Questions have been raised about the feasibility of a 'business reality test' that has been proposed to deal with the problem of bogus self-employed labour.David Rogers and Jon Fletcher report
TO SAY news of plans to introduce a self-employed tax test for the industry has created a bit of a stir is rather like suggesting the demise of Paula Radcliffe in the Olympic marathon didn't create many headlines in the British press.
In the words of tax expert Alastair Kendrick at accountant Ernst & Young, plans to get the so-called business reality test onto the statute books by next year have created a 'complete hornet's nest' The test is designed to prove that workers who claim they are self-employed are exactly that. If they don't pass the test - which is expected to include questions about whether an individual is VAT-registered or not or whether they employ other people - the idea is that they will be automatically placed onto PAYE.
The test has been pushed for most concertedly by Liz Bridge, Construction Confederation head of tax.
She met paymaster-general Dawn Primarolo at Easter to warn her that enough was enough and something had to be done about the problem of bogus self-employed labour.The result was the proposed business reality test.
In theory, it seems like a good idea. It will root out a problem which has dogged construction for ever and a day, and legitimise day-to-day working practices. Construction needs to clean up its act. It is constantly told so by people who drift into it and then move on, so what better way than stamping on the dodgy geezer practices like this which happen every day?
A former tax inspector herself, Ms Bridge said: 'We want a level playing field for everyone in construction.We know we have in the industry hundreds of thousands who should be in PAYE but aren't.'
The issue of self-employed labour has long vexed the industry and the Inland Revenue. For those legitimately self-employed there is nothing to worry about, goes the refrain.The idea of a test to prove someone's employment status is meant to be the classic win-win situation politicians love to talk about.
Contractors who play by the rules see the playing field levelled while the Revenue collects more tax.This is of course the news that really excites those at the Treasury.
But some in the industry are now claiming that hopes have been raised too high about exactly what the business reality test can do.
One source, who has regular meetings with the Revenue, said: 'A lot of people are worried about what Liz Bridge has said to Primarolo. Has a deal been done? This will cost main contractors more in things like holiday and sick pay and so on.Why would they want to do that? I think they want to be clean and they're prepared to pay for it.That's the impression I'm getting.
'But specialist trades think they've been shafted and that Liz has played up the potential to Primarolo. In some ways the Revenue has been backed into a corner because it will say it hasn't got the resources, which are pretty stretched as they are, but it is going to have to come up with a pretty good reason why this test won't work.'
Privately, the Revenue is getting in a sweat about how it will police this test. It knows full well contractors will want them to have the final say on whether somebody is genuinely self-employed or not.
The source added: 'If the Revenue says to the industry 'you as the contractor have got to be satisfied that somebody passes the self-employed test' then the industry won't go along with it.Why would they want to take the risk of being fined, of having inspectors crawling all over their books? They wouldn't. If the Revenue can resource it, it's likely it will go ahead.'
In fact the Revenue may have no option but to resource the proposals itself.The source said: 'The Treasury must have some idea of how much it can get in tax which it may have already banked into future financial funding.'
Expressing any kind of sympathy for the Inland Revenue is pretty much akin to suggesting drinking and driving is a good thing but in this case it's hard not to have a smidgen of understanding for those in Somerset House.
Officially the Revenue is not saying too much just yet. It stated last week:
'It is clear from representations made by members of the construction industry and trade unions to the Inland Revenue that not all contractors are meeting their responsibilities on employment status. Industry representatives have complained that this creates unfair competition between those meeting their responsibilities and those that are not.
'A consultation process has been set up and is ongoing to explore whether a business reality test is feasible.Those participating in the consultation process include businesses of all sizes, trade unions and professional advisers with an interest in construction.'
The Revenue points out there is no statutory definition of employment and self-employment for tax purposes. Under the Revenue's guidelines, 'people are self-employed if they are in business on their own account and bear the responsibility for the success or failure of that business; and they are employed if they personally work under the control of their engager, and do not run the risks of having a business themselves' But for the moment the Revenue's main concern is to shepherd through the planned changes to the existing Construction Industry Scheme, designed to come into force by April 2006. It has enough on its plate, considering that it plans to mastermind the switch from a paper-based system to an IT one.
More discussions are planned on the business reality test this autumn with the next meeting on the whole issue pencilled in for October.
What the Revenue will come up with remains to be seen. Experts believe the taxman is nervous about repeating the mistakes of the past.
Mr Kendrick of Ernst & Young said: 'There were problems the last time anything like this was tried, which was in the late 1990s. It's got to be done properly; it can't be a piecemeal attack on the industry.And the other problem is that some firms will end up losing good workers.They will go to contractors who will put them on a self-employed basis.'
Indeed some main contractors claim that many of the workers they deal with are happy to remain self-employed for all sorts of reasons. One top 10 contractor, who asked to remain anonymous, said: 'Our experience is that many CIS4-holders are quite happy to pay the appropriate tax burden and have no desire to be employed.They want to remain self-employed and bear their own responsibility for holiday pay and so on.They want to retain the flexibility of working for different contractors. It would be wrong to assume that all CIS4-holders are deliberately attempting to withhold tax.'
Some cynics, unions notably, would argue that main contractors, ever keen to abdicate their responsibilities, would say that. But as Mr Kendrick pointed out, workers - good or not - are lured to rival sites by the promise of more money.
Clearly much more needs to be thrashed out. Suzannah Nichol, chief executive of the National Specialist Contractors Council, said: 'We obviously do not support bogus self-employment but we do have concerns that an unworkable system may come in. Bricklayers are not going to come in on the train with all the bricks for the job. Floor layers will have their own tools but materials will be provided for them.Are they employed?'
Ms Bridge is hoping that draft legislation for the business reality test could be introduced as early as next spring when the Government's finance bill is debated before Parliament.That at the moment seems ambitious but, with the Construction Confederation and unions both pushing the idea, the likelihood of a business reality test in some form becoming reality would seem near.Too close, clearly, for some.