Draft legislation following HM Revenue & Customs’ recent review of self-employment in the construction industry may still be at least a year away but proposals set out in the consultative document, False self-employment in the construction industry - taxation of workers, are already causing widespread consternation.

The proposals would see self-employed contractors who fail to meet certain criteria considered as employees and therefore liable for PAYE and National Insurance (NI); and the fear is these latest anti-avoidance measures will increase the cost of hiring, restrict the required flexibility of the workforce and impact employment rights for the genuinely self-employed as well as increase the administrative burden for everyone.

Even umbrella companies, which could stand to be the winners as the increased administrative burden turns greater numbers of self-employed workers towards an umbrella arrangement, are outspoken on the subject. “It may have a positive effect for the umbrellas but you are going to lose the flexible workforce - which I would have thought is pretty key at the moment,” says Trudy Gordon, managing director of umbrella company, Gabem Management.

She also expresses dismay that following the introduction of the Construction Industry Scheme (CIS) and managed service legislation, construction is once again being targeted by HMRC.

Ted Winterton, regional managing director and recruitment specialist at Bibby Financial Services, is also critical of the ‘blanket’ approach that is being taken to the problem and believes that is going to place a lot of additional pressure on recruiters. “They will be under a diktat that they have to do something until they can prove to the contrary,” he says. “It will mean increased paperwork, increased time; it will push up prices and it’s not properly looking at the core problem. It certainly won’t do the construction industry or the recruitment industry any good at all.”

HMRC estimates it is losing £350m annually in tax and NI because of what it refers to as “false self-employment” where a worker is being treated as self-employed for tax and NI but the way in which they perform their duties on a daily basis demonstrates that an “employment relationship” exists with whom they are working for. HMRC believes the best way to tackle this issue is to introduce legislation which “deems” workers within the construction industry to be in receipt of employment income unless they meet what it describes as one of three “simple, clear and easy to apply criteria”:

• that a person provides the plant and equipment required for the job (this excludes standard tools of the building trade required by a construction worker to do their job);
• that a person provides all materials to complete a job, or
• that a person provides other workers to carry out operations under the contract and is responsible for paying them.

While HMRC may have spelt its criteria out plainly enough, even a casual observer would have to question whether it has thought through the implications. It will mean contractors will be forced to deduct tax and NI from labour-only sub-contractors, which will make it more expensive to hire people at a time when contractors’ cash flow is limited. In turn this will encourage more illegal cash-in-hand work with a combined effect of further stymieing the sector’s recovery. What’s more, labour-only subcontractors will find themselves subject to PAYE and NI like employees but will not benefit from the employment rights such as statutory holidays or company pensions.

Alan Nolan, senior partner of the Aspire Business Partnership, an independent consultancy advising on tax matters to the construction, recruitment and managed service sectors, and who provided a detailed response document to the consultation, has deep-rooted reservations about the proposed changes. “This is masking HMRC inadequacies in its compliance regime and [secondly], I’m not totally convinced in the consultative document that the Revenue has proved that a bogus self-employed position exists,” he says.

Brian Pursey, group chief executive of Oriel, a specialist provider of outsourced financial solutions and business services to recruitment agencies and SMEs, is similarly at a loss to see any sense behind HMRC’s latest foray into the sector. “HMRC is trying to squeeze a quart into a pint pot because they want these guys to be employed and not self-employed. But rather than tackling the core issue it is trying to put through some fancy legislation to get around it,” he says, adding: “When you do that you end up with a mess.”

Working with contractors, we can already see within the draft legislation ways that we can change things such that they remain self-employed

Among a host of concerns highlighted in Aspire’s response document is a belief that the reclassification will lead to a rise in tribunal cases as well as “significant” confusion around direct employment versus deemed employment. Nolan also told Recruiter that the deeming process represents a potential “administrative nightmare” for recruiters and employers as staff will consequently have to be trained in how to deem employed status as well as how to then process the individual. He adds that this flies in the face of the original aims of CIS, which was brought in to reduce administration. “So are we saying the CIS has not done its job and we really should be looking at a radical overhaul of the CIS rather than putting another patch on the significant patchwork quilt that we have around employment and self-employment?” he asks.

Gary Butterworth, managing director of Zeva, an umbrella and sub-contracting firm which specialises in the construction sector, suggests a solution to the deeming challenge might be that companies like themselves offer a deeming service. “We already do that assessment. So rather than an agency having to deem 1,000 of its contractors to be employed or self-employed and take the risk, they could just pass them over to us and then [HMRC] only has to deem us,” he says.

Whether any proposed changes would spawn a new service or not, there seems little doubt the umbrella companies will benefit. “I should think the umbrella companies will be rubbing their hands [and] in truth they will be hoping it comes off, whatever they say to you,” says Pursey. “People will shift their payment from going through the CIS to being paid through umbrella companies.”

Pursey also points out that people will resort to finding other ways around the legislation to preserve their self-employed status. “Certainly working with contractors as we do, we can already see within the draft legislation ways that we can change things such that they remain self-employed,” he says.

“If someone is truly self-employed, HMRC can try as long as it likes to push them down another route but it will fail because they are truly self-employed. If it wants to tackle this HMRC should do what actually it wants to do which is change the tax structure of employed people,” he concludes.