The consultation document “false self employment in construction”was issued jointly by HM Treasury and HMRC in July 2009.The consultation process has now finished and we had a meeting with Treasury officials last year to exchange views.
It was clear that the Treasury was willing to listen to representations,and whilst sticking rigidly to the view that false self employment is a significant problem, they were interested in any suggestions as to how the proposals made in the consultation document could be modified without weakening their position.
The problem appears to be that the consultation document has relied heavily upon the UCATT report authored by Mark Harvey and Felix Behling which perhaps unsurprisingly portrayed an industry rife with employment status problems which was in desperate need of new legislation to prevent what it perceived was widescale abuse of the tax system.
The consultation document makes the point that the European Labour Force Survey 2007 showed that 34% of workers in the construction industry were self employed compared to only 11% across other sectors, and the clear implication is that this indicates that many construction industry workers are incorrectly classified as self employed. There does not appear to be any foundation for such an assertion. Different sectors will have different levels of self employed workers and this will usually reflect the type of work, the ongoing requirements of the provider of the work, and the personal preference of the worker, rather than indicating that the sector itself may be a hotbed of taxation abuse.
The consultation document states that there are around 300,000 subcontractors operating within the construction industry scheme who do not claim any deduction for the cost of materials or for the cost of supplying plant and equipment (labour only subcontractors). The document suggests that a large proportion of these workers should be taxed as employees as a result. This is a somewhat sweeping assumption as the main criteria for determining status does not involve any requirement to spend money on materials or equipment.
These items may well be supplied by the contractor who sets up on site .The contractor may wish to control his costs by using his buying power to obtain good deals on materials/equipment whereas an individual subcontractor would not have the same buying power. He may wish to ensure that the materials used are of the required quality. The most significant criteria for determining self employed status involve the concept of “being your own boss”. Does the worker decide when to work, how much time to take off, where to work, how to do the work and who to use to do the work? Will he be liable if the work does not go according to plan? Will he be paid if there is no work available or if bad weather prevents him from working?
Recent press articles have painted a picture of a few hundred thousand workers in the industry who are unhappy at being treated as self employed, and who would much prefer to be engaged as employees. Our research indicates that this is inaccurate. Most workers in the construction industry prefer to be self employed as it means that they have the freedom to work when they want, and to take whatever time off they require, rather than being under the control of the engager. Being self employed gives the worker the opportunity to build a business which he can pass down to the next generation.It enables the worker to negotiate terms rather than being obliged to accept the terms laid down by an employer.
When IR35 was introduced, an impact assessment confidently predicted a yield to HM Treasury of £1.100m over a five year period.Data released last year revealed a yield of only £9.5m ie.less than 1% of the predicted yield, which suggests that an air of caution should be adopted by those commentators who have seized upon the statistics quoted in the consultation document as justification for the long established self employed criteria to be overhauled.
HM Revenue and Customs has always (quite rightly) contended that being self employed is not a matter of choice,and that it is the nature of the job,and it’s real terms and conditions which dictate whether or not a worker should be treated as self employed.It is however important to appreciate (and this is something which most commentators have failed to take on board) that there is absolutely nothing wrong with a contractor agreeing terms and conditions with a subcontractor which,provided they are strictly applied in practice, show that the subcontractor is self employed.
In that sense it IS a matter of choice, with the proviso that the terms and conditions of the day-to-day relationship are consistent with the criteria required to prove self employment. A contract drafted to support self employment is not sufficient to prove self employment – a point frequently made by HMRC and again, they are absolutely right.What matters is the working relationship between the contractor and the subcontractor and only they can decide what that relationship will be. If both parties want the relationship to be one of self employment, then provided that the reality of the relationship satisfies the criteria which has been established for a number of years then the subcontractor can be self employed criticise.
We are not saying that there is no false self employment in the construction industry – there is, just as there is in most other sectors in the UK. We cannot however see any justification for singling out one sector and devising one set of rules for self employed status in that sector,whilst the existing rules will continue to apply to all other sectors. This is clearly wrong and discriminates against blue collar workers with no attempt at all to look at issues of false self employment in other sectors.
Surely the fair way forward (our tax system is supposed to be fair to all taxpayers according to the taxpayers charter) is for HMRC to devote more time and effort into risk assessment and enquiry work so that instances of false self employment can be identified and successfully attacked. If the problem is anything like as prevalent as the consultation document suggests, then the reward would far outweigh the cost. This would leave the genuinely self employed to pursue work unaffected by any ill-considered legislation which may well have the effect of creating a new problem of “false employment”.
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For further information:
Dave Williams, Partner, Tax at Francis Clark.
Telephone: 01803 320100
Francis Clark has offices in Exeter, Plymouth, Salisbury, South Devon, Taunton and Tavistock. Francis Clark is winner of the 2009 LexisNexis Best General Tax Practice award. More information is available at www.francisclark.co.uk.