Subbie or employee?
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Traditionally, the construction industry has often faced problems with the taxman, and consequent tax liability, over whether operatives are classed as being subbies or directly employed.
Back in 2009, we wrote about how, after decades of grumbling about false self-employment in the construction industry, the Government had decided it is time to tackle the problem head on and legislate to make the position clearer. Three years on what has happened to the proposals? Why have they still not materialised?
What's the scale of the problem?
According to HMRC and HMT, false self-employment occurs where workers are treated as self-employed for the purposes of income tax and National Insurance contributions (NICs) despite the fact that the way in which the work is carried out on a day to day basis demonstrates that there is an employment relationship. The number of subcontractors working within the Construction Industry Scheme (CIS) in 2007/8 who did not claim deductions for the cost of materials, plant or equipment (i.e. those suspected of false self-employment) is estimated at 300,000. The cost to the Exchequer of the lost tax and NICs is in turn estimated to be in the region of £350 million pounds per annum.
What was proposed?
Under the proposals, a worker would have been deemed to be receiving employment income if the worker provides construction services to a person whose main business involves carrying out or commissioning construction operations unless one of three exceptions is met:
- Provision of plant and equipment - this excludes the provision of tools which it is normal and traditional in the industry for individuals to provide for themselves to do their job
- Provision of all materials - this includes all the materials required to complete a job
- Provision of other workers - this includes responsibility for paying those other workers (who may in turn be deemed to be receiving employment income under the provisions)
The person paying the worker (this may be the engager, an employment agency or an intermediary) was to be responsible for applying the test and, if the worker was deemed to be receiving employment income, operating pay as you earn (PAYE) and paying employer's national insurance contributions (NICs).
The proposals are bad news particularly for specialist contractors and small companies in the industry who often in practice engage specialist expertise, often consisting of single specialist operative people for commissioning, testing, design or commercial services, who would not want to be engaged on an employment basis.
Why have the proposals not progressed?
In Spring 2010, HM Treasury and HMRC published their joint comments on the responses received to the 2009 consultation. The opinions of those responding to the consultation were mixed as to the efficacy of the proposed ‘deemed employment’ legislative tests and the administrative burden of the proposed legislation. The overwhelming view from the construction industry was that the proposals as they stood would not achieve their aims. Despite this, the Government expressed its intention to press ahead with legislation with improved legislative tests. However, in view of the potential effect on the costs and flexibility of the labour market in the construction industry, the Government decided it would wait until the economic recovery is more firmly established in the construction sector before introducing legislation.
So it seems that, but for the double-dip recession, the proposals may have progressed by now. As it is, given that the construction sector (and the economy in general) is now in a worse state than it was in 2010, it seems likely the proposals will remain shelved for the medium term at least.
For more information on the subject matter of this article, please contact Scott McKinnell and Emma Cross on 0800 840 4929.