False self-employment: A false economy?
Nichola Ross Martin presents a short story illustrating why the government’s false self employment rules are stranger than fiction for those in the construction industry.
It’s August and the dog end of a long summers’ day. John Weasley, a patiently greying accountant, tax compliance public servant and sole proprietor of Weasley and Co shuffles around his office searching for something. A snail trail on the ribbon of paint that hangs down from one of the broken sash windows glints at him in the afternoon sunlight. For a fleeting moment John forgets where he is and who he is. Then he finds his glasses and the awful truth comes flooding back: The Finance Act 2010.
He sits back down. The letter: today he must finish the letter.
The letter, John does not like to remind himself, is to a client. A long standing, faithful and dependable client, who due to mutal sympathy and the effluxion of time is also now a firm personal friend. A client who has brought John a steady stream of personal tax, and the odd corporate tax clients over the years. A client whose business has weathered the rough and the smooth of credit crunch and recession and now, well, who knows what?
Terry Naughty took over his father’s company, Naughties Construction Company Limited, when the old blighter finally shuffled off his mortal coil by falling off a roof at the tender age of 56. Suspicious of those who managed his father’s finances (the company was in dire straights), Terry walked into the offices of Weasleys and found himself a new accountant.
He turned the business around. There are days though, even with the assistance of John, when Terry feels like more of a troubled form filler than a hands-on builder, and his missus Donna has to spend every morning opening mail and typing on the computer.
A builder’s life involves is a never ending array of paperwork, from quotes and orders, delivery notes and returns, invoices and credit notes, to CIS forms, PAYE forms and other tax induced frustrations. Naughties has weathered several recessions, paid more than anyone’s ‘fair share’ of tax penalties over the last two years and has just had a narrow escape from jeopardising its gross payment status after the main contractor on the company’s largest project went under. “What will be the effect on the sub-contractors? Will any of them still be paid gross this time next year?” Terry mused to John.
Then there is the Finance Act. When the UK’s budget deficit hit 200% of GPD, the Treasury announced a national state of emergency. The election was cancelled and a new Finance Act was passed, without debate. Under the government’s new scheme to extract even more cash from the construction industry, companies like Naughties will have to put all their workers on the books, regardless of actual employment status or economic reality. That means less take home pay and more tax for the workers and employers’ NICs at 12.8% for the engager.
John’s heart sinks. Naughties made its first loss since Terry took over last year and the current year looks so bad that Terry is already considering laying off one of his employees. How is he going to take even more bad news? Will this be the end of the company and many others like it?
Naughties, like 101 other small building firms demands a flexible workforce, and Terry makes ample use of his address book full of jobbing builders when it suits him (and them).
Generally, workers are able to come to his assistance at the drop of the hat. It suits the business, and the company is engaged in a variety of different projects from small domestic repairs, to sub-contracting in million pound renovations (city bankers particularly favour this part of rural England for their weekend retreats), where he is expected to have a minimum of three men on site on a daily basis. Then there’s the seemingly endless site work on the sprawl of the county’s new eco town.
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Naughties has four full time employees excluding Terry and his wife. The company takes on sub-contract labour as and when, typically the company uses between five and ten different individuals at any one time. These include:
Terry Two, Jim and Clive who are sub-contractors, generally engaged by other firms in the week but they will work for Terry sporadically and at weekends. Saturdays are generally quite relaxed and more subbies can be brought in at short notice – they’re happy for the extra hours and the chance to avoid household chores at home.
Griff, Paul, Darren and Andy are a gang of mobile brickies. They like to work together when they can. They are experts in what they do and a project manager’s dream. True jobbing builders, they move from site to site in a patch which covers four counties.
Taylor and his mob are plasterers but they will also render the outside of your building it you want. These men are machines, and they work in an interchangeable gang of up to five men leaving acres of pristinely smooth walls in their wake as they power on from site to site.
Terry also uses a large number of other contractors, who will come in to do specialised jobs as and when they are needed. This could be from laying a stone or wooden floor in a farmhouse or a patio in a new development to additional first or second fixers, electricians, plumbers and general labourers in a new build.
Each group comes onto site for one to three weeks on average, the brickies stay a bit longer perhaps. ‘Flexibility’, is Terry’s motto and the key to making a profit.
What of the government’s new rules? “False self-employment?!” Terry sniffs when he reads John’s letter. His sub-contractors come and go at will and generally charge by the job, but sometimes by the hour or on piece work. It varies according to what is needed.
Naughties tends to provide all the materials - how else do you think that it achieves such good bulk purchasing discounts? It hires all the large tools too, partly because these are all factored into its quote to the client or main contractor. Besides which, on a busy site, management is the key and Terry needs to monitor security in and out of the gates. Can anyone imagine what would happen if each site worker came and erected his own scaffold? As far as he knows none of his subbies is an employer in their own right, although some of them work in gangs. As he understands it, if the government has its way, this means that every one of these men will be his employees for tax purposes. Can this really be right?
It means that some workers will insist on supplying their own materials, which will may cause costing to run wild and be duplicated (he will have to do the costing and get quotes in order to check that what he is being charged is fair). Large tools are a problem from a logistical perspective. Should he just say no tools or materials but insist that they all take on a Saturday boy, so they can claim to be employers? Will that work out?
The awful truth of the matter is that he may well end up having to inform the brickies and plasterers that he is going to deduct tax and they will probably try and charge more. He is not looking forward to negotiations.
The knock-on effect for John is something that he had not really considered. He does the tax for many of those who work with Terry (including the plasterers and brickies). He stands to lose over 100 clients under these proposals. “Oh, blow” he sighs, “so, I incorporate the lot of them or face less income and save tax and NICs. I suppose what comes around, goes around”.
The consultation paper, 'False Self-Employment in Construction: Taxation of Workers' is open for comment. Send in your observations by 12 October 2009. Click here to download the paper.
Nichola Ross Martin FCA, heads up www.rossmartin.co.uk a unique practical tax database with Virtual Tax Partner support for accountants.