and reliable cost/value comparisons of contracts, and to get out clients daywork accounts quickly. The cost and value of “own work” must be kept separate in the books from the cost and value of “Supply and fix sub-contractors” work (this does not apply to “Labour-onlycontractors”).

The Procedures Action on contemplating employing a sub-contractor.

SUB-CONTRACTORS PROCEDURES

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ask to see his Tax Certificate No. 714, and if it is produced check that it is current, and that the photograph on the certificates resembles the presenter see if the holder has Forms 715 provided by the Inland Revenue which bear his name and the number of his 714 Certificate if he has no Tax Certificate, point out the necessity to deduct tax at 25% from the gross payments to be made to him, and obtain his agreement (27% until 31st October, 1988) consider, especially in the case of a “Supply and fix” sub-contractor, that absence of a Tax Certificate, and the consequent deduction of tax, might place the sub-contractor in financial difficulties regarding the purchase of materials, which could have repercussions on your business.

Upon engaging a sub-contractor, check and record the Tax Certificate. Check that the photograph on the certificate is that of the sub-contractor, the Tax Certificate is not out-of-date, that the holder has Forms 715 (although not entitled to do this, contractors often hold the Forms 715 on behalf of the sub-contractor), and finally enter particulars of the Tax Certificate in a Tax Certificate Register, and return the certificate to its owner.

The design and purposes of a Tax Certificate Register: Fig. 2 shows a Tax Certificate Register, which can be made on suitably ruled paper kept in a special folder. A main purpose of the Tax Certificate Register is to make regular checks as to when the date of a Tax Certificate is due to expire. A Contractor might even consider it advisable to give a long notice (say, six months) to a Sub-contractor that his Tax Certificate is coming up to its expiry date, and that steps should be taken for its renewal.

Design and uses of Sub-contractors Certificates: A form of Sub-contractors Certificate is shown Fig. 4. Similar suitable forms can be obtained from the Building Employers Confederation, Publications Department, 2309/11 Coventry Road, Sheldon, Birmingham, B26 3PL82.

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SUB-CONTRACTORS PROCEDURES

The form as designed is intended to meet the legal requirements of both VAT and the Tax Deduction Scheme. Standard forms of Sub-contractors Certificate are usually in quadruplicate: top copy goes to the sub-contractor for his retention duplicate is provided to the sub-contractor but to be signed and returned by him to the Contractor triplicate is the surveyor’s copy quadruplicate becomes the accounts office copy. However, in small businesses a set of three might be sufficient and it is useful if each copy in a set is of a different colour.

Preparing a Sub-contractors Certificate: One set of Sub-contractors Certificates should relate to one job/contract. If there is an entitlement by a sub-contractor to payment for more than one job/contract, prepare a separate Sub-contractors Certificate for each. Enter on a set, using carbons, the name and address of the subcontractor, and the date. If a standard form is used (not forms specially printed with your name, address, etc.) rubber stamp your name and address on each copy: also rubber stamp your VAT number. Enter the name and number of the contract to which the Sub-contractors Certificate relates and enter the gross valuation to-date, less retention and discount, and the Net Balance. You will also need to enter the previous gross valuation, retention, discount, and net balance. This line is obtained from the top line of the previous Sub-contractors Certificate. Show the difference between the current and past valuations, which will represent the “Net balance now due”. *Deduct income tax at the rate of 25% from the “Net balance now due” if the sub-contractor has no Tax Certificate. In making this calculation, see Chapter 2, “Sub-contractors Tax Deduction Scheme: Main Principles”, regarding adjustments for materials supplied by the sub-contractor. Add VAT to the “Balance now due”, i.e. before tax, if any, is deducted. This is subject to the sub-contractor claiming he is VAT registered, and providing his VAT number. Deduct any Contras: these are sums it is maintained are owned to the main contractor by the subcontractor, e.g. for goods, plant or services supplied to him, damage he or his employees caused, or the cost of making good his work. *27% until 31st October, 1988.

