The taxation of workers in the construction industry has always been a contentious issue between HMRC and taxpayers. HMRC would prefer, wherever possible, to treat workers as employed and subject them to Pay as You Earn (PAYE) and higher rates of National Insurance (NICs).
HMRC have been challenging the self-employment status of construction workers for many years and there have been a number of contested cases which have gone to the specialist tax tribunals. By and large, taxpayers have succeeded in arguing, in a wide range of circumstances, that they are self-employed.
HMRC have responded with a consultation paper in which they are proposing to introduce legislation under which the income of self-employed workers in the construction sector will be reclassified and subject to PAYE and higher rates of NICs.
This reclassification will apply when a person ('the engager'), whose main business involves the carrying out or commissioning of 'construction operations', uses the services of a worker to carry out such operations. Under these circumstances the payment received in respect of those services will be deemed to be employment income unless the worker is able to meet one of the following stringent conditions:
- Provision of plant and equipment – the person provides the plant and equipment required for the job they have been engaged to carry out (excluding tools of the trade which it is 'normal and traditional' in the industry for individuals to provide for themselves to do their job);
- Provision of all materials – the person provides all materials required to complete the job; or
- Provision of other workers – the worker provides other workers to carry out operations under the contract and is responsible for paying them.
Currently HMRC are collating responses to the consultation document with a view to pushing through legislation as quickly as possible.
The proposed legislation is driven by a desire to increase yield and demonstrates the Government's determination to crack down on a sector perceived by it to be noncompliant. The proposed 'remedy' will however see many fully tax compliant contractors and construction businesses suffer.
Self-employed contractors who are caught by the proposed legislation will have to pay NICs at a far higher rate than at present and construction businesses will have to pay NICs on the payments they make to such workers.
It should be noted that the consultation document, while making it difficult to be a self-employed labour only subcontractor, affords no employment rights to those who will be caught.
In addition to raising more revenue for the Government, the proposals will also burden those responsible for paying the worker with the task of applying the new test for determining whether the worker's income is to be treated as employment income. In addition to construction businesses, employment agencies and other intermediaries may be affected by this increased administrative burden.
It would be prudent for existing arrangements to be reviewed in the light of the proposed legislation. The consultation paper contains a number of examples as to how the new 'deeming' would work and there remains scope for the income of a worker not to be deemed employment income.
As each case will turn on its own facts, it will be important that, when status is challenged, the facts are properly presented to HMRC if a successful argument is to be made that a person is self-employed. HMRC often cave in when faced with a properly presented case supported by a robust technical argument.