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False self-employment in construction: taxation of workers – July 2009

Response from the Recruitment and Employment Confederation – October 2009


1.    INTRODUCTION

1.1   This paper outlines RE C‟s response to the consultation on false self employment in
      construction. It has been written in consult ation with members of the RE C‟s Employment
      Policy Committee, REC Legal Services and members of RE C Construction Executive. In
      addition an online survey was open to Construction Sector members for further feedback.
      REC participated in the Construction Employment Forum in 2008 and has spoken to its
      members in the construction field over the last year about the issue of false employment.

2.    ABOUT THE RECRUITMENT AND EMPLOYMENT CONFEDERATION

2.1   The RE C represents around 8000 recruitment company branches, estimated to constitute half
      of all recruitment agency branches by number but a higher proportion by turnover. Over 85%
      of the industry is made up of small businesses. In 2007/ 08 the recruitment industry generated
      a turnover in excess of £27 billion and plac ed 1.2 million people into temporary jobs every
      week in every sector of the labour market. In addition to this, nearly 800 000 permanent
      placements were made by the recruitment industry. The RE C Construction sector has around
      150 branches in membership.

2.2   REC members sign up to our Code of Professional Practice and we take complaints against
      the Code. In recognition of the need to cement RE C as a brand of quality recruitment, four
      enforcement officers have been rec ruited to make random checks on our membership. Over
      10% of membership have now been subject to inspection.

2.3   REC also supports its members through the provision of a free legal helpline, standard
      documents, training and professional qualifications for the industry and a service that helps
      start ups in the recruitment industry.


3.    GENERAL COMMENTS ON THE CONS ULTATION DOCUMENT

      Self employment in construction
3.1   The consultation paper states on page 5 that there is “no obvious reason why the proportion
      of self employed workers in the construction industry should be so high”. The RE C disagrees
      with this statement on two grounds:
       Firstly construction is a project based profession with workers moving from site to site as
          the build is complet ed. A more mobile work force is likely to have a higher degree of self
          employment as workers would be looking for more autonomy to pick and choos e the
          locations of their work, rather than being moved from site to site by their employer.
       Secondly construction involves many skilled crafts which are easily applicable to any
          construction site. Workers can therefore trade more easily on their skills and so are more
          likely to be self employed.
      The correct use of self employed status in the construction industry is t herefore a valid form of
      engagement and the Treasury and HMRC should not seek to brand autonomous workers as
      employees for tax purposes. This could result in a false employment status.

      Compliance activity in construction
3.2   The paper highlights concerns that current compliance activity is not effective in construction.
      However it offers no real explanation as to why the proposed criteria would yield more results.
      HMRC should be able to demonstrate why the new criteria would be easier to enforce before
      introducing deeming legislation which over-rules common law on employment status.
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      Supply of workers in construction
3.3   The RE C Annual Industry Survey for 2007/8 estimates that the construction rec ruitment
      sector supplied 170 000 temporary construction workers into work ever week. From our
      surveying and consultation of members it is thought that the majority of these workers are
      supplied by the agency with the agency paying an intermediary gross for the work. The
      intermediary then makes the relevant deductions for tax, usually under the CIS scheme. Very
      few agencies make deductions under CIS as the deeming provisions for employment
      agencies to deduct employed levels of tax and NICS under ITEPA 2003 are very stringent. A
      number of agencies also make PAYE deductions of construction workers they engage – but
      these may fall out of scope of the CIS. At the higher end, where workers may not be able to
      access deductions under CIS, they often work through their own limited company. This would
      include engineers and technical staff.

3.4   It is worth noting that recruitment agencies only supply a section of flexible staff in the
      construction industry. There are also many labour only sub-c ontractors who supply and
      control their workers on site. These are distinct from agencies who place workers under the
      client‟s supervision.

      Intermediaries in construction
3.5   Members report ed a growth of intermediaries in the construction sector. This may be as a
      result of the MSC legislation (in the 2007 Finance Act) which shut do wn cert ain intermediary
      structures. Members prefer to have a Preferred Supplied List of intermediaries through which
      they pay workers. As explained in 3.3 most agencies do not mak e deductions under CIS. So
      when a worker believes they are working in a self employed manner and would like to be paid
      under CIS deductions then an agency will ask that the worker finds an int ermediary to do this
      for them.