SUB-CONTRACTORS PROCEDURES

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Sub-contractors Book: A sub-contractors Book, illustrated as Fig. 5, should have entries for: Column 1. The date of the Sub-contractors Certificate Column 2. If the sub-contractor holds a valid current Tax Certificate 714I, 714P, 714S, 714C, or whether there is no Tax Certificate (N/C) Column 3. Name of the Sub-contractor Column 4. The date the form 715 was received (if the sub-contractor holds a 714I, 714P or 714S Tax Certificate) Column 5. The date the Form 715 was sent to the Inland Revenue at Liverpool Column 6. The Net Payment of the sub-contractor Column 7. The amount of VAT paid to the Sub-contractor (Provided he is VAT registered) Column 8. The amount of tax deducted, if any Columns 9 and 10. From the net payment in column (6) is deducted the VAT in column (7), and the tax in column (8) is added. The balance is then inserted in column (9) if the sub-contractor is “Supply and Fix” or in column (10) if the sub-contractor is “Labour only”. Column 11. Enter the contract/job number to which the entry refers. Columns (9) and (10) are for identifying the amounts to be entered in cost sheets, and the columns of the cost sheets in which the entries should be made: “Labour only” OR “Supply and Fix”.

Sub-contractors in the VAT Return Column (12) of the Sub-contractors Book is required for the VAT Return: Place in this column the “Net balance now due” to a sub-contractor, i.e. the amount on which VAT is charged. The total of this column each month (or quarterly for a quarterly VAT return) is required as a part of inputs at the foot of the VAT Return. VAT is recoverable from the Department of Customs and Excise whether or not the sub-contractor has been paid: It follows that it is important that the Sub-contractors Book is kept up-to-date, so that recoveries of VAT are not delayed.

Costing Sub-contractors Certificates At the end of the month rule-off the Sub-contractors Book, and total the columns. Ensure that the total of column (6), less column (7), plus column (8)

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SUB-CONTRACTORS PROCEDURES

equals the aggregate of columns (9) and (10) when these two columns are added together. Using a list/adding machine, obtain a total to be charged to each job/contract, separately for “Labour only” and “Supply and Fix”, i.e. the amounts in columns (9) and (10) to be charged to the job/contract numbers in column (11). Make summaries of the foregoing totals, and ensure that the total of each summary: in the case of “Supply and Fix” subcontractors, equals the total of column (9)—for “Labour only” subcontractors, equals the total of column (10). Enter each “Supply and Fix” amount and each “Labour only” amount in the respective columns of the relevant cost sheets.

All expired entries can be crossed through.

NOTES: A Tax Certificate, once seen, is returned to its owner, and need not be seen again. However, a watch needs to be maintained on the expiry date column. A renewal Tax Certificate should be re-registered in this book.

REGISTER OF SUB-CONTRACTORS CERTIFICATES

Fig. 2

SUB-CONTRACTORS PROCEDURES

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SUB-CONTRACTORS PROCEDURES

Fig. 3 EXAMPLE OF A “CERTIFYING DOCUMENT” (Issued by a Limited Company which holds a 714C Tax Certificate)

NOTES: All of the foregoing information is needed in a Certifying document The document should be on company headed notepaper and signed by a Director or Secretary Photo-copies of the document are acceptable

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SUB-CONTRACTORS PROCEDURES

Fig. 4

NOTES: 1. The above certificate should be prepared in triplicate: 1.1 Two copies should be provided to the Sub-contractor, one of which he is required by law to sign and return (it becomes the VAT invoice). That copy should be filed in the same sequence as entries in the Sub-contractors Book. 1.2 The other, the office copy, should be filed along with the other documents for that job/contract. 2. The deduction for Materials, before taxing the difference, will vary from trade to trade. Suggestions for the proportions to be used are given in the text. 3. The above certificate is shown as an entry in Fig. 5. 4. Tax is deductible at 27% until 31st October, 1988 (not 25%).

Fig. 5 SUB-CONTRACTORS BOOK

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SUB-CONTRACTORS PROCEDURES

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SUB-CONTRACTORS PROCEDURES

Fig 6 SUB-CONTRACTORS RECORD SHEET For the purposes of: – the annual return to be made to the Inland Revenue at the end of March of each year – recording the amounts paid to each sub-contractor a simple record should be maintained in the following form, separately for each sub-contractor.

