Carol Barrie, Head of Property and Construction and RSM Bentley Jennison, bemoans another attack on the construction industry by the Government.
HMRC have just issued a consultative document which sets out proposals in relation to self-employed contractors in the construction industry.
The suggestion is that self-employed contractors who do not meet certain criteria laid down by HMRC will be treated as if they were employees and subjected to PAYE and National Insurance.
Why this concern, you may ask. The fact is that HMRC calculate that they are losing £350 million pounds per annum in tax and National Insurance by virtue of the self-employment of these contractors. What this is really all about is Employers National Insurance an additional tax for property and construction businesses of 13.3 per cent for 2011 on a large part of their labour costs.
The fundamental question must be: Can an industry which is already on its knees cope with this additional burden even when the upturn comes?
The consultative document refers to “false self-employment” which it says occurs where workers are treated as self-employed for income tax and National Insurance, despite the fact that the way in which their work is carried out on a day-to-day basis, demonstrates that there is an employment relationship.
If individuals are truly employees there are adequate measures in place already whereby HMRC can challenge their status.
Anyone who based upon legislation and case law is truly an employee can and should be dealt with under the Pay as You Earn system.
How can self-employment be false if it stands up to the tests laid down by case law?
What Government and HMRC are really saying is that there are large numbers of self-employed workers who they would like to see subjected to tax and National Insurance, particularly labour only sub-contractors. Indeed, the consultative document goes on to state “the Government has concluded that the best way to address this issue for income tax and NIC purposes is to introduce legislation which deems workers within the construction industry to be in receipt of employments income unless one of three simple clear and easy to apply criteria is met.”
The consultative document points to the fact that 34 per cent of workers in the construction industry are self-employed compared to only 11 per cent across other sectors. It goes on to add in paragraph 2.5 that “even given the range and variety of skills used by the industry there is no obvious reason why the proportion of self-employed workers in the construction industry should be so high.
Strange therefore that in paragraph 1.5 of the same consultative document it states that “the Government recognises that a flexible labour supply is important to the industry and that the self-employed workers who are carrying on a business make an important contribution to this.”
Surely this is precisely the reason why there are so many self-employed workers in the industry; they need to lay off workers when they don’t need them. 1.6 of the document goes on to state “this measure will only deem a worker to be in receipt of employment income for the purposes of income tax and NIC’s and will not confer employment law rights on a worker.
In effect, therefore, these individuals will be treated as employees for tax purposes but not for any other purpose. In other words HMRC accept that for employment law purposes these people are indeed self-employed, and need to be so for commercial reasons.
If something looks like a tax increase and sounds like a tax increase and has all the attributes of a tax increase then it probably is a tax increase however much it is dressed up to look like reasonable tax avoidance.
What of these three simple criteria that Government propose should be applied to decide who is caught by these deeming provisions? They are:
n That a person provides the plant and equipment required for the job they have been engaged to carry out. This will exclude the tools of the trade which is normal and traditional in the industry for the individuals to provide for themselves to do their job.
n That a person provides all materials required to complete a job or:
n That a person provides other workers to carry out operations under the contract and is responsible for paying them.
One of these requirements will have to be met if a person who is self-employed under UK law is to escape the deemed employment income rules. All of the existing rules will remain in place and it will only be the ones who are categorised as self-employed under the existing rules that will come within this new test.
Turning to these new tests, is a self-employed bricklayer or roofer on a typical house building site going to provide all of the plant equipment (including things like scaffolding) required for the job and are they going to acquire all of the materials.
The tests might be easier to satisfy for electricians and plumbers, but the benefits of bulk buying for the contractor may well be lost.
This again will create great inequity. Why should a self-employed bricklayer be deemed to be an employee simply because he does not provide the bricks and scaffolding and yet a self-employed electrician that provides the electrical wiring and sockets is left as a self-employed individual?
What of this flexible workforce? There can be no doubt that the major factor that has helped some of the large construction companies survive through the current recession, has been the ability to terminate self-employed workers without the cost or complexity of our current employment law.
Government have readily accepted that by acknowledging the need for a flexible work force. How do they then justify treating individuals for tax purposes as if they were employees but without giving them any of the benefits or protection of employment status including redundancy pay and Job Seekers Allowance.