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'False Self Employment' – Construction Industry
Back in April 2009, Alistair Darling announced the 2009 budget.
Within the budget notes released at the time the following was
published under the heading ‘Helping People Fairly':-
The Government remains committed to addressing false self-employment in
the construction industry. The Government will consult with a view to future
legislation to ensure that construction workers and those they work for are
taxed appropriately. The Government will work with the construction industry
to ensure that any legislation is effectively targeted and the industry retains
a flexible labour supply. (source
- www.hm-treasury.gov.uk/d/Budget2009/bud09_chapter5_280.pdf)
This was followed by a consultation document in July 2009 entitled
‘False Self Employment in Construction: Taxation of Workers'. Whilst
this has gained some attention within the tax world it has not
come to public attention on a large scale. This document contains
proposed changed changes to the self-employed/employed debate such
that the principle will no longer be decided on case law but on
cold hard facts as defined by a legal definition of self employment.
Why is this necessary?
According to government figures there are approximately 300,000
labour only contractors in the UK who are working under what are
essentially employment terms but are presented as self employed.
The government also put forward the statistic that traditionally,
in most sectors 11% of the workforce are self employed whereas
in the construction industry 34% of workers are self employed.
If this is correct, then the government is potentially losing out
on a large amount of national insurance, both from the worker and
their ‘employer'. However, common sense would suggest that there
are likely to be more workers operating on a self employed basis
within the construction industry when compared to other sectors.
This admission also highlights the lack of success of the much
heralded new CIS regime, implemented in 2007, which was intended
to remedy this very problem.
Current Position
Currently the argument over the employed/self-employed status of
contractors is determined largely by the terms of the contract
under which they operate. Based on case law over the years there
are a number of indicators which are used to determine whether
or not someone is self employed for Tax and National Insurance
purposes. The most important of these tend to be:-
- Whether or not the contract contains a substitution clause.
- Whether or not the Customer is obliged to provide work to the worker, and, whether or not the worker is obliged to accept any work offered.
- Whether or not the worker bears any risk for the work carried out?
- Who has control, the worker or the customer?
- Who provides the equipment and materials?
Until now it has been relatively for a worker and the customer to arrange the terms of the engagement such that the worker meets the relevant indicators or self employment and therefore avoids being treated as an employee. This is beneficial for both parties in that there is a National Insurance saving and, for the customer, there us the benefit that they are not legally obliged to provide the worker with the same rights and responsibilities as an employee.
Proposals
The consultation document outlines HMRC proposals regarding a new statutory definition of self employment. With the introduction of such statutory criteria there would be a shift away from case law to a simpler check box approach.
The Government believes that the following three criteria are reliable indicators, within the context of the construction industry, of self-employment:-
1. 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; or
2. Provision of all materials – that a person provides all materials required to complete a job; or
3. Provision of other workers – that a person provides other workers to carry out operations under the contract and is responsible for paying them.
Any worker who meets one or more of these three criteria will not be deemed to be in receipt of employment income. If a worker doesn't meet any of these three criteria then they will be deemed to be employed and be subject to PAYE on their earnings.
However, it is important to note that this new definition would apply for Tax and National Insurance purposes only, the fact that they were deemed to be employed by the customer for tax purposes will have no impact on their status from a legal perspective. This means that legally they would continue to be self employed and therefore not subject to the benefits afforded to employees under the employment legislation. It has yet to be clarified whether or not these workers, who are deemed to be employed and subject to PAYE, would therefore fall to be entitled to state benefits such as job-seekers allowance and state second pension. If genuine employees accrue such benefits on the basis of their employment income then, relating back to the Budget notes, it is presumably only ‘fair' that workers deemed to be employees by this legislation shall benefit in a similar manner.
What happens next?
At present the consultation document is open for comment, this closes on 12 October 2009. After this date HM Treasury will consider the comments received and review the proposed changes to the definition of self employment in the Construction Industry.
If you are interested in reading the consultation document it is available at the following web address:-
http://www.hm-treasury.gov.uk/d/consult_falseselfemploymentconstruction_200709.pdf