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Section 1 Introduction

Section 2 Establishing the Company

Section 3 Business Administration Requirements

Section 4 Appointing and Administering Personnel

Section 5 Contracts

Section 6 Carrying out the work


Description:  The purpose of this unit is to enable you to explore the relevant legal principles and requirements when establishing a company and undertaking a construction contract.

Author:  Gates MacBain Associates

Section 1  Introduction

There are a number of legal requirements which will relate to the establishment of a building service engineering company and the way it carries out its work.  

To simplify the process we can look at the requirements under a number of headings.
The Establishment of the Company
  • Business Administration Requirements
  • Appointing and Administering Personnel
  • Contracts
  • Carrying out the work
These are explored in the Sections below.

Section 2  Establishing the Company

Aims and Objectives

At the end of this section you should be able to:
  • State the methods that can be used for a person to carry out work in industry.

A company can be carrying on business in a number of ways; this is known as their method of trading. The way that they trade will have implications from a legal aspect and the procedures they must adhere to with regard to maintaining and reporting their trading activities and in the payment of tax.  To understand the way that a person can trade and the legal requirements relating to companies you should work your way through the constructionsite unit Law of Contract and Tort chapter on Company Law.   Guidance on the establishment of a company can be obtained from the NatWest website linked to below.  

HM Revenue & Customs 

A major area for legal requirements is governed by Her Majesties Revenue and Customs. They cover many aspects that a company is involved with so it is important that these are understood.  The link below provides access to their website which sets out all the things that a business must be aware of and provides guidance to the matters.   


Constructionsite Units

Self-Assessment Task

  • Describe the different ways that a business can trade and the implications with regard to the payment of tax.

Section 3  Business Administration Requirements

Aims and Objectives

At the end of this section you should be able to:
  • Advise on the retention of company records and their use and the requirements for Insurance.

Limited Company Records 

There is a need to retain records for tax purposes though there are a number of other requirements for limited companies relating to the annual return that they need to make to Companies House. This involves the filing of accounts, ensuring that any changes in share allocations or directors are reported. Details of the requirements can be found on the Companies House website shown below.  

Value Added Tax (VAT) 

Value Added Tax (VAT) is a tax that's charged on most goods and services that VAT-registered businesses provide in the UK. It's also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries. 

If a business has a turnover above a certain amount each year it is required to register for VAT with HM Revenue and Customs, although it may be able to register voluntarily. 

The HM Revenue and Customs web site explains the subject in an easy to understand way, this can be reached by clicking on the web link below.   

Insurance Requirements 

Anyone carrying on business is required to hold a number of insurance policies which will cover them in the event of misfortune. Not all insurance is a legal requirement though others are, the types of insurance relate to: 
  • Employers Liability is required by law to cover against bodily injury, illness or disease sustained in the course of employment. Details are available from the web link below.
  • Public Liability Insurance covers people other than employees and would be required if members of the public, clients or customers are visiting your office or site or if your people are visiting theirs.  Public Liability insurance will provide cover if someone is accidentally injured by you or your business operation. It will also cover you if you damage third party property while on business. The cover should include any legal fees and expenses which result from any claim by a third party.
  • Product Liability. Businesses that supply products to other businesses or the public are at risk if a faulty product causes injury or damage usually it is the manufacturers of a product who are at risk if things go wrong, but the liability can fall on a supplier.
  • Professional Indemnity provides protection against an action by clients who believe they received bad or negligent services and incurred a loss as a result. This can be the installation of a service or advice.

Data Protection Act 1998

The Data Protection Act gives individuals the right to know what information is held about them. It provides a framework to ensure that personal information is handled properly.

The Act works in two ways. Firstly, it states that anyone who processes personal information must comply with eight principles, which make sure that personal information is:
  • Fairly and lawfully processed
  • Processed for limited purposes
  • Adequate, relevant and not excessive
  • Accurate and up to date
  • Not kept for longer than is necessary
  • Processed in line with your rights
  • Secure
  • Not transferred to other countries without adequate protection
The second area covered by the Act provides individuals with important rights, including the right to find out what personal information is held on computer and most paper records.

