The taxman has been moaning about bogus self-employment for decades. Well, he’s not moaning anymore: he’s getting his money, or else
If you go to Building’s website archive and enter “bogus self-employment” as a search term, you will pull up 56 hits stretching back to 1999. All are different, but they all form part of the same story: up to a million workers are making a dubious claim to be self-employed, thereby earning up to £100 a week more than their directly employed colleagues and depriving the Exchequer of £350m a year. The unions fight for state intervention, and HM Revenue and Customs is continually planning/implementing a crackdown, usually by means of changes to the construction industry tax scheme (CIS). And nothing much changes – until now.
The Revenue’s latest plan is to scrap the CIS and tax all workers at source using PAYE. It may sound like a simple step, but it is hard to overstate its importance for the whole of the industry. Put simply, the principal effect will be to impose external control on a large, and largely unregulated, area of the industry, and the implications of this go well beyond the financial realm.
Who is affected
The change will alter the employment conditions of two groups of workers: those who become companies and so do not pay payroll taxes or National Insurance (NI), and workers supplied by labour agencies.
To take the first group first, the Revenue estimates that 300,000 subcontractors, or about a third of the total, claim to be self-employed even though they do not bring their own tools and take instruction like any other worker. Under the new system, they would be moved onto PAYE and the Revenue would levy income tax and NI. That means the firms that use these workers will have to pay their contribution to NI, adding 13% to their wage bills.
The second group is workers supplied by labour agencies, all of whom will be taxed at source. Liz Bridge, secretary of the Joint Taxation Committee, which includes the UK Contractors Group, says it means “agencies that offer a real service finding good quality workers will survive, and those that are just factories for avoiding PAYE will have to find something else to offer” (see "The end of a tax scam" below).
The most obvious implication of the change is that contractors and housebuilders will have to pay more for their workers, and because they are trading in a buyers’ market, they will find it hard to pass those costs on. John Slaughter, director of external affairs at the Home Builders’ Federation, says: “We do not believe the evidence has been produced to justify this proposal. Adding to costs and reducing flexibility in this way would hinder recovery and amount to a tax on jobs.”
As Steve Acheson points out overleaf, employers may have other motives for lamenting the loss of the CIS. A genuine subcontractor relies on its contract and the provisions of the Construction Act to regulate its dealings with the employer. An individual presenting themselves as a company does not, and nor are they protected by employment law. As Acheson says, this makes for a flexible, cheap and compliant workforce.
The other side of the argument is given by Julian Weightman of Borber Craft Homes. He says that given the industry’s need to routinely mobilise and demobilise labour, self-employment through the CIS is an effective system. This may be true for some companies, but others argue that the move to PAYE will eliminate the benefits of being a bad employer: the self-employed are not offered training in health and safety or skills, although last week’s Donaghy report may have more to say about these issues than the Revenue (see last week’s leader for more on its recommendations). Jason Farrell, director of risk management company CR Management, says the change will “create a more level playing field, as those who employ staff are struggling to compete.”
For the unions, the decision is a partial victory. If the number of directly employed workers is increased, it is likely to greatly increase the labour pool that it can recruit from and organise, thereby increasing their income and clout.
It may also go some way, in conjunction with the Donaghy report, to address their long standing concern over the plight of “vulnerable workers” – that is, migrants hired by agencies highly skilled at exploiting them (see "Been a long time coming” below). Their terms and conditions are likely to be more transparent, and so easier to police.
However, the proposed change will define these, and other, workers as employed only for the purposes of NI and income tax. Employers will not have to give them holiday and sick pay. Bridge says: “The legislation would leave employer and worker arguing the toss just as they do now. The Revenue is saying, give us our tax and then decide what the law says about sick and holiday pay.”
The end of a tax scam
This clampdown may be painful but it’s desperately needed
The consultative document released by the Treasury last week is a ray of light in an area of construction that HM Revenue and Customs has allowed to fester in the dark for years – bogus self-employment.
The document begins with a trip through their sad attempts at coercion. Each of them worked for a year at most – or while HMRC was watching. The minute HMRC looked away, bogus self-employment was alive and well.
So now HMRC is proposing force, in the shape of legislation, and I for one am delighted. I am sick of measures that affect some firms and not others, where contractors have to guess whether they will be caught and take silly risks simply to keep competitive. I have had it with workers who refuse to work unless they are taken on as self-employed but who are not prepared to take the sort of risks that running a real business entails such as buying materials or paying VAT.
