Response to HM Treasury Consultation paper

Introduction

Francis Clark was established ninety years ago and has grown to become the largest independent accountancy firm in the South West.
The firm focuses on innovative strategic advice, coupled with strong client relationships and a friendly, down-to-earth approach to business. As a top 40 UK firm it works to deliver services through its 8 offices, employing tax specialists who advise individuals and businesses alike.
The tax practice was the winner of the Lexis Nexis 2009 taxation awards for the best general tax practice.

In this consultation paper response, we address directly the basis upon which the HM Treasury Consultation paper has been written. Our contention is that:

1. ‘False self-employment’ is a false premise

2. It is unfair to focus solely on self employed construction workers and prejudice their social mobility

3. The evidence base for the Consultation paper is flawed

4. The net result of the proposal for construction workers is that their pay will reduce

5. The paper shows little understanding of the real dynamics of the construction industry

We then directly address the formal consultation questions.

Executive Summary

‘False self-employment’ is a false premise

The paper is based on the premise that ‘false self employment’ is endemic in the construction industry. Yet the evidence is that existing self-employment rules are being properly applied in the construction industry. Indeed, it is only 2 years ago that a new requirement was imposed on contractors who engaged self employed workers to declare on a monthly return that the status of these workers had been considered and that the contractor was satisfied that they were genuinely self employed. An incorrect declaration attracts severe financial penalties and contractors have taken steps, at some expense, to acquaint themselves with status criteria to ensure that they do not make an incorrect declaration.

These rules are regularly tested in the law courts. The legal process is therefore the fair arbiter of how correctly the law is being applied. In the eyes of the law, those who are currently deemed to be self employed are indeed self employed.

The legal effect of the proposal is not to end so called ‘false self employment’ but to create an entirely new status of ‘deemed employed’ for freelance construction workers who have none of the rights but all of the costs of those employed.

It is unfair to focus solely on self employed construction workers

Government figures estimated that there are 3.4 million businesses without employees working in the UK. They operate in a diverse range of industries, from barristers at law to window cleaners. Of this total, nearly 2.7 million are unincorporated sole traders.

This proposal is focussed solely on workers in the construction industry. It chooses to selectively apply a new law to one class of self employed, sole trading, freelancer. For that reason alone, it is iniquitous as it does not fairly deal with the classification of self employment– only the perceived mis-classification in the construction trade.

Construction workers are selected for this proposal because the construction industry has the largest proportion of self employed workers. Yet there are many thousands of IT consultants, professional service providers, transport workers, agricultural, financial services and healthcare workers that work as self-employed. Although their employment shares many of the features of the self employed construction worker, they will not be targeted by the proposed legislation.

The BBC has recently told many of its regular presenters that it will no longer engage them on a self employed basis, as it views their engagement as having many of the indicators of employment. These individuals will be able to form their own limited company and then be subject to the legislation commonly known as IR35.

Construction workers who form a limited company will not, under the new proposals, be subject to IR35 as the new proposals will be applied in place of IR35, being more draconian and likely therefore to yield far more in tax/NI liabilities.

It is difficult to see why such draconian proposals are intended for the construction industry but not for other workers whose self employed status has recently been questioned.

Construction workers have fewer formal educational qualifications on average. The construction industry facilitates social mobility as employees can become self employed on their own behalf and ultimately employ other operatives to build a robust business.

The evidence base is flawed

The Paper makes use of ‘evidence’ that is questionable and bold assertions that are not supported.

Statistics quoted in the Consultation document are limited, however there are a number of anomalies that are unsubstantiated or have incomplete references and are therefore unable to be verified.

The Consultation paper makes reference to the report ‘The Evasion Economy – False Self Employment in the Construction Industry,’ by Professor Mark Harvey of Essex University. Many of the assertions made in the Consultation paper appear to be directly influenced by this Report.

Yet, in an independent review of this document by Susan Kirk of Nottingham Business School (Nottingham Trent University), it was found that,

‘This report is written in a pejorative manner with a number of inferences and statements made without supporting evidence. The source of the statistics is not always evident; particularly those that purport to derive from the Labour Force survey 2007. The emotive language used and lack of substantiation of assertions made has led to a report that lacks persuasiveness and objectivity. There are numerous instances of the use of judgemental terminology and unsupported comments.’

