The construction industry. By Simon Sweetman
Simon Sweetman wonders whether the next tax amnesty should centre on employer compliance in the construction industry.
Sometimes you get so used to something that you can't see how odd it is. There was paper written recently by Mark Harvey and Felix Behling of the University of Essex called 'The Evasion Economy: False Self Employment in the UK Construction Industry' that was quoted by the construction industry trade union, UCATT.
Is this going to become an issue?
Historically the construction industry scheme, introduced in about 1971, was an attempt to bring some order to a chaotic industry suffering from the 'lump' or excessive casualisation – rather like fruit picking today. Even getting a list of those who had been paid by a contractor was probably fruitless, because the right name and address would be very unusual. So the introduction of deductions from gross pay was something gained for the Inland Revenue, and brought those who wanted certificates into the mainstream of taxed self employment. In those days it was rare to hear any talk of 'status' and the job of PAYE compliance was to sweep up the totally untaxed employees from smaller employers. Yes, most of the construction industry depended on workers who in most respects looked very like employees but the Inland Revenue was just pleased to be getting any tax at all from these guys, rather than setting out to reclassify them. I remember when I was an inspector, small contractors explaining to me that it was not exactly easy to withhold the tax when faced with a bunch of labourers on a building site on a Friday.
So over the years the Inland Revenue was happy to collude with the industry and pretend that people who on the face of it looked like employees were genuinely self employed, even if it was a rather special category of self employment.
But that was then and this is now. The scheme was reformed in 1976? And now we have the new all singing all dancing scheme, but we also have now is a much more serious effort by HMRC to reclassify workers as employees: an effort of course supported by the trade unions who want to see the workers getting the benefits of employment. So now we might want to ask how the construction and especially the very large businesses that now dominate it, can seem to be getting away with practices that other industries can't.
What the authors of the report say is this: the level of registered self employed is uniquely high in the UK construction industry, and can only be attributed to the presence of false self employment on a massive scale. Self employment is between two and three times higher than any other advanced building industry, including the famously flexible US labour market. Even within the UK, the construction industry is a freak case in terms of the level of registered self employment.
After a short period of decline, the evidence now is that false self employment is once more on the increase
The authors are surprised (and so am I) that the Treasury Minister, Stephen Timms, dismissed the matter as being of little concern to the government, stating that it was a 'matter for the industry' and not 'for government to regulate how companies are organised.' This is extraordinary and would not, I feel, go down very well in – shall we say – the IT contracting industry where the government has seemed very ready to regulate away.
So this tells us nothing that we did not already know (though it may be that many people did not). The construction industry has become the elephant in the room of employer compliance, and rationally it is time to do something about it: it would surely be a case for amnestying those who are now prepared to put their houses in order.
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Replies (13)
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status issues tomorrow: gross payment status today
Hopefully articles like these help to generate concerted effort by the professional bodies and the industry, so that Revenue build in concerns at a policy level BEFORE the process is rolled out.
Of more pressing concern is the operation of a "by the book" policy by local districts regarding gross payment status and compliance failures. Is anyone aware of HMRC being receptive to "special circumstances" arguments were gross payment status is being revoked because of compliance failures?
It appears there is little discretionary power for HMRC to halt the revocation process ... reasonable excuse only. Have the professional bodies/industry lobbied for leeway to be shown, particularly in the current economic climate (similar to the special treatment afforded agri-business in the wake of foot-and-mouth)?
Sole reason
@Howard:
"Are there subcontractors who stay with the same firms for years? Undoubtedly."
So were it not for the fact that they were officially sole traders, the Intermediaries Legislation would deem them to be employees ?
Self employment market driven
I agree that self employment in the construction industry is market driven in that the self employed can achieve a higher net pay and employers a lower cost base.
The political decision is whether this should be considered an acceptable position.
Workload fluctuations can be covered through Agency staff (employed by the agency) and genuine subcontractors.
The side effects of the self employed hire/fire mentality is a lack of training/development and a low cost/low quality industry.
Employment in construction is key to modenising the industry, training the workforce we need for the future and raising standards.
The best way of changing the current position would be to reduce the financial gap between self employment and employment.
Non quid pro quo
@Ian:
Yes, sounds ever so reasonable, but those "caught" by IR35 do not currently receive any "employment-like" benefits as a consequence of having to pay more PAYE/NI than a "standard" employee. (And I'm sure most would rather be "uncaught" than receive any benefits.)
So how would that work out - state-funded "Statutory Holiday Pay" ?]
And I have never heard any "official" reference to this issue - although for agency workers it would at least seem equitable that they would get automatic statutory protective "opt-in" to the Agency regulations, or the Temporary Workers Directive, as a "worker with ... an employment relationship with a temporary agency".