The proposals outlined in the paper are rough drafts and it will be important that everyone works to improve them. In a nutshell the legislation will say that when a worker is paid for construction work, their pay packet will be taxed under PAYE unless:
- They provided the plant and equipment needed for the job
- They provided all the materials
- They brought and paid other workers.
What the proposals do not say is that the worker is an employee, just that tax and class one NI contributions must be deducted from the payment, so those who say they need casual workers for flexibility can still have them.
Where HMRC has shown cunning is that it is the payer of the money who will be responsible for paying the money. This is a knife to the heart for all the strange intermediaries and agencies that beset construction’s self-employed labourers.
And yes, there will be screams of pain. We are an industry in recession. We do not need added costs. My answer to that is that these proposals have no start date – a whole industry must be educated to move together into the brave new world on an agreed date.
But do they respond to a need? Yes, they do. We work in a dirty old world where some employers struggle with PAYE and others sail along without.
So what should construction firms do now? Well, first, read the proposals on the Treasury website. Then think how they could be designed so they only catch workers who are not really in business at all and leave the genuinely self-employed alone.
And what about adding a fourth test: that the worker has to be VAT-registered before they can be considered self-employed? How many businesses can supply all the materials for a job, or supply substantial plant, or provide and pay other workers and not trigger the VAT threshold? Why not use this legislation to strike a blow at the black economy?
These are my personal views – the Joint Taxation Committee for Construction has yet to discuss the proposals. But I hope I have stirred you up to at least look at these measures and once you have thought about them, send me your comments – using the following questions:
- Do the three criteria fairy indicate who is genuinely self-employed?
- Should other indicators be considered?
- Are there instances where none of the criteria are met, but a worker should still be treated as self-employed?
- Would it be helpful to include VAT registration?
- Is the payer the correct person to have the responsibility for applying the criteria and operating PAYE and NICs?
Liz Bridge is secretary to the Joint Taxation Committee for Construction. Please send comments to Liz@thetaxbridge.com.
What is bogus self employment?
It’s when you tell the taxman you’re self-employed when you’re actually behaving as you would if you were “on the books”. So, you’re obeying orders, working fixed hours and not providing your own equipment.
What’s the point?
Employers only pay National Insurance (NI) contributions for people they directly employ. Meanwhile, self-employed people pay lower NI than others. The self-employed are taxed on their “profits” and the rules on what they can deduct from the gross income are more generous than those applied to the directly employed. So bogus self-employment makes, or saves, money for both employers and workers.
Why clamp down now?
The government has tried all sorts of ways to stop bogus self-employment over the past 15 years but none have worked. Now that the Revenue is under intense pressure to increase its tax take, it has naturally reached for the most powerful weapon in its armoury: PAYE, which allows it to grab the cash before the employee has even seen it …
One initiative was to write letters to anyone using subcontractors to ask them to check that they were correctly registered. Strangely, this terrifying tactic, which involved two years of brutal, unremitting letter-writing, had little effect.
What’s different now?
If the new regime comes in, anyone working as a subcontractor would automatically be taxed under PAYE unless they meet one or more of the following criteria:
- They provide all the materials and tools needed to do their work
- They supply other people’s labour
- They provide a substantial amount of plant.
The housebuilder, the worker and the contractor
‘It will open a can of worms’
Julian Weightman, partner in housebuilder Borber Craft Homes, average turnover: £1m
This is another burden to businesses when times are already tight. The news is disappointing – we need this like a hole in the head. I can’t quite believe the government would bring this in when the industry is already on its knees.
My firm employs 12 people, all of whom are directly employed, but we often use specialists who are classed as self-employed. On any given week, we employ between six and eight specialists, such as tilers or roofers. We use the guys frequently, every six weeks or so, but not enough to employ them directly. There’s a real worry that the men we use will simply drop out of doing work for us and work for domestic clients instead, or simply slip under the radar.
If the government wants more tax, they should ask the self-employed workers for it: I’m sure they would oblige, given the alternative that’s being imposed on them. They like their freedom and independence.