Given the questions over all calculations and statistics supplied in the Harvey report which has informed this consultation document, and the questionable assertions listed below, the accuracy of the Impact Assessment contained within the Treasury Consultation paper has to be questioned.

The net result of the proposal for construction workers is that their pay will reduce

Although it is proposed to deem construction workers as employed for tax and NI purposes, there is no proposal to extend employment rights to these workers. The only likely outcome for workers at the end of the supply chain is that their pay will reduce as their taxes increase. No other benefits will accrue to these workers, making the whole process a net loss for them.

The Consultation paper shows little understanding of the real dynamics of the construction industry

The UK construction industry can be characterised as a cyclical business, exposed to a volatile market with short term time limited contracts, which require a highly mobile and flexible labour force. Needless to say, in the current economic climate, demand in the construction industry is currently deeply depressed.

The origin of self employment in construction is a function of the industry cycles and process, and is not borne out of a desire to avoid tax and NIC contributions.

Enterprise is a significant feature in the construction industry. Many successful building firms can trace their origins to self employed sole traders, who grew into the businesses we recognise today.

The paper assumes that construction workers would prefer to be employed, if only they were permitted. There is no evidence for this view. Self employment is deeply embedded into the culture of the construction industry and best reflects the nature of the range of skills and jobs present in the industry. One of the most common reasons given for becoming self employed is the desire to be one’s own boss. Many workers do not have the right to temperament to be employed.

Contracts are let on the basis of the job price, not the notional employee head count. Thus the worker is seen as a commodity to be hired and fired as the contract permits. This saves the contractor from ongoing costs of paying an employee when there is no work to be done, and avoids administration time and attendant costs of engaging “casual” employees.

1 ‘False self-employment’ is a false premise

There should really be no such thing as ‘false self employment.’ The law concerning whether or not a worker is self-employed has been established for a very long time, and where there has been a difference of opinion, the Courts/employment tribunals have been asked to decide who was right, and who was wrong. Precedents and principles for guidance have been established in these contentious cases, and HMRC has won and lost cases by applying precedents and established principles to the facts of the individual case, and accepting the outcome on a case-by-case basis.

Once either HMRC had agreed self employed status with the worker, or the Courts/tribunals had found that the worker was self employed, the worker would be genuinely self-employed in everyone’s eyes, so what does the term “false self employment” actually mean? It would appear that “false self employment” refers to a situation where HMRC takes the view that the terms and conditions of a workers engagement have been carefully arranged so that if the current case law is applied to it, the worker will be viewed as self employed, whilst in HMRC’s view, the worker is really an employee, but HMRC is powerless to prevent the application of self employed status.

It appears from the consultative document that HMRC has become frustrated over a period of time with the existing system, and now wishes to ‘move the goal posts’ to give it a better chance of defeating arguments for self-employed status, and therefore generate increased tax revenues for the Treasury.

Currently, self employment in the construction industry is governed by The Construction Industry Scheme. The (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.

Contractors have certain obligations under the scheme, including registering with the scheme, checking whether their subcontractors are registered with HMRC, paying subcontractors and submitting monthly paperwork. Subcontractors’ main obligation is to register with HM Revenue & Customs (HMRC)and to keep HMRC informed of any changes to their business (including changes to the structure, address, business name, partners etc).The scheme was extensively revised in April 2007.

Currently, those who might be suspected as being wrongly classified as self employed are subject to compliance checks under CIS by HMRC inspectors. There is a clear process for dealing with such instances, ultimately leading to court adjudication in contested cases.

In evidence to the Business and Enterprise Select Committee on 22 January 2008, the then Business Minister Rt Hon Stephen Timms MP said that the real issue was not one of interpretation of the law, but one of compliance,

‘There is a perfectly proper place for genuine self-employment and I do not think it for government to regulate or instruct companies about how their relationships are organised as long as it is in compliance with the legislation as it currently stands.’

