'False self-employment' in construction

Alistair Darling announced at Budget 2009 that the Government would be addressing the issue of 'false self-employment' in the construction industry. What new developments have now been announced?

What is the issue?
HM Revenue & Customs (HMRC) has historically taken a hard line against what it sees as false self-employment, that is, workers treated as self-employed when HMRC's opinion is that they should be treated as employees. The issue is an important one to the Government, as employed workers generate more tax revenue than self-employed workers. As a result it is keen to ensure the correct classification of workers. HMRC reportedly believes up to 400,000 site workers are registered as self-employed when they should be employees, costing the taxman up to £350 million in lost tax and national insurance contributions.

To date, there is no simple legislative test which defines what 'employment' actually is. The matter is determined through judicial precedent, and there are many cases which have addressed the issue. The bank of case law on this matter provides a number of factors which must be considered together to ascertain the nature of the engagement between the worker and contractor.

What is HMRC proposing?

With a view arguably to making this simpler, HMRC has issued a consultation document which proposes tests which, in certain circumstances, will classify self-employed workers as 'deemed' employees for tax purposes. Where a worker is deemed an employee by virtue of these tests, PAYE and National Insurance Contributions (NIC) will need to be deducted from their pay, and the 'deemed' employer will also be required to pay employer's NIC on earnings and benefits. Therefore this will be a significant change to their current tax position.

The test for 'deemed' employment asks the person paying the worker to consider three questions:

1. Provision of plant and equipment
Does the worker provide their own equipment necessary to perform the job (excluding tools it is expected individuals should provide themselves)?

2. Provision of all materials
Does the worker provide all materials necessary to complete a job?

3. Provision of other workers
Does the worker employ the services of others to perform a job?

A worker will have to meet one or more of these three criteria in order not to be 'deemed' to be in receipt of employment income for PAYE and NIC purposes. Not only will this potentially increase the payroll burden for those paying 'deemed employees', there could be a great deal of complexity if the worker has a number of different 'deemed employments' throughout the tax year, some of those employments perhaps occurring simultaneously.

The matter is open for consultation until 12 October 2009.

Anil Patel, Senior Tax Manager in Employer Solutions at Grant Thornton says "This is an increasingly important issue for our clients, and we will be putting forward our response to the consultation document to make sure our clients' views are represented. Experience has shown that when such matters are suggested in this way it nearly always goes on to become legislation although we will be lobbying hard to encourage Government to consider very carefully the full implications of these proposals. In the meantime, businesses should consider the impact that this potential change in the law could have, and contemplate what action (if any) should be taken."

Please contact us if you would like further advice on any of the above.