Self Employment
I must disagree with an earlier comment that it is a myth that self employed workers are cheaper.
As a contractor with directly employed staff we have to compete against those using self employed.
It is only necessary to look at the NI savings to the employer and the tax savings to the employee to see the difference not to mention the number of schemes there are around to "convert" employed to self employed none of which seem to be dealt with by the revenue.
Certainly fluctuating workload is a problem but that can be dealt with by agency staff (properly employed by the agency). Motivation of hourly paid staff has to be handled in other industries and I don't see why it should be an exceptional problem in construction that can only be resolved through casual labour.
Amnesty
I thought the construction Industry already had an amnesty in 96/97 ? or thereabouts. More rigourous enforcement is what we need, to support those that are trying to get it right, HMRC are still unable (goodness knows why) to spot the obvious offenders.
Make taxation levels the same for self employed
The first step should be to make taxation levels for (low capital) self employed and directors of small (low capital) companies match closer to the taxation levels for employed people. Likewise the fact that someone is label as self employed should not have a great effect on what benefits they can get.
Then there will be a lot less people trying to abuse the system so the system should be able to be made a lot less complex.
At present there is the problem that HMRC can only cope with two states, “employment like” and “business like”. In real life a lot of people are somewhere in the middle, so there should be a new state “some were in the middle” that is tax in the middle of employment and company tax. E.g. you must pay out 50% of you contact value var PAYE. The least that is needed is for training/tools cost (include a reasonable portable PC every few years) to be allowed under IR35.
The Construction Industry
First, can I dispel the myth that 'self-employed' workers are cheaper than employed? My experience is that they are not! I'm a Director of a Construction company that employs around 40 and has 12 - 15 regularly engaged on 'self-employed' contracts, as well as many 'bone-fide' sub-contractors. It is fair to say that that using Labour Only Sucontractors can be advantageous for sudden increases, or decreases in workload, but by far the biggest driver is that many crafts people want to be Self-employed! They can work the hours they wish and because they're usually paid on some kind of measure or total price are usually very keen on getting on with their work, so usually work with a minimum of supervision!
We've been through a Compliance Review in 2007, which took months (three meetings and hours of senior management time) and during which we were automatically treated as guilty with each decision we had taken seemingly being reviewed for errors, although it finally ended up with HMRC 'happy' that we had conducted 'appropriate status reviews' and were closing the file. We make sure each of our S/C's want to be self-employed, carry P/L insurance, that they are correctly contracted and that they provide their own tools & transport.
I've no doubt there are contractors out there that try to abuse the system, just like there's a small minority that try to abuse, cheat, scam any system, but that doesn't mean everyone is guilty!
Perhaps UCCATT should spend some of it's money on setting up one or two workers co-operatives and show us how everything it advocates can be done successfully in a competitive economy.
Profits or Compliance?
For a contractor to employ his labour involves further costs such as NIC, holiday pay etc. Over the years I have seen many contractors trying to do the job properly by employing workers under PAYE but they need to compete in the real world and contracts are lost to those firms using cheaper forms of labour such as the self-employed sub-contractors.
Unless there is a level playing field for all contractors there is no incentive to join the PAYE club and the suggested amnesty is worthless if work cannot then be obtained.
Construction Industry - a special case
The Construction Industry in several respects does seem to be a "special case".
The workers are, as pointed out, are very commonly self-employed.
The is little job security for workers.
Workers have virtually no rights by being self-employed.
The above factors work hand in hand - it could be said morally that the the tax "adavantages" of being self-employed compensate for the lack of employment rights and job security.
As for employee rights, one contractor client of mine was well and truly ripped-off by a former worker who he took on on an employed basis (because paid hourly rate, worked for no-one else) - not surprisingly that contractor is not enthusiastic about taking on any more employees - new workers will be piece-work / job-rate subcontractors on a self-employed basis from now onwards.
Having been involved in several contractor "Employer" compliance reviews in recent years for contractors and never yet had a case of having to concede employment status for workers, I see no reason why my contractor clients should change the status of their workers to employees, just to fit in with all-UK-every-industry statistics when their own industry (Construction) has its own unique circumstances.
Agree with Everyone
(I can't believe I just wrote that)
Simon is right to say that this is the elephant in the corner. There are some significant parallels and overlaps with IR35. And commonsense (and probably EU law somewhere) demand a level playing field not only within the construction industry but also as between the industry and the wider economy.
To get an insight into the size of the problem try googling "tax refund" and "cis" with the UK filter on. Then draw your own conclusions from the existence of dozens (hundreds?) of specialist outfits boasting of their prowess at garnering tax refunds, with many offering "no refund, no fee"...
Wrong again
Hmmm, so I was wrong a while back to comment that the CIS seemed like the IR35 of the construction industry - nothing at all like it, based on Simon's penultimate paragraph.