It may be that HMRC has insufficient focus on resourcing this important compliance function to satisfy itself that the CIS scheme is working properly. We would argue that a greater concentration on compliance is the appropriate response, rather than a blanket re-classification of self employed workers.

2 It is unfair to focus solely on self employed construction workers and will prejudice their social mobility.

Additional points:

• PH to Insert ONS/Eurostat table showing breakdown of workers

Case study – A self employed telecoms worker ends up turning over £20 million

K was a trainee Chef who lost his job in the recession of the 80's. His best friend asked him to help out in his work which was laying telephone cables. They were two men in a van provided by their employer. They switched to another firm who paid them on a price basis as long as they provided their own Van and tools. They purchased an old Van for £200 and borrowed and scrounged the necessary tools. The work was hard and somewhat technical, but they learned on the job and were soon quite proficient at carrying out this type of work in what was a fairly new industry following deregulation.

K at the time remarked to his friend in a moment of exuberance, that someday they might own and run 4 or 5 of these vans. His friend on hearing this and looking around at the decrepit state of the vans immediately burst out laughing.

Some 6 years later K ran a fleet of 300 vehicles from small vans to heavy construction equipment. His firm’s turnover was in excess of £20 million and employed up to 1,000 operatives.

K was able to expand his business so dramatically because he was initiated into self employment by working under his own control on price based work under the SC60 regime. He was lucky to be in at the start of a new fast growing industry. However, he was given the opportunity to take baby steps towards running a business without any business training or professional advice, ultimately allowing him to grow his business dramatically. Had the rules proposed in the new consultation documents applied, K would still be working as a chef.

Case study - A self employed journalist would not be affected

L became a freelance journalist after he left staff employment with a national newspaper, to enable him to look after his disabled son.

Anyone can call themselves a freelance journalist because there are no rules or qualifications required. The tools of the trade are usually commonplace too, being limited to a home computer with internet access.

He has varied contracts – writing a monthly column for a trade newspaper, producing features for a couple of Sundays, and occasional copywriting jobs. He estimates that he has 20 or 30 different jobs a year, from a mixture of sources – like a builder but he does not get his hands dirty.

L says that the flexibility of freelancing has allowed him to write about a wide range of different things, and allows him to keep up his training for occasional editing jobs. He enjoys not having to specialise in one subject area, as he had to as a staff journalist attached to a business finance team.

He struggled with the basics of accounting at first, but was soon able to manage his money, even though payments came in spasmodically, whilst his bills continued to arrive.

The lack of security from freelancing made L invest in health insurance and sickness cover because a long stretch of illness would mean no income. He also set up his own pension, which he controls on an affordable basis, rather than by making fixed monthly payments. As a freelance, L has had to get used to living with uncertainty.

He pays tax on his annual profits - what is left after his expenses have been deducted from his earnings. Expenses that he incurs include things like the cost of his home office space, consumables, and travel.

Were the Treasury’s proposed deeming rules extended to sole trader journalists, L would need to seek a staff job again, or have a significantly reduced income.

3 The evidence base is flawed

The Paper makes use of ‘evidence’ that is questionable and bold assertions that are not supported.

Statistics quoted in the Consultation document are limited, however there are a number of anomalies that are unsubstantiated or have incomplete references and are therefore unable to be verified.

Yet, in an independent review of this document by Susan Kirk of Nottingham Business School (Nottingham Trent University), it was found that,

Overall, given the questions over all calculations and statistics supplied in the Harvey report which has informed this consultation document, and the questionable assertions listed below, the accuracy of the Impact Assessment contained within the Treasury Consultation paper has to be questioned.

A number of specific assertions made in the Consultation document are questionable. For ease of reference, these are detailed below:

Paragraph 2.5

‘Within all industries and sectors it is the case that certain services will be provided on a self employed basis and this is no different in the construction industry. However, within this industry there is a much higher proportion of self-employed workers than in other sectors. The results from the European Labour Force Survey 2007 showed that 34 per cent of workers in the construction industry are self-employed, compared to only 11 per cent across other sectors. 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.’

