The construction industry has a long tradition using casual or self-employed resources. Although the HMRC has always kept a close eye on this practice, recent events have suggested that HMRC’s appetite to investigate and take action is increasing. David Harmer, Tax Consultancy Manager at Accountax outlines the current situation.
There is no doubt that the Government is looking closer at employment status in the construction industry. From a tax perspective, HRMC will be aiming to determine whether the contractor should actually be employing a self-employed individual. Muddying the water somewhat is a third option, that of “worker status”: where a worker is not an employee for tax purposes, but does have some employment rights, including national minimum wage and holiday pay.
The distinction between employed, self-employed and “worker” has become blurred, creating a challenge for construction industry firms looking to remain compliant.
The Government is aiming for greater alignment between tax and employment law. This would require businesses engaging more workers as employees, and having to deduct PAYE and offer increased employment rights. As a result, businesses would incur increased costs, sufficient to make some contract work unprofitable.
The most significant HMRC status consultation last year relevant to the construction sector asked whether new employment tests are needed or if existing tests are sufficient and should be formalised by legislation. The tests essentially ask:
- does an individual provide the services personally
- is that individual subject to control over how the services are provided
- is there an obligation on the engager to provide works along with an obligation on the individual to undertake those works
If the answer to any one of these is ‘no’ the individual is not an employee and should be considered self-employed.
Eight months after the consultation closed, we still await the Government’s conclusions. However, we believe one of two routes will be taken:
- the Government will legislate with new “in business tests”. This means factors such as whether equipment or invoices are provided by the individual may carry more much weight in determining status and could result in the fundamental tests being watered down
- the legislation will place a stronger focus on control and ignore the other existing tests altogether. The implications of this are that self-employed status will become the same as we see in other areas of tax, and nothing more than the dreaded supervision, direction and control test.
On the back of the more wide-ranging Taylor Report in 2017, the Government consulted last year on various measures in respect of “worker status” and announced on 17 December 2018 that it would legislate based on 51 of the report’s 53 recommendations. For the construction industry, this means that the consequences of worker status will cost contractors even more, extending far beyond holiday pay. It will be significantly more important to ensure an individual is genuinely self-employed.
Due to the lack of substance in any proposals or prospective legislation and, of course, Brexit, there is still much uncertainty surrounding self-employment status. Nevertheless, status issues are still real and pose a threat to non-compliant construction businesses, which could end up with a big tax bill or paying for employment claims. Action should be taken now to review current working practices and contracts to shore up a firm’s position in respect of the current law and the proposals.
Whilst a review of an entire workforce is recommend, it is of the utmost importance that contractors pay close attention to the terms and conditions under which their lower skilled subcontractors are providing services. Gone are the days when you could rely on a substitution clause in a contract. Now the emphasis has to be on control (how they do their work) and subcontractors being able to demonstrate in-business factors like taking financial risk, invoicing and having insurances.
Author: David Harmer, Tax Consultancy Manager at Accountax