NOTES: Exclude VAT from the above record If there is a Tax Certificate, column (3) will contain the same amount as column (5). The annual return to the Inland Revenue requires the “amounts paid in the year, to each sub-contractor”, not the “amounts due”.

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Chapter 4 PAYROLL PREPARATION There are a number of proprietary payroll systems obtainable from stationers. Some but not all of them are suitable for builders. For purposes of demonstration a payroll sheet is provided as Fig 8. If so decided a blank of this sheet can be stencilled to obtain a number of copies for general use, but it requires that there shall be completed in addition: the Inland Revenue’s form P.11 (Deductions Working Sheet) plus a Payslip (Fig 9) for the information of the employee. However, the Inland Revenue usually gives permission to dispense with forms P.11 if it is satisfied that a proprietory system, or a system such as that in Fig 8, fulfils its rquirements. Start a new Payroll Record Sheet (Fig 8) for each employee at the commencement of each fiscal year —If an employee is engaged after the commencement of the fiscal year, start a new Payroll Record Sheet at that time. Enter on the Payroll Sheet the employee’s name, trade, address, National Insurance Number, date of birth, and starting date. The National Insurance number is important. You will need it for Government returns made at the end of the fiscal year (31st March next) and for other possible queries you may have to deal with after the employee has left your service. Enter in one of the boxes in Line 5 the tax code number of the employee and the date it came into operation. If the Inland Revenue should notify any changes in the employee’s tax code during the fiscal year, there are other boxes in Line 5 in which to record such changes. Keep a special folder to contain notifications received from and sent to the Inland Revenue regarding employees. If the business is a limited company the Directors are deemed employees, even though they own most of the shares, and are subject to PAYE and National Insurance like any other employee. A Payroll Record Sheet should be maintained for them.

PAYROLL PREPARATION

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Use one vertical column for each week’s pay record Line 6. Head the column with the date, i.e. the Monday to which the pay relates in a year, 52 columns may be required. For monthly paid employees, twelve columns will be needed. Enter particulars from the employee’s Time Sheet. In line 7, enter the number of “Paid hours” (which includes non-productive overtime, guaranteed time and public holiday hours). In the other half of Line 7, enter the number of GMB (Guaranteed Minimum Bonus) hours (maximum 39). GMB is payable for public holidays. In Line 8, enter the hourly rate of pay, and the hourly rate for Guaranteed Minimum Bonus. In Lines 11 to 13, enter any taxable allowances, such as Bonus or Travelling Allowance. Annual Holiday money paid by you which is not within the Holiday Pay Scheme (but exclude payments which will be reimbursed by the Holiday Pay Scheme). Enter in Lines 27 and 28, any non-taxable monies payable to the employee, such as fares and expenses. Calculate the pay due, and to obtain the entry in Line 9, multiply the number of paid hours in Line 7 by the hourly rate in Line 8. In Line 10, multiply the number of Guaranteed Minimum Bonus hours in Line 7 by the GMB rate in Line 8. Total lines 9 to 13, and enter the total in Line 14. This is the gross taxable pay, which is subject to Income Tax and to National Health Insurance contributions. Maintain a cumulative total of Gross Taxable Pay. Line 15 is a running total of the amounts in Line 14, add £183.52 to £195.52 and enter the total, £379.04, add £207.52 to £379.04 to get £586.56, and so on. The total of all figures in Line 14 equals the latest total in Line 15. Enter the “Free pay” in Line 16. This is the amount calculated by the Inland Revenue to allow for Single or Married Personal Allowances, and any other allowances to be deducted from taxable pay. The Free Pay depends on the Code of the employee, which in the example is No. 183. The Free Pay Table provided by the Inland Revenue, shows for each week of the tax year the amount of free pay to be used for each Code number that week: The 1982 issue of the Free Pay Table is the latest available.