The figures quoted above are flawed as they disregard the fact that construction workforce is predominantly male. The Construction Statistics Annual 2007 (Department for Business Enterprise and Regulatory Reform) shows that 92.7% of the workforce in Quarter 1 of 2007 were male. OECD statistics (www.sourceoecd.org/employment/9789264014190) show that for 2007 self employment in the UK was 13.8% overall but 18% amongst males. The same report shows self employment amongst males in the European Union at 20.1%.

The Construction Industry is project based. Each project requires a different set of skills to deliver it to completion. Self employment delivers the structure to deliver such projects with out the costs of redundancy etc that would be expected at the end of each project if employees were used. The Construction Statistics Manual 2008 (Office of National Statistics) shows that only 60 out of 192199 private contractors employed over 1200 people in 2007. Of the total private contractors 134,638 employed fewer than 4 people (70.1% of the total), 74325 employed one person. The new proposals would adversely impact many of these businesses and thus reduce the flexibility of the industry to deliver projects efficiently.

Paragraph 2.6

‘In addition, both HM Revenue and Customs’ (HMRC) compliance activity and statistical evidence points towards there being a substantial number of workers in the industry, working under employment terms but being presented as self-employed. Given the nature of construction work, the supply of materials, plant or equipment is key to the completion of any contract. In 2007/08, the Government estimates that there were 300,000 subcontractors operating within the Construction Industry Scheme (CIS)1 who did not claim any deduction for the costs of materials, nor for plant and equipment. These subcontractors provided none of the materials or plant and equipment which would form a substantial element of any contract and provided only their labour. The Government believes that a large proportion of these subcontractors, who represent approximately one third of the active subcontractor population, and are operating as sole traders, will in fact be working under employment terms.’

As discussed above the Government Estimate of 300,000 is based on incorrectly comparing the level of overall self employment in the UK to the level in construction. Given that the workforce is predominantly male and that self employment is higher in males the Government estimate is overstated. Furthermore as discussed above the nature of Construction and the need for flexibility leads to higher rates of self employment.

Paragraph 3.3

‘False self-employment may also contribute to a culture of employers neglecting their wider responsibilities in accordance with employment law.’

There is no evidence to support this statement. There is significant evidence to show, however, that self employed subcontractors are less likely to have on site injuries than employees. HSE statistics show that self employed subcontractors accounted for 12.1% of injuries in construction in 2005/6 (www.hse.gov.uk/statistics/causacc/tables.htm#kind) although they represented above 30% of the workforce.

Paragraph 4.7

‘Measures designed to encourage voluntary compliance have in some cases resulted in workers and engagers seeking other ways to disguise employment, which is evidenced by the growing use of intermediary structures.’

There is no evidence to support this. Self employed subcontractors, along with other self employed individuals, have moved to outsource the billing and collection of their services to third parties. This allows the subcontractor to spend a higher proportion of his time on delivering services and generating income. The use of an intermediary is more cost effective than engaging staff, thus increasing the profitability of the business. It has long been acknowledged by HMRC that the ability to manage one’s affairs in such a way that profitability is increased is an indicator that the worker is self employed.

The use of an intermediary does not disguise employment status – the same, well established criteria still have to be applied to the working relationship in the time honoured fashion.

Paragraph 6.6

‘In the Government’s view, the effect of the decrease in wages would be to reduce the number of people willing to work in construction at the lower wage meaning the impact of the measure would be shared between workers and employers.’

There is no statistical proof to support this argument. Indeed there is a danger that the pressure to decrease costs to protect, already thin margins, will result in an increase in undeclared work and a resultant decrease in HMRC tax take. A recent report by the European Foundation for Improvement of Living and Working Conditions found that whilst most of Belgium’s construction sector comprises of employees with a permanent contracts the sector was of the most effected by undeclared work and it is estimated that migrants employed illegally in construction activities increases total employment by almost 30%.

Paragraph 6.9

‘Overall, labour and product market efficiency will benefit from the removal of two distortions to competition: first, between firms within the construction industry who use false self-employment and those that do not, and second, between the construction industry as a whole and other industries where using false self-employment is not widespread. Removing these artificial benefits to the construction industry will level the playing field, allowing labour in the economy to be allocated more efficiently.’

