In July 2009 the Treasury published a document setting out the government’s proposal for addressing the perceived problem of false self employment in the construction industry.
False self employment occurs when a worker pays tax and national insurance as a self employed worker, but a review of the terms under which he has been engaged show that he should in fact have been taxed as an employee under PAYE.
A worker who is self employed pays less by way of tax than an employee as the self employed worker is able to claim a tax deduction in respect of certain expenses incurred in the course of carrying out his work, which he would be unable to claim as an employee. The company /person who engages the self employed worker has no liability to pay employers national insurance (currently at the rate of 12.8%) and this encourages many engagers to seek to take on self employed workers rather than incur the greater cost of engaging employees. The ability to reduce costs of a workforce can result in either a greater net profit for the engager or a more competitive quotation when tendering for work (or indeed a combination of the two!) and this has been seen in some quarters to give an unfair advantage to engagers who, under the terms of the engagement should be treating it’s workers as employees, but in fact treat them as self employed in order to make themselves more competitive in what is a very competitive market place.
Specialist HMRC officers have been investigating false self employment for a number of years with limited success. Several high profile cases have been lost in the courts(although there have been successes too)and it would appear that the view has been taken at a high level that unless the law is changed, HMRC will continue to lose more cases than it will win.
The document which was published in July 2009 proposed that self employment in the construction industry should be determined by three specific tests. A worker would be regarded as self employed only if one or more of the following tests could be satisfied:
- The worker supplies all of the plant and equipment required for the job he has been engaged to carry out – this excludes the “tools of the trade” which are traditionally held by the category of worker
- The worker provides all materials required in order to complete a job
- The worker provides other workers to carry out operations and he will be responsible for paying them
If none of the above criteria could be satisfied, the worker would be a “deemed employee” and pay tax and national insurance as if he were an employee, but he would not qualify for the various benefits which would be available to a standard employee(sick pay, holiday pay, etc).
If these new proposals were to become law, they would have a catastrophic effect on many workers in the construction industry. Workers have taken on mortgages on the basis of their net income from self employment. Their net income would almost certainly reduce if they became “deemed employees” making it difficult for some, and impossible for others, to finance their living costs.
It would become very difficult for a young man starting out in the construction industry to build his own business and eventually hand it down to the next generation, because in the current financial climate he would find it difficult, if not impossible to raise the finance to supply all plant and equipment, or all materials required for a job, and if he is unable to do so, then it is highly unlikely that he would have sufficient work to enable him to engage others to help him do the work, and thus he could not qualify under the proposed new rules as a self employed person, in business on his own account.
A further issue is that of fairness. The government is never shy of insisting that it wishes for all of it’s policies to be seen as fair to all, and indeed in this document expresses the view that the new proposals would go some way to eradicating the unfairness of some construction firms gaining an advantage over others, by engaging workers on self employed terms who should really be employees. Why then do these proposals only embrace the construction industry? They effectively seek to introduce one set of rules for determining self employment in the construction industry, and then apply the long established rules to all other trades, professions and vocations – it is difficult to see how this is fair, as it appears to discriminate against construction workers. Would it be acceptable for all car drivers to have a speed limit of 70mph applied to them when driving on a motorway, but a limit of only 50mph applied if the driver is a manual worker? The concept is ludicrous, but hopefully it illustrates the point.
The Treasury has considered representations made by interested parties to the new proposals and it published a summary of the consultation responses in a paper issued in March 2010.Some responses were in favour of the new proposals, possibly influenced by trade unions in some cases and in others respondents are already reliant on employee workers and therefore wish to see their competitors placed at a similar disadvantage.
Whilst the government makes clear in the consultation response document that it is still totally committed to bringing in new rules, there are glimmers of hope that the final proposals may be a little more flexible than those currently put forward. At paragraph 5.13 of the document it is stated that “ government is convinced that these criteria provide a solid start in the development of a legislative solution……given the feedback from respondents in relation to the provision of plant and machinery and materialist is clear that these two tests as outlined in the consultation need further development”.
It would appear from para 5.13 that there is an acceptance that it would be unfair and perhaps unrealistic to expect a genuinely self employed worker to be obliged to provide all plant, equipment and materials and it will be interesting to see how these criteria may be modified. In all likelihood a de minimus figure will be adopted so that say 15% of all materials used on the job must be supplied by the worker, or tools of the trade may be taken into account provided that the cost incurred by the worker in acquiring them amounted to say £2000 or more.
The government has also undertaken, as a result of the consultation process, to consider whether there are other criteria which should be taken into account in determining whether or not a construction worker is genuinely self employed. A number of respondents suggested alternative criteria, some of which made sense, for example the requirement to have public liability insurance, and some of which were nonsensical i.e. the need for a business bank account - having one of these does not mean that a worker is self employed!
Conspicuous by it’s absence from the response document is the aspect of control. This aspect has featured constantly in status disputes over the years in cases agreed between the investigating tax inspector and the taxpayer, and also in cases which have gone to tribunal and beyond. The latest status questionnaire being used by HMRC to quiz a contractor concerning the status of his workforce runs to in excess of 100 questions, and at least 15 of these relate to control. This has always been an important area, as if a worker controls when he works, how he goes about the job, when he decides to take time off, etc. then it is a pretty good indicator that he is his own boss, and therefore self employed. If however he is constantly under supervision and has to do what he is told when he is told then he would appear to be an employee. Quite why control has not been brought into the thought process is a mystery, unless HMRC believes that this would level the playing field somewhat in favour of the quest for self employed status.
The government has stated that it will not seek to introduce any new rules concerning self employed status whilst the construction industry is suffering the consequences of the recession. This should not change any time soon as the Office of National Statistics has released data showing that private sector construction work fell by 20 per cent in 2009,the largest fall since records began in 1955. The decline in total construction output fell by 11 per cent which has only ever been surpassed once, back in 1974 which showed a drop of 16 per cent. Output on public sector projects showed an increase, reflecting the wise decision by the government to bring forward investment into schools and hospitals at a time when it was estimated to cost up to 20 per cent less to build them compared to a year ago. Recovery is unlikely to be spectacular.
However the need to generate further significant tax revenues may encourage the government to introduce the new rules before the industry has truly recovered, and even if they are introduced at the “right” time, this would not detract from the unfairness of applying one set of rules to construction workers and another set to everyone else.
One can only hope that the final proposals do not unfairly single out construction – false self employment is not exclusive to this sector. Perhaps a viable alternative would be for the government to seek to retain it’s better staff and increase resources to police the current regime which would surely result in a significant increase in tax revenues without discriminating against one working sector.