False self-employment in construction: taxation of workers…
At Budget 2009, the Government announced that it remained committed to addressing false self-employment in the construction industry and would consult with a view to future legislation to ensure that construction workers engaged in an employment relationship were taxed appropriately.
On 20th July the Government issued a consultation paper titled False self-employment in construction: taxation of workers. In summary the Government concluded that the best way to address this issue for income tax and National Insurance (NIC) purposes is to introduce legislation which deems workers within the construction industry to be in receipt of employment income unless one of three criteria is met. If the worker is deemed to be in receipt of employment income, Pay as You Earn (PAYE) and NIC will be due on the payment they receive.
The Government sought comment on the consultation from the construction industry and the tax profession. Hooper & Co duly responded to the consultation document on 12 October 2009 and our published response is reproduced below.
For a copy of the Government consultation paper click here
Response by Hooper & Co, Chartered
Accountants to the consultation document
Question 1: Do these three criteria represent fair indicators of a person who is running his own business and is therefore genuinely self-employed?
The criteria, as set out at 5.11 of the consultation document, are extremely limited in scope and are very likely to exclude a significant number of workers who are genuinely self-employed. In setting these criteria the government has failed to comprehend the organisational structure in which a major of construction projects operate.
Our experience with clients in the construction industry leads us to believe that the majority of small business and self employed specialist workers (bricklayers, electricians, and plasterers), rarely require plant and machinery other than the normal tools of the trade, nor do they require engagement of other workers.
The criterion does not recognise that groups of contractors may share bulk facilities and heavy plant, for example, an on site cement silo.
We expect the provision of materials by individual workers to have a detrimental cost impact on the construction industry. Volume purchase discounts, normally available to larger contractors, are unlikely to be available to these workers thereby increasing material costs which must be absorbed by the worker or ultimately passed on to the customer.
Provision of materials by individual workers has significant commercial and legal implications for both contractors and subcontractors with regard to cash flow, material and site management and quality control.
Question 2: Are there other indicators which ought to be considered for inclusion?
Preferred indicators include: • Control & independence, as set out in case law. • The right of substitution • Genuine financial risk
Question 3: Are there instances where none of the criteria are met, but a worker would, by reference to the usual case law tests in respect of the true terms of an engagement, otherwise be treated as self-employed? If so, please provide examples.
The criteria as set out in the consultation would, in reality, restrict self-employment status only to larger business with the resources to acquire heavy plant and materials and engage other workers.
Our experience suggests that this does not reflect the true structure of most construction operations where it is often the case that a main developer will subcontract to a number of small firms who in turn further subcontract to specialist workers. Expertise and accountability vests with the specialist worker often with back-to-back contractual risk.
Example 1 A national house builder undertakes a large housing development. The construction work is sub contracted to a number of smaller firms specialising in bricklaying, electrical, plastering etc.
Each sub-contract firm acquires all materials for the site taking advantage of its own volume buying power.
The sub-contract firms then contract with individual workers (bricklayers, electricians, and plasterers) to undertake specific elements of the construction. The basis for charge is commonly by piece work, and responsibility for the satisfactory completion of the work and rectification of faults generally lies with the worker.
The criteria as proposed make no provision for specialist trades (such as plastering) where there is often no need for plant and machinery other than the normal tools of the trade.
Usual case law tests including ‘control’ and ‘exposure to risk’ would be likely to deem these activities a contract for services and thereby workers correctly classified as genuinely self-employed.
Under the current proposals none of the three criteria are met such that these specialist workers would be incorrectly deemed employees, and subject to PAYE & NIC on the value of their contract.
Example 2 A glazing firm engages the services of an independent fitter to install a window. This is single fixed contract for installation services.
Current case law suggests that as there is no ongoing relationship of master & servant there can be no employment. However, in accordance with the current proposals, because the fitter does not supply plant, materials or other labour they must be paid as an employee.
Question 4: VAT registration can signal that the worker is in business on his own account, buying materials and investing in plant which takes the turnover of the business over the threshold for registration. Would it be helpful to include the additional requirement of VAT registration? This would mean that the worker would need to meet one of the three specified criteria and would also have to be registered for VAT.