The proposals would reduce the efficiency of the market by increasing the costs of doing business in the industry. Each time a major project finished a number of employees with skills not suitable for the next project would have to be made redundant with attendant time and monetary costs.

We would suggest that the answer to the perceived problem of any inequality created by false self employment is for the long established criteria and caselaw to be applied by HMRC to a far greater number of contractors than has been the case in recent years. The current rules are perfectly adequate but require more rigorous and widespread policing by HMRC.

4 The net result of the proposal for construction workers is that their pay will reduce

Confusingly, the new rules do not alter a worker’s actual status. These rules will “deem” any payments made to the worker as employment income and the income will be taxed accordingly, unless one or more of the “key tests” are met. “Deemed payments” will be liable to employees’ and employers’ national insurance.

This will of course impact severely on a main contractor’s ability to trade profitability. Increased national insurance costs will remove a significant chunk of profit from a contract. Will the worker request more money to counter the effect of being unable to claim business expenses to offset against his earnings? What will the financial damage be to a business if HMRC applies these new rules to a large, previously self-employed workforce and charges penalties for failing to apply the new rules in addition to tax and national insurance?

The estimated annual gross income of a construction subcontractor is £25,300. The number of projects a subcontractor can work on in a year varies significantly depending on the trade of the individual and the economic climate. An expert in tunneling would work on relatively fewer projects as each is likely to be large scale and lengthier. On the other hand plumbers are likely to work on many more smaller jobs.

‘Deemed employment’ will cause a significant increase in bureaucracy and confusion. Using the HMRC estimate that 300,000 people could be impacted by the proposed changes an extra 3 million P45’s will be generated if each subcontractor takes on 10 projects a year. Some skilled trades people will attend and complete more than one job in a day, resulting in the multiple P45’s for that day. This will increase the administrative burden on both the subcontractor and his/her client.

‘Deemed’ workers will pay PAYE and NIC, but will not get employees rights, such as:

• Contracts of employment
• Company sick pay rights
• Performance-related pay
• The National Minimum Wage rates
• Working time limits (the 48-hour week)
• Rest breaks
• Overtime
• Holiday entitlements: the basics
• Time off for dependants (compassionate leave)
• Time off for public duties
• Employment protection during business transfers and takeovers

5 The Consultation paper shows little understanding of the real dynamics of the construction industry

The origin of self employment in construction is a function of the industry cycles and process, and is not borne out of a desire to avoid tax and NIC contributions.

Contracts are let on the basis of the job price, not the notional employee head count. Thus the worker is seen as a commodity to be hired and fired as the contract permits.

Additional points

• Chris/Dave to challenge the selective quotes taken from websites and point out that this is not the industry norm. P8

Case Study - Dry-lining Plasterer makes good

C learned his skills as a plasterer when he was a young man. He spent many years working as a subcontractor for some of the larger contracting firms. All the work was carried out on a price work basis. A culture of working at speed and efficiency evolved while working to a high standard. Work was often carried out in teams and a strong sense of camaraderie developed.

His first break came when he and a group of plasterers were asked to complete the dry lining for prestigious hotel that was running behind schedule. C and a small crew worked long hours 7 days a week on a price basis to complete the work within the allotted time. The crew shared the profits evenly but it made C think that he would like to do this on his own account.

C continued in this fashion for a number of years but being somewhat driven, constantly yearned to start his own dry lining business. He realised that by simply registering for VAT he could take on a small job and get some of his friends to work for him on a price basis (as before). As payment terms in the industry were fortnightly, he only required minimal working capital. His wife operated the very simple deduction of CIS tax (SC60 version) and he was suddenly in business.

As a hard worker who had leadership qualities he was soon taking on larger and larger jobs, eventually using the services of an accountant. A number of years later he employed a quantity surveyor and started purchasing materials.

C now has a Limited Company and employs 200 plasterers, 3 Quantity Surveyors with a sophisticated management structure. He has branched out into other business ventures including property development.

Case study - Ground worker works his way up to employ 10 men

M left school at 15. He had no formal education or skills. He started work on building sites - working for many years with various ground work contractors. M enjoyed operating plant and was good a fixing them when they broke down. He worked hard and made regular money on an SC60 basis.