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in Week 1 (April 7) the Free Pay under Code 183 is £35.47 in Week 2 (April 14) the Free Pay under Code 183 is £70.94 in Week 3 (April 21) the amount is £106.11 which is about three times £35.47 It follows that until a Code changes, the Free Pay is approximately the same each week for any particular Code number. The Free Pay is accumulated throughout the year, so that by the end of the tax year, if there is no Code change, Code No.183 will be about 52 times £35.47, which is £1844.44 (£1839.24 in the Free Pay Table). Enter the cumulative Taxable Pay (Line 17) which shows the difference each week between Line 15 and Line 16. Line 17 therefore provides the accumulated taxable pay (because Lines 15 and 16 are both accumulated, their difference in Line 17 automatically increases week by week to become the accumulated Taxable Pay).

Line 18 shows the Tax due-to-date, and it is calculated on the Taxable Pay todate, in Line 17, as described below Line 18 is obtained from the Inland Revenue’s “Taxable Pay Tables” B to D each week turn up in those Tables the accumulated Taxable Pay to-date (look in the Tables for the amount in Line 17) against that amount will be given the Tax due to-date enter the latter amount into Line 18. For the week April 7 the taxable pay in Line 17 is £148.15. The Tables show £37.00 as the amount of tax payable on £148 (ignore the pence) Line 18 in subsequent weeks is based on the accumulated amount. In the week Apri 14, the taxable pay to-date, in Line 17, is £308.30, and the Tables show tax due of £77 on £308.

Tax due this week Line 19 is the resut of deducting Tax paid to-date from Line 18 (Tax due todate). The difference, being Tax due this week is entered in Line 20. For the week April 14: —the tax due to-date is £77, from this is deducted the tax paid the previous week, £37, this gives a balance of £40 to be paid for the week April 14. For the week April 21 the tax due to date is £120. However, £77 (£37 plus £40) has been paid already, leaving a balance of £43 to be paid in the week of

PAYROLL PREPARATION

29

April 21. In the week April 28, tax paid to date is £160, leaving £40 due, and so on for each week.

National Insurance Contributions Line 21 and Line 30. National Insurance contributions must be entered for both employer and employee. The amounts of National Insurance contributions to be paid each week are given in the book “National Insurance Contribution Tables”. In the examples in this chapter, Vol CF391 of the above publication is used (not contracted out). The amounts payable are based on the Gross Total in Line 14. They are in £1 steps, and the line always to be taken is the next lowest £1. For a Gross Pay of £183.52 (April 7) the Table gives, on the £183 line, a contribution of £16.51 for the employee and £19.18 for the employer. In the week April 14, the Table gives in the £195 line, £17.59 for the employee and £20.43 for the employer.

“Further deductions” and “Total deductions” Lines 22–24 are for further deductions and the total deductions. There may be further deductions from an employee’s pay, such as Subs recovered, or contributions to which he had agreed such as to a private pension fund, club, etc. Enter the total deductions (Lines 20 to 23) into Line 24.

Net Pay Line 25 is for the Net Pay (not yet the “take home pay”). Line 25 is the difference between Line 14 (Gross Total) and Line 24 (Total deductions).

Non-taxable Pay Lines 26 to 28 are for “Non-taxable pay”. Line 26 is to be used when the Inland Revenue has authorised a Tax Refund to an employee. The letter of authority should be kept. Lines 27 and 28 should be completed from the Time Sheet (fares, expenses, etc.).

“Take-home Pay” Line 29 is for the amount actually paid to the employee, and it should correspond with the amount shown in the Bank Payments Book, for Wages (when added to the “Take home pay” of other employees).

30

PAYROLL PREPARATION

The Holiday Pay Stamp Line 31 shows the value of the Holiday Pay Stamp (see Chapter 1). A stamp should be affixed to the employee’s Holiday Pay Stamp Card each week. A stamp is not affixed for weeks when the employee takes his annual holidays, so it is usually payable for 47 weeks of each year, in some years 48 weeks. As shown in Fig. 8, the 1988/89 cost of the weekly stamp is £14.45 for both craft operatives and labourers.