3.6   REC has worked wit h guidance with HMRC on intermediaries following concern from HMRC
      that some intermediaries may simply be „nominees‟ under the CIS and so the agency should
      be making deductions themselves. REC would like to see this situation resolved more clearly
      in law, however it does not believe that the proposals tabled address this issue.

      Approach to employment status
3.7   Employment status of temporary workers has been reviewed on several occasions by the DTI
      2002 and 2005. The Government concluded in „Success at Work‟ in 2006 (a Policy
      Statement for the 2005-2010 Parliament by the then DTI) that the status quo, with regards to
      employment status should remain. Whilst REC notes that there are differences in the way
      that employment status is considered in the employment and tax fields, both use case law as
      a basis for determining status. REC believes that this is the right approach. Whilst temporary
      agency workers are usually deemed to be employees for tax purposes, the flexibility for some
      work ers to be self employed for tax purposes is a necessary part of the cont racting market.

      Current financial difficulties in construction
3.8   The RE C/KPMG monthly Report on Jobs tracks placements trends within the recruitment
      industry. Whilst we are starting to see positive growth again the construction and engineering
      sector is lagging behind other sectors in this recovery. Attempts to class more construction
      work ers as employed for tax purposes will have a large impact on the costs of delivering
      public sector infrastructure projects as well as private sector build, which has already dropped
      dramatically in the recession. A more comprehensive analysis of the impact of these
      proposals is needed – including the wider impact on the economy of the cost of building rises.

      Skills training in construction
3.9   Page 11 of the consultation notes in relation to false self employment that “there is a risk of a
      failure by the industry to invest adequat ely in training and skills for the future.” REC notes
      that the CITB training levy is set higher for self employed workers than for employees and
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        would be int erested to know if the Treasury had factored thes e payments into account when
        making this statement.


4.      REC’S RESPONS E TO THE CONSULTATION QUESTIONS

Question 1: Do the se criteria represent fair indicators of a person who is running hi s own
business and is therefore genuinely self-employed?

These indicators do not reflect those which are usually thought to depict employment status. These
are summarised on the Government‟s Businesslink website as:
     control - whether you as an employer can instruct them how and which tasks to perform
     integration - whether they are part and parcel of your organisation
     mutuality of obligations - whether the work er is personally obliged to carry out the work and
        whet her you as an employer are obliged to pay the worker for the work
     substitution - whether someone else can be sent by the work er to do the job
     economic reality - whether they are in business on their own account, eg where they bear the
        financial risks of failure to deliver the service or can profit from their own sound management
        of the task

Taking each criteria in turn the REC found the following issues:

         Provi sion of plant and equipment – that a person provides the plant and equipment
         required for the job they have been engaged to carry out. This will exclude the tools
         of the trade which it is normal and traditional in the industry for individuals to
         provide for themselves to do their job;
A client may put in a request to an employment business to supply a worker with their equipment.
This would be fairly clear. However there was a lot of concern about where the line would be drawn
between plant and equipment and tools for the job. For example, would a ladder be seen as plant or
tools. In addition to this it was noted that it would not be possible to provide plant and equipment for
some jobs, e.g. a crane operat or. An additional concern would be if the worker took their own
equipment to a site and then did not use it. An agency would not be in a position to see if this
happens and so it would not be right to hold the agency liable for falsely declaring the worker as self
employed under the proposed deeming regulations.

          Provi sion of all materials – that a person provides all materials required to complete a
          job;
An agency does not supervise the work of a worker on site. It would there for not be able to ascertain
if a worker had supplied all the mat erials for the job. They may take some materials to the job, only to
find further materials supplied. In this situation it would be unreasonable for an agency to be
responsible for „falsely‟ declaring a worker self employed, as they were not privy to all the facts.
There is no explanation in the document as to how liability for establishing employment status would
be handled in such circumstances.

         Provi sion of other workers – that a person provides other workers to carry out
         operations under the contract and is responsible for paying them.
This measure was generally agreed to be easier to measure. But even then there may be a case of a
subcontractor, who usually takes his own people to complete a job, may chose, on occasion, to
complete the job alone. It is hard to see how such an individual would suddenly be employed for a
single job, which they are directing themselves.