When he got married and his first child arrived, he became motivated to improve his circumstances. He and his brother took on a number of small ground work jobs for the various subcontractors he had worked for in the past.

He registered for VAT and obtained a gross payment status which allowed him to be paid without the deduction of tax by his clients. His accountant explained some of the fundamentals of record keeping and carried out his bookkeeping and prepared his accounts each year.

M did well and grew the business, acquiring new equipment and employing up to 10 operatives. His accountant certified his income and he was able to take out a mortgage and now lives in a comfortable 4 bedroom house. This is something he would not have been able to do had he not started his own business. Many of his friends live in council accommodation. M also makes provision for his retirement having taken out a personal pension. He often remarks that despite his lack of formal accommodation he feels very fortunate that he started his first job in the construction industry, otherwise he feels he would have experienced regular bouts of unemployment like many of his contemporaries.

Answers to Consultation questions

Question 1: Do these criteria represent fair indicators of a person who is running his own business and is therefore genuinely self-employed?

No they do not. The document suggests that there are three reliable indicators within the context of the construction industry, of a worker being in receipt of self-employment income. These are the provision by the worker of:

• Plant and equipment which is required for the job – this does not just mean traditional hand tools, but all major items.
• All materials required to complete a job.
• Other workers to carry out aspects of a job, but only where the worker is personally responsible for paying them.

If a worker can meet ANY ONE of these tests, he will be regarded as self-employed. These tests will be applied to each engagement undertaken by the worker, so that on one job he may be regarded as self-employed and on the next job he may be taxed as an employee.

Part of the argument put forward for the use of these key tests is that if any one of the tests were brought to a tribunal as evidence it would represent a “killer fact” that would almost inevitably lead to a status finding of self employment.

It is difficult to follow the reasoning behind this argument. In recent status cases HMRC pursued arguments for groups of subcontractors to be reclassified as employees. In each case the status of almost all of these workers was held to be self employed. If the three “key tests” outlined above had been applied in these cases, every worker would have been treated as being in receipt of employment earnings. There appears therefore to be clear evidence that the three “key tests” proposed by the Treasury and HMRC are extraordinarily harsh compared to the well-established status tests that are applied in appeal cases.

Question 2: Are there other indicators which ought to be considered?

There should only be one test of self employment – applicable across the entire UK workforce, and not just to the construction industry. The Courts have been extremely active over the years in examining status and it is difficult to see any reason why the criteria established by the Courts should be ignored and replaced by the proposed key tests.

The concept of control is, we would suggest, impossible to ignore. Many workers set up in business because they want to be their own boss. They therefore have a fair degree of control in how and when they work and control must surely be a key test.

Question 3: 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? If so, please provide examples.

Of course, this is the current situation – refer to case law. A bricklayer who builds a wall with bricks supplied by the contractor, a mixer supplied by the contractor and who does the work himself meets none of the 3 key tests, but if he decides when an how to do the work, prices by metre, provides his own public liability insurance and protective clothing and has to spend ½ day rectifying bad work without further payment, then he will be found to be self employed under current law.

Question 4: 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?

The VAT threshold is £68,000 per annum. The average self employed construction worker earns an estimated £25,000 per annum. This proposal would penalise a worker who was either not very successful or who would turn work away because he only needs to earn a certain amount (which is below £68,000) in order to lead the lifestyle to which he aspires.

Question 5: Is the payer the correct person to have the responsibility for applying the criteria and applying Pay as You Earn (PAYE) and NICs?

When IR35 was initially proposed, the intention was that the payer would be responsible. These rules were changed prior to becoming law, making the payee responsible. It is surely fair for the worker to be responsible for applying PAYE, as it otherwise places what in some cases will be an intolerable administrative and financial burden on the contractor.

Question 6: Are there instances where the introduction of the deeming provision could bring about a significant additional administrative burden? If so, please give examples.

Employers would be required to undertake the starter and leaver procedures for all of their ‘deemed’ workers.

