Proposed changes to application and collection of PAYE (pay as you earn) tax will hit the recovery in the construction sector, according to Bibby Financial Services.

The yet-to-be-agreed legislation would cover PAYE to all self-employed subcontractors unless an employer can prove that materials, tools and/or additional labour is being directly provided by the employee.

Contractors will be obliged to deduct tax and National Insurance contributions from the otherwise self-employed subcontractor, a process many fear will unnecessarily increase hiring costs, will further boost the illegal cash-in-hand workforce and ultimately hit the recovery of the sector.

Jason Heath, construction finance specialist at Bibby Financial Services, says: “It’s no secret that the construction industry has been one of the worst hit by the current recession. The Office for National Statistics recently reported that the total volume of output by the construction industry fell 10% in the 12 months to the second quarter of 2009.

“Understandably, therefore, contractors with limited cash flow are in an already highly precarious position. This will further be exacerbated by the proposed changes to PAYE which will increase their own initial outlay while providing an additional reason for clients to extend payment terms, ultimately stifling the much needed recovery of the sector.”