In addition to the propos ed criteria members highlighted that the definition of construction
operations is, in itself, not entirely clear cut. The ex ample of Site Managers was given where it is not
clear if this role falls into „construction operations‟ or not. As our members supply workers within and
outside the scope of „construction operations‟ there will need to be a clear line between the two.
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Question 2: Are there other indicators which ought to be considered?
The questions do not consider if a work er is taking financial risk and who, if any one, is supervising
their work. The test of control is key to determining employment status and the consultation
document gives no explanation as to why this test has not been considered. In addition to this the
tests of integration and mutuality of obligation should also be considered. The freedom to terminate
an assignment at any moment is a key feature of the supply of construction workers by rec ruitment
agencies and again, there is no explanation as to why this indicator is not considered.


Question 3: Are there instance s where none of the criteria are met, but a worker would, by
reference to the usual case law tests in respect of the true term s of an engagement, otherwise
be treated as self-employed? If so, please provide examples.
Examples are given in response to questions 1 and 2.


Question 4: V AT registration can signal that the worker is in busine ss on hi s own account,
buying materials and investing in plant which takes the turnover of the busine ss over the
thre shold for regi stration. Would it be helpful to include the criteria of VAT registration, which
would need to be met in addition to one of the three other criteria?
Materials and plant may be acquired, second hand, through contacts etc, without necessarily a formal
transaction being made. This would therefore not appear in turnover figures. In addition many
work ers may complete their work below the VAT threshold. Workers may also only work part of the
year (perhaps residing abroad for some of the year, or choosing to work part time). RE C cannot se e
a valid explanation as to why the Treasury would but a financial floor to self employment. This is
unreasonable and contradicts common law.


Question 5: I s the payer the correct person to have the responsi bility for applying the criteria
and applying Pay as You Earn (PAYE) and NI Cs?
In principle yes. However some of the factors may not be in the control of a recruitment agency or an
intermediary to control (for example the supply of extra materials or equipment on site). How the
liability would be dealt with in these circumstances needs serious consideration.


Question 6: Are there instance s where the introduction of the deeming provision could bring
about a significant additional administrative burden? If so, please give examples.
Some rec ruitment firms may have limited or no PAYE payroll and so there would be the costs of
setting up a payroll, if they were to find more of their work ers paying employed tax levels. Training in
determining employment status would have to be given to all recruitment consultants placing workers,
as a incorrect determination could result in liabilities for the recruitment company.


Question 7: Are there occasions when the deeming provision could impact on the adaptability
and flexibility of the labour market? If so, ple ase provide examples.
Recruitment agencies provide a supply of workers on an employed tax and self employed taxation
basis. If the numbers of workers who are employed for tax purposes increases this would not
change. However it is possible that if the pro vision is not workable many employers may see the
engagement of self employed workers as too high risk, thus having an impact on the adaptability and
flexibility of the labour market. Until there is more detail on the proposals this matter cannot be fully
investigated.


Question 8: What avoidance routes might be available and how should the se be countered?
A voidance is of greatest concern to the REC. Many construction workers are determined to work on
a self employed basis and there is genuine concern that if this option is not available to them through
an agency they will simply work for less visible labour only subcontractors. Compliance in this sector
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is already and issue and unless a change in employment status rules is coupled with an effective
enforcement strategy there is a real danger it will simply push workers into the margins.

Recruitment agencies provide a visible well regulated source of labour to the construction industry.
There is no guarantee that the deeming regulations would result in easier or better enforcement. The
Treas ury and HMRC would need to demonstrate why this deeming legislation will assist in
enforcement if this measure is to be supported by the recruitment industry.


5.      CONCLUSIONS

There are certainly issues of false sel f employment in construction but there probably are in ot her
sectors as well. Whilst the consultation paper attempts to put a figure on the numbers of supposedly
falsely self employed people in the sector, it does not take account of the different nature of
construction which involves varying work patterns and a skilled work forc e supplying their trades. REC
remains unconvinced that the proposed solution would be easier to police and it is clear that the
additional costs involved in deeming large numbers of workers to be employees for tax purposes
cannot be borne in the current market. Further question marks surround the liability of deciding if a
work er is self employed when they may be directed differently in the workplace they are supplied to.
In short the consultation does not provide enough information to explain how the proposed provisions
would work and whether they would result in more successful enforcement. They therefore cannot be
supported.



For further information contact:

Anne Fairweather
Head of Public Policy
Recruitment and Employment Confederation
15 Welbeck Street
London W1G 9XT

020 7009 2107
anne.fairweat her@rec.uk.com

				
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