Using the HMRC estimate that 300,000 people could be impacted by the proposed changes an extra 3 million P45’s will be generated if each subcontractor takes on 10 projects a year. Some skilled trades people will attend and complete more than one job in a day, resulting in the multiple P45’s for that day. This will increase the administrative burden on both the subcontractor and his/her client.

Not only will this potentially increase the payroll burden for those who pay such 'deemed workers', there will be a significant increase in complexity if the worker has a number of different 'deemed employments' throughout the tax year. It is likely that some of those ‘employments’ might occur simultaneously.

In addition, if the worker also engages in residential work – which is expressly excluded from the scheme, the resulting complexity of ‘deemed employment ‘ and self employment will produce a huge additional administrative burden, including on HMRC.

There would be a significant administrative burden on the workers themselves, who would be required to keep track of their tax and NIC affairs – making sure that their P45 is passed from employer to employer for example. The risk for them is that the process is not efficient and that they pay the wrong level of tax as a result. There will then be a large increase in tax refund claims to HMRC, often involving a high level of complexity, and certainly more costs for the Government.

Should a ‘deemed worker’ lose a P45, their next ‘employer’ will need to follow the HMRC procedure and complete a P46 form and submit it to the Revenue.

For example, plasterer J Smith works 5 days a week for 3 weeks finishing a commercial property. He is a deemed employee for that period. He is inducted in the starter procedure by the large construction company, and at the end of his term, is issued with a P45 – although it takes sometimes takes two weeks to process. Simultaneously, he works on two Saturdays out of the three for people in his village, on small private plastering repair jobs. He is self employed for this work, as it is outside the scope of the ‘deemed scheme.’

This pattern of work continues over the tax year, with mixed ‘deemed employment/self employment’ during the period. In all, J Smith is deemed employed’ for 11 spells of work, each requiring a starter and leaver procedure. This ‘deemed employment’ includes work for 7 different contractors over the year. On no occasion is his P45 ready for his starting day for his new ‘deemed employment,’ and he has to spend his breaks phoning up previous ‘employers’ to chase it up. He is charged emergency tax as a consequence.

As work is currently hard to find, one of his assignments meant that he had to move from his home in Luton to work in Sheffield for two weeks of ‘deemed employment’ finishing off a retail centre. As he is not self-employed for this work, he has to travel to the job at his own expense and pay for lodgings out of his ‘deemed wages.’ He has worked out that he would have been better signing on as unemployed rather than take this work.

J Smith also undertakes 16 days work as self employed, serving 24 clients. The payments he receives will be dealt with by his accountant who will have to complete his tax return.

Over all, his take home pay has reduced considerably, through a combination of being wrongly coded and with significantly reduced allowances for his expenses. As predicted in the Treasury paper, he is less inclined to continue working in this way and is now looking to take a steady job, perhaps as a security guard, making his money up through tax credits.

He reckons he could get more than £280 per month in tax credits.

Question 7: Are there occasions when the deeming provision could impact on the adaptability and flexibility of the labour market? If so, please provide examples.

This is a major weakness in the proposal, please refer to section 5 of our submission.

Question 8: What avoidance routes might be available and how should these be countered?

There are no avoidance router available now and we would not expect any to become available under any new proposals. Status is quite simple – one looks at the working relationship in practice and applies the criteria established by existing caselaw, and if the parties cannot agree, the tribunals/Courts will decide. No amount of clever avoidance can circumvent the basic criteria. Either the worker is self employed based on how he interacts with this engager, or he is an employee. The current law has been valid for many years and has not suddenly become bad law. What appears to have changed is the amount of resources which HMRC is putting into the reviewing of working practices concerning status, and if resources were increased with more and better focus, any workers who are being treated as self employed but who are actually working as an employee, will be identified and tax/NI recovered as a result. An increase in resources and activity by HMRC would send a message to contractors that the status is their workforce should be reviewed and any status reclassification applied before HMRC paid a visit. This would, in our view, have the desired affect without any need to penalise the industry where workers are genuinely self employed, and avoiding the unfair action of treating the construction industry differently to all others.

The Chartered Institute of Taxation have also responded and share our views.
Click here for more information.