The imposition of VAT on small business that would otherwise below the registration threshold would be an imposition of additional costs and an unreasonable administrative burden.
The requirement to register for VAT is in direct opposition to the HM Government’s stated aim of reducing ‘red tape’ for the small business.
VAT fraud is increasing and it is surprising the HM Government wish to further expand the VAT system by 200,000 taxpayers at a time when HM Revenue & Customs are struggling to meet current demand for VAT registration and fraud prevention.
Question 5: Is the payer the correct person to have the responsibility for applying the criteria and operating PAYE and NICs?
It is foreseeable that the status of a worker could change during the duration of a contract without the knowledge of the payer.
Responsibility for applying the criteria and operating PAYE and NIC should fall to the worker as is currently the case with “IR35”.
Example 1 A worker is engaged to provide electrical installation services. If, at the start of the contract they work alone the proposed criteria would deemed them an employee. If, during the execution of the contact the worker engaged an assistant, it could be argued that the worker has now met criteria 3 and should be reclassified as self-employed.
A similar reclassification may also been necessary were a worker to undertake a contract with a team of assistants but chooses to reduce the workforce and complete the contract personally.
Given this uncertainly in status, it would be unreasonable to expect the payer to undertake day-to-day monitoring of workers and to update its pay system due to actions outside its control.
Note, this is not the case with the Construction Industry Scheme (CIS) where Net and Gross payment is notified by HM Revenue & Customs.
Question 6: Are there instances where the introduction of the deeming provision could bring about a significant additional administrative burden? If so, please give examples.
Small businesses which currently operate on a pure subcontract arrangement with self employed workers (correctly classified under the current system) have limited payroll administration, if any.
Under these proposals it is likely that a large number of genuine self employed workers would be deemed employed thereby significantly increasing payroll administration for the small contractor, a point already highlighted in the consultation document at item 6.4“The Government recognises… small businesses may find accounting for PAYE and NICs a significant additional burden. This is more likely to be the case where the small business engages only one or two workers for short periods on a sporadic basis. The need to operate the necessary starter and leaver processes on a frequent basis will increase the administrative burden for these businesses.”
As stated previously, theses proposals are in direct opposition to the HM Government published aim of reducing ‘red tape’ for the small business, particularly in an economic environment where the average small business is highly sensitive to additional costs.
Question 7: Are there occasions when the deeming provision could impact on the adaptability and flexibility of the labour market? If so, please provide examples.
To mitigate exposure to employers NIC we would expect contractors to favour established medium to large business over smaller sole traders, especially in cases where conformity with the 3 criteria may not continue to be met (see our response to question 5).
As a result the deeming provision would have a significant impact on ability of individual workers to find work, restricting the adaptability and flexibility of the labour market.
Question 8: What avoidance routes might be available and how should these be countered?
The government has already introduced a number of schemes to counter the avoidance of taxation by construction industry workers including the introduction of the Construction Industry Scheme (CIS) and an increase in compliance reviews.
These two initiatives have resulted in the reclassification of a significant number of workers.
The CIS scheme in particular has been effective in ensuring a reasonable ‘tax take’ from self employed workers in the construction industry and provides HM Revenue & Customs a further opportunity to review the employment status of individuals via the self-assessment system.
Given that the HM Revenue & Customs currently have a number of opportunities to review and object to self employment status, we see no benefit in the introduction of further legislation that is potentially damaging to the construction industry, simply to resolve a misconception of an epidemic of false employment in the construction industry.
To discuss this response please contact: Jamie Hooper ATT CTA, Hooper & Co, 5 Marlowe Way, Colchester CO3 4JP T:01206 768538
Copyright Hooper & Co 2009 - Colchester, Essex CO3 4JP - Telephone/Fax 01206 768538
Hooper & Co is a trading name of
Hooper & Co (Financial Management) Limited a company registered in England &
Wales No. 5584443.
...the need for a specialist tax adviser has never been greater.