NOTES:

(1) See page 35 which shows how the hourly cost of £6.12 is calculated (2) The above Time Sheet particulars are used in Fig 8 (Week commencing 21st April) (3) Jobs are costed on the basis of “worked hours” only. The £6.12 includes the cost of non-productive hours

Fig 7 PAYROLL PREPARATION

31

32

PAYROLL PREPARATION

Fig 8

33

PAYROLL PREPARATION

Fig 9

34

Chapter 5 COST DIRECT LABOUR The figures quoted in this Chapter and its accompanying Tables have been derived from the book: “A Practical Guide to Estimating Daywork Rates 1988/ 89”, published by Building and Construction Books, 100 Avenue Road, London NW3 3TP (see back of Book for Details), which is recommended as an esstential reference to support the figures quoted in these pages. Fig.7 is a time sheet for James Brown, a carpenter, who in the week 21st April, worked 43 hours and was paid 45 hours, to include 2 hours nonproductive overtime. The 43 hours need to be costed to the jobs on which James Brown worked, and the 2 hours non-productive overtime require to be spread over all of those jobs. The Payroll Sheet for James Brown, Illustration No. 9, shows that for the week ended 27th April (commencing 21st April) he cost: £ 45 hours at his rate of £4 39 hours (the maximum) Guaranteed Minimum Bonus @ 39p Tool Money Bonus

180.00 15.02 1.40 10.00

Travelling Allowance

1.10

Fares

1.00

Employer’s: National Insurance

21.68

Holiday Pay Stamp

14.45

A total of Equals, per hour, for 43 “Worked hours”

244.65 5.69

35

COST DIRECT LABOUR

However, there are other costs not shown on the Payroll: Per hour p 10 1

Public holiday pay to be met in due course Tool Insurance The cost of absenteeism and sickness time plus Sick Pay Inclement weather time

13 6 p

Employer’s and Public Liability Insurances Redundancy provision CITB Levy

5 4 4 Total

13 43

This addition of 43p is equivalent of £18.49 for 43 “Worked hours”, and amounts to £869 per operative over a period of 47 weeks. It should be noted that 13p of the costs in ther above Non-payroll Labour Costs may be included by some builders in their General Overheads. When the 43p is added to the £5.69 on the previous page, the cost per “Worked hour” for James Brown becomes £6.12.

THE TABLE IN FIG. 10 AND ITS PROOF Fig. 10 provides a list of rates per “Worked hour” for craft operatives and labourers: With and without overtime At varying rates of bonus and/or plus-rates and/or Working Rule Allowances additional to those already included in the basic rate. If the bonus of James Brown, Carpenter, which is £10, is divided by his 43 “Worked hours” it becomes about 23.3p per hour. At £4 per hour, the plus rate is 78p above the basic rate of £3.22. In line 12 of Fig. 10, the cost per hour “With Overtime” with a bonus or plus rate of £1 is £6.03, compared with the £6.12 calculated above. However, James Brown’s bonus of 23.3p per hour and plus rate of 78p totals 101.3 per hour, which is above the maximum of £1 in Fig. 10. Further he worked 43 hours, compared with 48 hours used in that table.

36

COST DIRECT LABOUR

Fig. 10 THE COSTS PER “WORKED HOUR” OF BUILDING TRADES OPERATIVES

The calculations in this Table are derived from the book “A Practical Guide to Estimating Daywork Rates 1988/89” published by Building and Construction Books which should be obtained to properly understand and support the figures below.

The above rates: are based on 1704 “Worked hours” per annum, after allowing for annual and public holidays, absenteeism, sickness and inclement weather time include in the case of the overtime rates, an average of 48 hours “Worked” and 52.5 hours “Paid” per week.

COST DIRECT LABOUR

37

embrace the employer’s National Insurance and Holiday Stamp contributions, Public Holiday Pay, Tool Allowance, minimal Travelling Allowance and Fares, Sick Pay and Guaranteed Time also include a total of 13p per hour for Employer’s and Public Liability Insurances, CITB Levy and Redundancy Provision. If a contractor includes these in his General Overheads, he should deduct 13p from each of the above rates. The “plus rates” are intended to include not only bonuses and plus rates as such, but any “Working Rule Allowances” not mentioned above, and any travelling allowance and fares above the minimal rates. Note that the above rates are “costs”, to which should be added site and general overheads and profit, as described in the above mentioned book “A Practical Guide to Estimating Day work Rates, 1988/89”.

Building and Construction Books 100 Aveenue Road, London NW3 3TP Telephone: 01–935 6611. Telex 299973 ITP LN G Facsimile 01–586 5561

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