Should an individual or organisation feel they're being denied access to personal information they're entitled to, or feel their information has not been handled according to the eight principles, they can contact the Information Commissioner's Office for help. Complaints are usually dealt with informally, but if this isn't possible, enforcement action can be taken.

A person’s rights, responsibilities and obligations with regard to data protection can be found by visiting the website Data Protection shown below.   



  • Owen, S (1998) Law for the Construction Industry; Pearson Longman: Harlow (Chapter 11)

Self-Assessment Task

  • List the main areas that need to be considered in determining the legal requirements relating to the administration of a company.

Section 4  Appointing and Administering Personnel

Aims and Objectives

At the end of this section you should be able to: 
  • Outline the factors relevant to Employment Law

There is a raft of legislation dealing with the employment of personnel. An introduction to this is provided in Constructionsite unit Legal Influences  which is linked to below. You should visit this unit and familiarise yourself with its contents. 

The law is quite specific on the requirements relating to the appointment of people and how they are treated by the employer.   

Duties of an Employer 

An employer owes the following duties to his employees: 
  • To provide reasonably safe premises.  He is not absolutely responsible for the safety of the premise providing he has done what could be reasonably expected of him to make the premises safe.
  • To provide safe equipment, tools and materials. Once again his duty is limited to doing what is reasonable to ensure they are safe.
  • To provide a reasonably safe system of work. The employer's organisation must be efficient and co-ordinated to avoid injuries to people engaged on separate tasks. It must also provide reasonably efficient fellow workers.
  • To employ proper staff.  To treat them with respect and to pay the agreed wages and any necessarily incurred expenses.

Formation of a Contract of Employment 

A contract for employment can be either verbal or in writing and is subject to the same requirements as the formation of any contract. Though within 13 weeks the employer must give the employee a written statement of the following matters: 
  • identification of the parties and the date employment began
  • the scale or rate of remuneration, or the method of calculating it, and the intervals at which it is paid
  • the terms and conditions relating to the hours of work, entitlement to holidays, incapacity for work and any provisions for sick pay and any pension rights
  • the length of notice the employee is entitled to give and receive to bring the employment to an end or the date when a contract for a fixed term is to expire
  • a person who the employee can apply for the purpose of redress of any grievance relating to the employment, the manner in which application should be made and the procedure to be followed.

Workers Rights 

New EU proposals would give temporary workers the same rights as full-time employees with regard to pay, holidays, pensions and other benefits.  


The process of subcontracting can be bringing a person or a firm on to a contract to carry out a particular job. This may include the subcontractor providing materials and labour or just the labour to carry out this job, when that job is completed the sub‑ contractor leaves the contract.  

Alternatively it may be very similar to employing someone 'on the books', as a contractor can have a worker working solely for him on what appears to be a permanent basis. However, as a sub‑contractor the worker is self employed and contracts out his labour on a contract for a particular job, or on a daily or weekly basis. 

It is the subcontractor who is responsible for his National Insurance stamps and tax affairs. He receives no holiday or sick pay, and he can be laid off without redundancy pay, or even notice once his contract is complete. 

He also lacks any protection given by the Employment Protection (Consolidation) Act 1978 as amended by the Employment Act 1980.   

Deduction of Tax 

During the building boom of the late 1960's early 1970's, the Inland Revenue found that a large number of workers were sub‑contracting their labour to contractors who paid in a lump sum without any stoppages. The Collector of Taxes found it extremely difficult to trace and collect taxes due to be paid by these workers. 

A tax deduction scheme was therefore brought in for the construction industry which applied to payments made by a contractor to a sub-contractor for work involving construction, installation, repairs, fittings, decoration and demolition. This became known as the "715" which was the number of the certificates used.  This was replaced in 1999 by a scheme which required action to be taken whenever a contractor paid a subcontractor. The card (CIS)  and certificates that the sub-contractor held depended on whether the contractor paid the sub-contractor in full without making any stoppages or deduct tax on behalf of the Inland Revenue. 

The scheme held the contractor responsible to make all deductions required and to pay over any deductions due even if he has not made them from the sub-contractor.  

