Q. I have seen in the press recently that HM Revenue & Customs (HMRC) have now completed the consultation period on False Self Employment for workers in the construction industry. What are HMRC proposing to change and what effects will this have on employment status for tax purposes of subcontractors?
A. HMRC have confirmed that following a recent consultation it is there intention to request the introduction of new legislation to simplify the determinaton of emplyment status for PAYE and NIC purposes in the construction sector.
HMRC hope the new legislation willaddress what they see to be a grey area open to interpretaion and reference to both employment and tax case law. Currently tax legislation does not define employment or self-employment, and in many cases disputes are decided by the courts, based on the facts of each case and previous case law, normally using three established definitions of employment known as the “Holy Trinity”
• Mutuality of obligation – that an employer is obliged to provide work and an employee is obliged to perform it.
• Control – an employer can control how employees perform their work.
• Personal service – an employee works for an employer under a contract of personal service.
HMRC has recently lost several tribunal and court cases, and wants to move away from the current case law approach. The new proposed legislation will seen the introduction of a statutory “deemed test” to establish employment status removing the current perceived grey area.
The proposed legislation states that for a worker to be considered self-employed for tax or NI purposes, one or more of the following criteria must apply:
• 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.
Although it is the work done for the contractor (the engager) that is relevant for the above provisions, the person responsible for making the payment to the subcontractor (“the payer”) will have to apply the statutory criteria. The payer could be the engager, an employment agency or intermediary. The payer will also have responsibility for applying PAYE and NICs to the amount of employment income and accounting for employer’s NICs.
This will form part of the status test required when considering the declaration made currently on the monthly CIS returns.
The effects of this, apart from the additional further administrative burden placed on the contractor by the legislation, will be the extra cost of “employing” the subcontractor as an employee in the form of employers national insurance contributions that will become due on any worker failing to pass one of the three tests.
HMRC have acknowledged in the consultation report that construction industry has been badly affected by the recession, and therefore accepts that the new legislation should not commence until after the industry shows signs of a clear recovery. This will give the industry the opportunity to consider its current working practices and review what steps it may need to take to ensure its subcontractors retain their self employed status.
If you need any assitance, call the TaxWise Advice Service on 01455 852555 and one of our specialists will be happy to help.