IR35 for subbies? A new Treasury consultation will have far reaching effects for many builders and their workers…
A consultation paper was published on 20 July 2009 to consider the issue of "false self-employment" in the construction industry.
False self-employment occurs when the underlying relationship between engager and worker indicates employment, but the engagement is presented as self-employment. The result is that:
- The engager avoids NICs, holiday pay, and other employment costs/benefits such as pensions.
- The worker pays lower NICs (max. 8%) as a self-employed worker, compared to 11% of an employee.
- The tax regime for the self-employed allows more generous tax treatment, in that that worker is often able to deduct more expenses than he would if an employee.
The construction industry is being targeted by these new government proposals because it has a higher proportion of self-employed workers than other industries. The problem has been identified by several studies over the years, but it has proved difficult for HMRC to pursue on the grounds that employment status cases are incredibly costly and time consuming.
There will be a new "deeming provision", as follows:
Where an engager (whose main business is construction operations) uses the services of a worker to carry out such operations, the payment received for those services will be deemed to be employment income. The engager will then have to deduct and account for Pay as Your Earn (PAYE) and NICs.
There is an opt out: a worker will be treated as being genuinely self-employed if he can meet one or more of the following three criteria:
- Provision 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;
- Provision of all materials – that a person provides all materials required to complete a job; or
- Provision of other workers – that a person provides other workers to carry out operations under the contract and is responsible for paying them.
The deeming provision applies to payments made via agencies and to personal service companies (taking precedence over IR35). If the Managed Service Company rules would have applied PAYE and NICs to the payment, they may be adopted.
They will not apply to domestic works, and so you do not need to apply PAYE and NICs to your gardener, handyman, or any builder who comes and works on your house.
The net result of these proposals will be that construction becomes more expensive or that workers are paid less. Not much fun given the current state of the building industry but then why should construction workers have better tax treatment than say, office or retail workers?
The problem is going to be tough to crack, but the Treasury is probably doing it in the right way. HMRC's new CIS scheme should have addressed the problem and failed, because employment status is such a complex thing. HMRC's employment indicator tool, tells, as we all appreciate only half the story, and each case turns on its facts.
Looking at the "opt out" conditions there is obviously an issue with the definition of "plant". Many labour only workers use their own vans to get too and from work. These provide transport but are also essential in many cases when you have to carry around the tools of the trade. These toolkits tend to build up over the years. The question will be whether vans will represent qualifying plant and how many tools do you need before they become "plant".
Secondly, will workers be able to piggy back into employment right as a result of deeming. This has been an issue under IR35. The problem is that tax law and employment law do not mix.
In theory, the government could apply a similar deeming provision to workers in other industries, for instance the IT sector. Now, that might be interesting. More on this topic in due course.
Examples (from the consultation document)
ABC Ltd – how ‘deeming’ would work
ABC Ltd is a business, which undertakes development of sites across the country for private
housing. It secures most of the required building services locally at the different locations,
rather than having a permanent workforce. For the current project, it is building six houses
on a small site.
The company enters into various contracts to have work carried out on the site, as follows:
Carrying out groundwork
Mr B supplies his own services and those of three other men for the groundwork. The
payments made to Mr B will not be deemed to be employment income, as he meets criterion
3. However, if he does not already employ the three people working for him, he will need to
treat them as being deemed to be in receipt of employment income if they meet none of the
Building the walls
Four people are engaged by ABC Ltd for bricklaying. ABC Ltd sources all the bricks and the
bricklayers bring only their tools of the trade. They will be deemed to be in receipt of
employment income, because they meet none of the criteria.
Installing the glazing
Mr C supplies and fits the glazing with the assistance of his employee. Mr C will not be
deemed to be in receipt of employment income, as he meets criteria 2 and 3.
Fixing the roofing
Four people are engaged for installing the roofing sourced by ABC Ltd. They do not bring
any equipment with them. They will be deemed to be in receipt of employment income,
because they meet none of the criteria.
Installing the fixtures and fittings
Two people are engaged to fit all the doors, cupboards and other fittings, which have been
sourced by ABC Ltd, bringing with them only their own tools of the trade. They will be
deemed to be in receipt of employment income, because they meet none of the criteria.
Where workers engaged by ABC Ltd are not deemed to be receiving employment income
they will be included on ABC Ltd’s CIS return.
Source: Treasury Website: hm-treasury.gov.uk/consult_false_selfemployment_construction.htm