The Construction Industry Scheme (CIS)   

This changed in April 2007 and became the current CIS, the main points being:  
  • There will no longer be any need for CIS cards, certificates or vouchers.
  • Contractors must check or ‘verify’ new subcontractors with HM Revenue & Customs (HMRC).
  • Subcontractors will still be paid either net or gross, depending on their own circumstances. However, it will be HMRC that tells the contractor which treatment to use during verification.
  • There will be a higher rate tax deduction if a subcontractor cannot be “matched” on the HMRC system. This will apply until the subcontractor contacts HMRC and registers or sorts out any matching problem.
  • Contractors must make a return every month to HMRC detailing payments made to all subcontractors. This will be sent to the contractors in good time, and it will be completed using existing records.
  • Contractors must declare on their return that none of the workers listed are employees. This is called a Status declaration.
  • Nil returns must be made when there are no payments in any month. These can be made over the telephone as well as via the Internet or on paper. There will be financial penalties for failure to submit a return.

You can find out more about the new CIS by visiting the website below.   

Chapter 9 of the Law for the Construction Industry book listed below looks at Employment Law   

The Asylum and Immigration Act 1996   

This Act obliges employers to ensure that they do not employ anyone who is not legally entitled to work in the UK. With the increasing amount of movement around the EU and from workers outside the EU seeking work in the UK it is important that a business does not fall foul of this law. Details of this law can be found at the link below.  



  • Owen, S (1998) Law for the Construction Industry; Pearson Longman: Harlow (Chapter 9)

Self-Assessment Task

  • Outline the requirement which relate to the stoppage of tax for sub-contract work carried out for your company.

Section 5  Contracts

Aims and Objectives

At the end of this section you should be able to:
  • Explain the requirements for a contract for a building services job to come into force.

When looking at contracts it is important that you have an understanding of contract law. 

To obtain this you should understand the factors which make up a contract and how a contract can come into existence, details of these are dealt with in the constructionsite unit linked to below and you should ensure that you are familiar with this.   


  • Owen, S (1998) Law for the Construction Industry; Pearson Longman: Harlow (Chapter 3)

Constructionsite Units

Self-Assessment Task

  • Explain the factors which will need to have been determined prior to a legal contract for a building services job to come into force.

Section 6  Carrying out the Work

Aims and Objectives

At the end of this section you should be able to:
  • Explain the main factors relating to the legal requirements in carrying out work.

When accepting a contract there is an implication that you are competent and qualified to carry out the work in a safe and proficient manner to an acceptable standard.  

All work carried out must be done in accordance with the Health & Safety at Work Act and the myriad of regulations relating to construction work. Details of these Regulations can be found in Introduction to Health & Safety in Construction book listed below though details can also be found in the .   


Care must be taken that the law of Tort is considered in all dealings. A "tort" is a civil wrong and a major consideration regard a company would that of negligence and the negligence of its employees. Tort is dealt with in the constructionsite unit Law of Contract & Tort and this should be studied to ensure an understanding of the subject.  

Vicarious Liability    

Vicariously liable is where an employer is responsible for the torts of their employees that are committed during the course of employment. Details on this can be obtained from the website and book listed below.  

Professional Competence 

A person must be capable of performing the duties required of someone of their profession generally, or to perform a particular professional task, with skill of an acceptable quality.  

Duty of Care 

In undertaking the work the company and individuals have a duty of care to ensure that all work is carried out to a reasonable standard and in a way that does not place other people at risk. 

It requires that everything ‘reasonably practicable’ is done to protect the health and safety of others at the workplace. This includes and applies to contractors and those who design, manufacture, import, supply or install plant, equipment or materials used in the workplace. The duty is regardless of the size of the organisation, its income or whether the organisation has paid staff. 

Reasonably practicable means that the requirements can vary according to the degree of risk relating to a particular activity or environment. This is balanced against the time, trouble and cost of taking measures to control the risk. It allows the most efficient means for controlling a particular risk from the range of feasible possibilities to be selected. It is important to show that reasonable precautions and that due diligence was exercised. 



  • Hughes, P & Ferrett, E ((2008) Introduction to Health & Safety in Construction; Elsevier: Oxford (Chapter 21)
  • Owen, S (1998) Law for the Construction Industry; Pearson Longman: Harlow (Chapter 7)

Constructionsite Units

Self-Assessment Task

  • Explain the principle which relate to a tort being committed by one of your employees and the implications to the company.

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