Technical Briefings

13 May 2010

Avoid the penalties of “false self employment”

In last year’s Budget, the government issued clarification of the issues surrounding ‘false self-employment in the construction sector’ and has now recently published it’s responses to the consultation paper. Although this is being billed as mainly a construction industry problem, it remains to be seen whether the legislation will be written to encompass many other businesses which use  freelancer and sub-contractors.

Furthermore, the impact of getting it wrong can be very costly indeed.  One major contractor in the construction industry was recently forced to pay over £7 million in back-dated tax and NIC duty. So it pays to take care!

False self-employment occurs where workers are treated as self-employed for income tax and National Insurance (NICs) despite the fact that the way in which the work is carried out on a day-to-day basis demonstrates that there is a more permanent employment relationship.

To soften the blow somewhat, the government claims that false self-employment affects not only the ability of compliant businesses to be competitive, but also workers’ entitlement to benefits, as well as representing a risk to the Exchequer. Indeed, the taxman calculates that £350 million tax and NIC revenues are lost each year.

So what are the main criteria?

The government has laid down 3 main criteria for self-employment or sub-contracting which it believes give a fair and reasonable outcome in deciding whether the worker should be treated as employed or self-employed. (albeit that these have been criticized as being too ‘woolly’). They argue that at least one of these criteria should be present:

1. That the self-employed person (supplier) provides the plant and equipment required for the job they have been engaged to carry out – but excluding the tools of the trade which it is normal and traditional in the industry for individuals to provide for themselves to do their job; or
2. That the supplier provides all materials required to complete a job; or
3. That the supplier provides other workers to carry out
   operations under the contract and is responsible for paying them.

Given the attention that the construction industry has been afforded over recent years, it would seem clear that the Exchequer see’s this as a problem area

Indeed, the Government estimates that there were 300,000 sub-contractors operating within the Construction Industry Scheme (CIS) alone who did not claim any deduction for the costs of materials, nor for plant and equipment.

It may therefore be argued that there is an agenda set for this sector, or that the Government does not understand the workings of this industry.

What happens now

Certainly from the summary of responses to the consultation it is very apparent that these changes are going to happen. In fact one wonders why they bothered with the consultation in the first place.

However, it would seem that the Government agrees that the construction industry has been particularly badly effected by the recession, and therefore accepts that the new legislation should not commence until after the sector shows signs of a clear recovery.

There may also be some scope for modification to the tests, but at the moment we are in a waiting game to see what transpires.

Not just the construction industries

Recent estimates suggest that 34 per cent of workers in the construction industry are self-employed, compared to only 11 per cent across other sectors such as advertising, fashion and many other sectors such as advertising, creative and fashion industries.