Don’t argue for the postponement of the Construction Industry Scheme – it should be scrapped so that the self-employed can get on with boosting the economy

Chancellor Gordon Brown implied during the general election campaign in April that, if re-elected, he would reduce the amount of unnecessary regulation being piled on to business. Four months on, it is already clear that, like most other implied promises from modern politicians, it is not going to be honoured – not by a long way.

Take another look at the key issues raised by Building in July and August. In one form or another, they are about regulations, most of them unnecessary and ineffective, many imposed simply to protect the backs of politicians, government and the construction industry’s supervisors.

One particularly vindictive set of regulations will cause more damage to construction than the whole of the rest combined. That is the revised Construction Industry Scheme, the Inland Revenue’s latest method of stamping out the “self-employed problem”.

For details of this real threat, I recommend that everyone re-read “How to get into an impossible position” in the last issue of Building (12 August) straight away. This documents two fundamental changes to the old CIS:

  • The responsibility for determining whether or not a person is self-employed is being dumped onto principal contractors, based on criteria the Revenue has yet to publish. Penalty fines will be automatically levied when contractors get it wrong, which will no doubt be frequently if there are no clear rules to abide by.
  • The whole system will be online, using software the Revenue has yet to prepare. Most construction companies will have to replace their entire business systems to comply because the Revenue has decided to use “access payable software” that nobody else does. This means replacements costing thousands of pounds for small companies and hundreds of thousands for larger enterprises.

There is unprecedented universal condemnation of the Revenue’s arrogance in refusing to postpone the launch until they have produced the software and we have bought the hardware. They have dismissed all suggestions and pigheadedly pushed on with their own dogmatic solution.

But why are we calling for only the postponement of this unnecessary and spiteful regulation? It is not going to make much difference to the amount of tax collected; it will simply switch the cost of collecting it from the Revenue to the industry.

These proposals are too flawed to be postponed. They should be scrapped altogether and contractors, subcontractors and the self-employed should be taxed in the same way as any other business. There should be no special restrictive registration, no unnecessary bureaucracy and no discrimination against the most productive sector of our economy – the self-employed.

The Revenue has always denied that its subcontractors’ registration schemes were designed to coerce the self-employed to change to PAYE status. But it is hard to disagree with Mr Justice Park, who said during Usetech Ltd vs Young in 2004 – a case dealing with “disguised” employment, as covered by IR35 – “the Revenue would have the whole world on PAYE if it could get away with it”.

Tax consultant David Smith, writing in Taxation magazine on 28 July 2005, reports that the Revenue’s annual “frightener” letters to tens of thousands of contractors and subcontractors are misleading. They imply that they have conducted in-depth analyses when they have not; they quote incorrect examples of self-employment “tests” and they list all the benefits of going on PAYE without mentioning the benefits of self-employment.

The self-employed play an essential role in many sectors of the UK’s economy. They are flexible, self-motivated and efficient. We should give them the legal right to remain self-employed, and thereby protect them from a bullying Revenue with its own oppressive agenda.

If Gordon Brown does not pull the plug on the CIS and IR35 it will be the biggest (and most expensive) mistake of his eight-year term.