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Construction Industry – HMRC consults on “false self-employment”
Wednesday, July 29th, 2009
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In a new consultation document, HMRC makes new proposals to tackle the culture of “false self-employment” in the construction industry. The Government’s commitment to address this issue was announced at Budget 2009, with a view to legislating to ensure that construction workers engaged in an employment relationship are taxed appropriately.
False self-employment occurs where workers are treated as self-employed for income tax and NICs purposes, despite the fact that the way in which the work is carried out on a day to day basis demonstrates that there is an employment relationship. The preference for self-employed status is driven primarily by differences in the tax treatment of the self-employed and employed, namely
- employer NICs are due on payments to employees but not on payments to those engaged on a self-employed basis
- the self-employed pay NICs at a lower rate than the employed
- the self-employed are taxed on the profits of their business and the rules on what they can deduct from gross income are more generous than those applied to employment income.
HMRC’s consultation document presents evidence that a significant number of workers in the construction industry are engaged on the basis that they are self-employed, but are working under employment terms. It is estimated, for example, that
- 34% of workers in the construction industry are self-employed, compared to only 11% across other sectors, without any obvious reason for the disparity
- in 2007/08, there were 300,000 subcontractors operating within the Construction Industry Scheme (CIS) who did not claim any deduction for the costs of materials, or for plant and equipment.
A number of earlier measures have had only limited success in tackling this situation. These include the provision of the Employment Status Indicator Tool on HMRC’s website, a moratorium in 1997 that promised no recovery action for underpaid tax and NICs if workers were correctly categorised, restructuring of compliance activity in 2004/05 followed by letters to engagers and subcontractors, and the inclusion of a declaration on the monthly CIS return. The minimal impact of these measures is, to a large extent, attributable to the development of schemes to maintain self-employment, such as
- engagement through intermediaries, e.g. limited companies and umbrella companies, and
- the artificial inclusion of key self-employment factors in contracts, in particular the right of substitution, even though such terms are not reflected in the reality of the working relationship.
The consultation document summarises the problems that false self-employment causes as follows:
- for the industry, an unfair competitive advantage for those businesses who disregard their PAYE and NICs obligations when they engage workers and a corresponding disadvantage for those businesses which properly engage their workers as employees
- for the worker, a loss of entitlement to Jobseekers Allowance and Secondary State Pension and a lack of long term job security and career opportunities
- a risk to the Exchequer, as the correct amount of income tax and NICs is not being paid.
The Government has concluded that the best way to address the issue of false self-employment for income tax and NICs purposes is to introduce legislation which deems workers within the construction industry to be in receipt of employment income unless one of three specific criteria is met, instead of the wide range of factors currently used to determine employment status.
The test would apply where the engager’s main business involves the carrying out or commissioning of “construction operations”. This limits the procedures to the construction industry scheme, so they would not apply, for example, to the provision of services to a householder for work on domestic property.
The test criteria would be applied to the activity that the worker is actually performing for the engager, irrespective of who pays the worker. However, it will be the payer who will be responsible for applying the criteria. The payer could be the engager, an employment agency or an intermediary. If one or more of the criteria are met, the worker will be deemed to be in receipt of employment income and the payer will be responsible for operating PAYE and NICs. The amount on which PAYE and NICs will be applied will be the full amount of the payment unless the payer is a Managed Service Company, in which case certain expenses may be deducted but the value of benefits provided is added.
The proposed criteria are:
- Provision of plant and equipment – 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 it is normal and traditional in the industry for individuals to provide for themselves to do their job;
- Provision of all materials – that a person provides all materials required to complete a job; or
- Provision of other workers – that a person provides other workers to carry out operations under the contract and is responsible for paying them.
These three criteria are proposed because the existence of any one of them would be sufficient to indicate self-employment under the current employment status rules.
The following example, taken from the consultation document, illustrates how the proposed deeming provision would work.
ABC Ltd – how ‘deeming’ would work
ABC Ltd is a business, which undertakes development of sites across the country for private housing. It secures most of the required building services locally at the different locations, rather than having a permanent workforce. For the current project, it is building six houses on a small site.
The company enters into various contracts to have work carried out on the site, as follows:
Carrying out groundwork
Mr B supplies his own services and those of three other men for the groundwork. The payments made to Mr B will not be deemed to be employment income, as he meets criterion 3. However, if he does not already employ the three people working for him, he will need to treat them as being deemed to be in receipt of employment income if they meet none of the criteria.
Building the walls
Four people are engaged by ABC Ltd for bricklaying. ABC Ltd sources all the bricks and the bricklayers bring only their tools of the trade. They will be deemed to be in receipt of employment income, because they meet none of the criteria.
Installing the glazing
Mr C supplies and fits the glazing with the assistance of his employee. Mr C will not be deemed to be in receipt of employment income, as he meets criteria 2 and 3.
Fixing the roofing
Four people are engaged for installing the roofing sourced by ABC Ltd. They do not bring any equipment with them. They will be deemed to be in receipt of employment income, because they meet none of the criteria.
Installing the fixtures and fittings
Two people are engaged to fit all the doors, cupboards and other fittings, which have been sourced by ABC Ltd, bringing with them only their own tools of the trade. They will be deemed to be in receipt of employment income, because they meet none of the criteria.
CIS returns
Where workers engaged by ABC Ltd are not deemed to be receiving employment income they will be included on ABC Ltd’s CIS return.
Where there is a potential conflict between which set of PAYE and NICs rules to apply, the following is proposed:
- If the payer is a personal service company, the deeming provision for construction will take precedence over the IR35 intermediaries legislation.
- If the payer is a managed service company, the managed service company legislation will take precedence over the deeming provision for construction.
- If the payer is an employment agency, the deeming provision for construction will take precedence over the agencies legislation.
The proposed measures will only deem a worker to be in receipt of employment income for tax and NICs purposes and will not affect entitlement to employment law rights. The Government hopes, however, that the tax changes will encourage responsible employers to apply employment rights and provide training opportunities.
The following questions are raised in the consultation document, to which interested parties are invited to respond:
- Do the three criteria represent fair indicators of a person who is running his own business and is therefore genuinely self-employed?
- Are there other indicators which ought to be considered?
- 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?
- 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 criteria of VAT registration, which would need to be met in addition to one of the three other criteria?
- Is the payer the correct person to have the responsibility for applying the criteria and applying PAYE and NICs?
- Are there instances where the introduction of the deeming provision could bring about a significant additional administrative burden?
- Are there occasions when the deeming provision could impact on the adaptability and flexibility of the labour market?
- What avoidance routes might be available and how should these be countered?
The deadline for commenting on the consultation is 12 October 2009. No date for introducing the measures is suggested in the document. There is, instead, a commitment that the measures developed as a result of the consultation will only take effect when the construction industry is in a stronger economic position.
Further information:
False self-employment in construction: taxation of workers
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