Self-employment test will hit construction hard

Lawyer Matt Boddington on a rushed-in measure that creates new risks for contractors

Many readers may have blinked and missed the recent hasty introduction of new “false self-employment” legislation at the beginning of this tax year. The new rules resulted from an HM Revenue & Customs consultation first published just before Christmas, and were announced on 27 March for implementation just a few days later on 6 April 2014. This whirlwind introduction (a deliberate anti-avoidance ploy by HMRC) was despite the fact that the effect of the rules is to shift an estimated quarter of a million workers, mostly in the construction industry, from self-employment onto PAYE.

The new rules apply not just to the construction industry, but to any industry where HMRC considers self-employment is abused – although by its own estimates the vast majority of these workers are in the construction sector.

The new legislation revolves around a simple concept – self-employment in certain circumstances will be determined by a single, stricter statutory test. Despite this, however, the finer details and intricacies of the rules are complicated in practice, drawing heavy criticism from industry bodies and professional advisers.

Employment status is often a thorny issue, both in terms of tax and from a general legal perspective. The construction industry has been at the sharp end of employment status disputes and HMRC compliance activity, and many contractors have found themselves hauled before an employment tribunal facing a claim for employment rights from a supposedly self-employed subcontractor. Those that have might think that a simple test and a level playing field might not be a bad thing, right? Unfortunately, wrong.

Confusingly, the new legislation applies only for the purposes of tax and National Insurance, and therefore subcontractors may find themselves in the worst of all worlds – being taxed as an employee but without any employment protection. 

Worse still, the legislation only applies in certain circumstances, so subcontractors may find that they switch employment status from contract to contract. The legislation takes precedence over the CIS scheme, so both will need to operate in tandem for some subcontractors, and tax returns will become more onerous.

These are some of the practical difficulties mentioned above, but the pitfalls don’t end there.

The new rules bite where a construction worker is providing services to a contractor but has a contract with another person, and where there is any supervision, direction or control over the manner of the work – even including an unexercised right within a contract.

The main intended effect of the rules is to catch what HMRC describe as “intermediary companies” that will typically offer to engage subcontractors on a self-employed basis, removing any risk away from their current engager. As usual, however, HMRC has thrown the baby out with the bathwater and the rushed legislation will hit any labour supply situation (for example a genuine subcontractor supplying labour to a main contractor),  where there is any right of control.

To make matters worse, labour supply chains are often long and complex, with many different subcontractors involved. The new legislation makes the ultimate supplier of labour to the client liable for any unpaid PAYE, even if they are not the actual engager of the operative. This not only makes life extremely difficult for labour suppliers, but will generate many disputes about who is supplying labour to whom, as the definitions are widely drawn and open to interpretation and argument.

If all this is not bad enough, there are provisions within the new rules enabling HMRC to transfer unpaid PAYE to main contractors (including, worryingly, personally to the directors) in specific circumstances. One of these circumstances is where a document is provided that is intended to constitute evidence that there is no control over the operative: if this turns out to be false then the person providing the document is at risk of debt transfer.

Given that there are many documents of this nature currently circulating in the desperate scramble to retain self-employment, these are signed at your potential peril. Sham contracts or contract amendments in the same vein are equally risky.

The confusion is not helped by the misinformation out there about the new rules.  Some of it is innocent but incompetent (for instance, one large professional body misreported that the rules took effect from 6 April 2015, mistakenly referring to the new reporting requirements that are coming onto the statute book). 

However some of the inaccurate “facts” filling the information vacuum are dangerous: we have seen suggestions that self-employed subcontractors earning more than £12 per hour are outside the rules, as are trades as they are “skilled professionals” and not caught by the control test.

This latter fiction is readily dispelled by the fact that one of the very few decided cases that exist on the control test involved a highly qualified doctor and surgeon – who was caught by the rules.

Less directly, these rules will undoubtedly have an inflationary effect on labour costs throughout the construction industry. HMRC (perhaps optimistically) estimates a yield of about £2bn from this measure over the next five years, mostly attributable to the construction industry.

In addition, there will likely be some move back to direct engagement of labour to cut out any “intermediary” and avoid these stricter rules. This has its own consequences for HMRC compliance and administrative costs.

Contractors and subcontractors are advised to review their labour arrangements and their contracts, and to seek professional advice if there is any doubt over whether they may be affected by the new legislation.

Matt Boddington is founder and director of Chartergates Legal Services www.chartergates.com, where he can be contacted for further advice and information. Chartergates is a member of the UK 200 Group of independent lawyers and accountants