It won’t lift the cost of houses – that’s dictated by the market – but it will restrict the supply of housing. If the costings and the figures don’t add up, developers won’t do the scheme. It might only be an extra 13% for our specialists on a house, but that could easily add up to thousands of pounds, which could make the project unviable. If lots of housebuilders take the same view, it could restrict the overall supply. Ultimately, I think this will threaten jobs in the industry.
I’m not really sure what our options will be. This tax change will open a can of worms. This sector needs the flexibility of specialist trades. It’s a wonderful idea in a utopian society, but with the black economy as it is, the situation’s only going to get worse.
‘I was so fed up with it’
Steve Acheson, 56, self-employed
This is a change that is long overdue. Most workers really want this. I worked as a self-employed labourer three years ago, and I swore I ‘d never do it again. You have far fewer employment rights, and you’re much easier to dismiss – something that is especially significant in the downturn.
A few years ago, you could get almost £3 extra an hour if you were self-employed and working for a contractor. I was on £16 an hour, compared with the £13 I work for now, and you can claim back a lot of income tax. I paid about £4 NI a week, compared with the £80 I pay now. But you have no pension, no holiday rights. You think you’re getting more money, but you’re not. You’re not eligible for half-time and double-time pay and as I said, there’s no protection from being dismissed.
Often, you also have to pay to receive your wages. Most composite companies [which handle the legal and administrative duties of the “self-employed” subcontractors] charge £26 a week simply to get paid. I complained to the DTI at the time, I was so fed up with it. It’s not right. Everyone should have a legal right to earn their wage and not have to pay for it.
Often you turn up to a site and are made to sign up through an agency or a composite company. One job I worked on had 10 agencies on site. On another, out of the 1,000 men working, classed about 900 as self-employed. It keeps the men fragmented, and stops them from organising. It’s this fragmentation and casualisation of labour that it is to blame for the awful statistics of construction deaths in the industry.
If this change comes about, it will be a great benefit to the industry. There’ll be a lot of workers happy to be done with the CIS scheme.
‘It’s a dog fight’
Peter Stone, commercial director of contractor GB Building Solutions, turnover: £207m
This is another employment cost being imposed, which is going to get passed down the supply chain just at a time when we need to be looking at cutting costs. We probably have about five to 10 self-employed workers on each of our projects, and we could well get caught by this. It’s not a massive number, but we are a business, and it is still an additional cost.
In most instances, we’re on fixed-price contracts, so we’ll be forced to bear the costs. On projects we’re bidding for though, we will be forced to add the extra cost onto our tender price, so the client will have to take the burden.
It will become another commercial pressure in the dog fight to win work. It may be that we have to take the cost though – you do what you have to to win work in the current situation.
I suppose the argument is that it will create a more level playing field in terms of the revenue generated, but I don’t think there will be huge benefits. In terms of it improving health and safety, that’s about how you set your business up, how you go about appointing the supply chain and how you set the project up, not whether you’re paying someone’s NI. The health and safety culture of a site should be set by the main contractor, not by the amount of tax they pay for their workers.
I can’t imagine many people being in favour of this because it will push up the cost of employment and make things more difficult in the market. It will make firms ask whether they really need these extra workers or not.
Been a long time coming
Previous efforts to stamp out bogus self-employment have had, as HMRC admits in this week’s consultation, “no significant lasting effect on levels of false self-employment within the industry”. These include a moratorium in 1997 which allowed people to switch to PAYE without being asked to pay back the income tax and NI on their previous time spent falsely self-employed. It led to just 18,000 workers in the industry switching, and many switched back over the following few years.
In 1999 the government introduced the CIS card system, under which subcontractors must get a card by registering as self-employed with HMRC and employers must check the card before making gross payment. But the scheme’s flaw was that employers had a financial motive to classify individual workers as self-employed to avoid paying NI contributions.
Throughout 2004 to 2006 the HRMC attempted to put pressure on firms engaging subcontractors by sending letters reminding them to determine the correct employment status of their workers. The move had “a limited positive impact”.
Then, in 2007, the government asked employers to consider whether the workers were truly self-employed. Most did.
The unions have long been trying to stamp out bogus self-employment to protect vulnerable workers.
Last spring a TUC report claimed that the CIS allowed companies to register migrant labour as self-employed and therefore avoid paying their NI contributions and benefits such as holiday and sick pay. This, like the other initiatives failed to make a significant impact on the problem. The new “deemed” employment regime, however, looks set to have a massive impact …
Original print headline: 'No more Mr Nice Guy'