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Chancellor in £350m PAYE crackdown

The Treasury is proposing plans to tackle what it calls “false self-employment”, which could land the construction industry with a bill of up to £350 million through an increased cost of labour.

HM Revenue & Customs believes up to 400,000 site workers are registered as self-employed when they should be employees, saving both the contractor and the worker thousands of pounds in tax and national insurance contributions.

The Treasury is proposing all construction workers be deemed employees and be subject to PAYE taxation unless they supply their own materials, provide a substantial amount of plant, or are providing other people’s labour as well as their own.

Nick Bustin, senior manager for employment tax services at accountancy firm Mazars, said: “The proposal includes a test specific to the Construction Industry whereby workers who provide, for example, their own heavy equipment, materials and other workers will be treated as self-employed. This will establish a distinct industry-based test which does not apply in any other sector. Similar proposals have been considered in the past and not implemented, so it is unclear why they are considered a viable option now.”

The plans were announced in the chancellor’s last Budget to tackle the issue and a consultation paper has now been officially launched.

Treasury bosses say false self-employment costs the Exchequer £350m per annum because of less tax and NI being paid.

The consultation documents say a possible effect of the proposals is an increase in the cost of labour to construction firms, resulting in either an increase in pre-tax wages or a decrease in post-tax wages, or a combination of the two.

The dominant effect is thought likely to be a decrease in post-tax wages, as income taxes are for the most part passed on in full to the type of workers affected.

In the Government’s view, the decrease in wages will 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.

Jason Campbell, chair of the Recruitment and Employment Confederation’s Construction Group, said: “Any change in status also comes at a cost to the supply chain and it is vital that this is properly understood.

“Recruitment agencies are in a position to easily supply flexible workers on a PAYE basis; however, it is vital that the supply chain meets the cost of this change and that the workers involved understand its implications.”

A Treasury spokesman said false self-employment occurs when workers are treated as self-employed for tax reasons despite their work on a day-to-day basis showing an employment relationship.

He added: “The problem of false self-employment affects not only the ability of compliant businesses to be competitive, but also workers’ entitlement to social security benefits, as well as representing a risk to the Exchequer.”

Readers' comments (3)

  • So now we have to deal with further attacks on an industry already devastated by the current financial climate.
    The true fact is that self employment works particularly well in construction because of the "nomadic" nature of the workforce.Added to that the customary rise and fall of workloads experienced by sub contractors in particular means that self employment is appropriate otherwise companies would be in a continual process of shovelling the paperwork involved in lay offs,redundancies etc. not to mention the costs of payments for these issues together with the staff time involved.
    Let's not forget that it was the government who sanctioned the use of self employed labour by the introduction of the 714 scheme way back in the 60's and this led the workforce to believe that they had the licence to use this new scheme regardless of whether they were truly self employed or not.Employers also believed that the use of self employed labour suited the needs of the industry for the reasons mentioned above i.e nomadic workforce etc.
    Of course the use of self employed labour had the effect of enabling contractors to keep costs down but these cost savings were passed onto the clients -not into the profits of the employers.
    In recent years HMRC have tinkered with with the original concept of 714 cards ,the latest being the introduction of the CIS (Construction Industry Scheme)
    but in reality this doesn't change the fact that self employment is still being legitimised by the government since "a rose by any other name is still a rose"and the continuance of schemes by HMRC will always encourage "self employment".
    As a user of self employed tradesmen we know only too well how difficult it is to get tradesmen to go "books in" indeed ,during the recent HMRC blitz ,we found that when we suggested our workforce were to be recategorised to "books in"there was such resistance that 95% of the workmen stated categorically that they would leave our employ with the result that we were forced to give in to their demand to remain self employed otherwise we would have been faced with the prospect of failing in our contractual commitments to our Main Contractor clients with all the penalties that would have created.
    In the end if HMRC want to get rid of what they would like to call bogus self employment then they should cease any schemes which encourage it.After all it is they and not the employers who now issue the "licences"which confer self employed status to the workforce by giving UTR numbers to them.
    I would suggest that it is HMRC who are abrogating their responsibilities - not the employers- and the solution lies in the hands of the government.
    The application of fines etc.to those employers who, in the eyes of the Revenue have wrongly classified their workforce,will result in the construction industry suffering even more in the present climate with inevitable further failures in the companies within it.

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  • Let us remember that the tax deduction scheme for the Construction Industry was introduced in 1971 to tackle the perceived substantial tax leakage in the industry.

    In March 2000 the Gov suggested that:
    "The widespread availability of certificates encouraged misuse of the documents and tax evasion continued at an unacceptable level. The loss to the Exchequer is believed to be well above £100m per annum."

    The fact is that the Gov has encouraged this method of working since the early 70's. The change away from direct employment has resulted in the majority of major contractors and others changing their business models. The shift away from direct employment was not initially of the industries own making and cannot be reversed overnight.
    Regrettably it will once again be the reputable contractor that has to deal with HMRC in hob nail boots !


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  • traditionalpainter

    Why is it such a surprise that employers find a way to reduce costs via treating what amounts to full-time employees as self employed. And it should be no surprise either, that Mr tax man wants to recover his pound of flesh.

    There is no free lunch, and if a contractor has what amounts to full time employees doing his work, don't account for them as subbies. And rather than revert to type and bleat about extra costs, pay your taxes and make extra profits by offering comprehensive valued added services that subbies alone cant offer.

    On the subby side of things, huge number of site workers know very well they are dependent on the contractor and arent free agents - ie self employed- in any way except as a convenient tick on the employers tax return. There should be no hard feelings about an end to free tax wages, because anyone knows that if tradesmen are really self employed, the disadvantages are massive compared to being on the books. No weekly wage, loads of admin, extra expenses with vans, all your tools, kit, pricing... You know the drill. And to be fair, the govt should leave true self employed alone as much as possible.

    If you ask me, the whole self employment paradigm from the 80's created a head ache for all, and created more problems than it solved. Many clients suddenly lost access to tried and tested firms with in house expertise right across the board. Instead, they, and contractor wannabe's have been faced with juggling a mish mash of contracting individuals,involving admin nightmares for all concerned.

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