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KEY POINTS
- New proposals would catch those who are genuinely self-employed.
- There is a problem, especially with umbrella companies.
- Let short-term employees claim home to work travel.
Dogs are mortal. Socrates is not a dog. Therefore Socrates is immortal? Clearly not. This is known as the fallacy of the ‘undistributed middle’; the first statement does not say anything about all mortals, only about the canine subset of them.
So what about this one? The presence of any of three criteria would mean that the courts would hold someone to be self-employed. This worker does not meet any of these three criteria.
Therefore this worker is not self-employed. It is equally an example of the ‘undistributed middle’; just because all those meeting at least one of the criteria would be self-employed does not mean that all the self-employed will meet at least one of the criteria.
And yet that is the basis of the HMRC consultation paper False Self-Employment.
The three criteria
The article by Martin Edhouse, True or false, set out the main principles of the proposal, but briefly the consultation is concerned with what HMRC see as false self-employment within the construction industry.
The proposal is that all those who cannot meet at least one of three criteria when working for an engager whose main business is the commissioning of construction operations should be deemed to be receiving employment income, and should be taxed on that basis by the payer (regardless of whether the payer and the engager are the same person).
The three criteria are:
- 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.
- Provision of other workers: that a person provides other workers to carry out operations under the contract and is responsible for paying them.
These criteria are prefaced with the assertion that:
‘The purpose of the legislation is not to deem a worker’s income to be employment income where it is clear that the worker is carrying on a business and would otherwise be treated as self-employed.’
The logical fallacy of this is set out in my first paragraph, and I think it is highly unlikely that there wasn’t at least one person with enough exposure to classical logic in the Treasury and HMRC team concerned who realised this. Yet the only admission that there could be any sort of a problem with the deduction made is in question 3 for feedback, which reads:
‘Are there instances where none of the criteria are met, but a worker would, by reference to the usual case law tests in respect of the true terms of an engagement, otherwise be treated as self-employed? If so, please provide examples.’
Pete the plasterer
Well, one could argue that HMRC have given no evidence that meeting the criteria would only exclude the falsely self-employed, so perhaps they should do that first.
However, it is easy to meet their request. This example is based partly on a conversation I had at the CIOT residential conference last weekend, and partly on a case which I discuss below.
Pete is a plasterer. He is well-trained and experienced, and gets a lot of work, for which he is paid on a daily rate. Each engagement tends to last for a few weeks at a time, as he normally works for smaller builders who erect extensions.
He takes a business-like approach to his work, invoicing properly and ringing round the builders that he knows on a regular basis to see if they are working on any jobs where they will be needing a plasterer shortly, so that he can keep his diary full.
The only tools he provides are the normal tools of the trade. The materials are provided by the builder. Pete does not employ anyone else. While he obviously will be told by the builder what work needs to be done, he is left to exercise his own skill and judgment to complete it.
You may recognise that this is the case of Hall v Lorimer [1994] STC 23, transposed from a vision mixer in a TV studio to a plasterer on a construction site.
Even though he was a ‘labour-only subcontractor’ when viewed in construction industry terms, Mr Lorimer was held to be self-employed primarily because of the pattern of his work.
He was an independent contractor, working for 20 or more companies during the year, and not dependent on any one of them for his work. The same would surely be true of Pete the plasterer, even though his engagements are longer than the one or two days of Mr Lorimer.
If his case ever came before the tribunal, he would only have to set out Hall v Lorimer as an authority, point out how his business was four-square within its principles, and HMRC’s case would collapse.
Yet the new proposal would deem Pete’s income from this work to be employment income, and each of the builders he worked for would have to deduct tax and NI under PAYE.
There is no indication of how the process of Pete changing ‘employment’ every couple of weeks would be handled; it seems highly unlikely that it would be processed fast enough for an accurate, cumulative, PAYE record to be kept and applied.
Making good?
Even worse, it is unlikely that Pete only works for builders. He probably also sometimes works for householders, replacing plaster after it has been damaged. He might also sometimes be called in by plumbers who need a plasterer to help make good after they have carried out some repairs.
The first is clearly outside the scope of the new deeming provision, and is specifically excluded. The second is more ambiguous.
According to the consultation document, only engagers ‘whose main business involves the carrying out of construction operations’ have to apply the deeming provisions. Construction operations have the same meaning as in the construction industry scheme (CIS) rules.
But for CIS, it is the installation of a water system or subsystem that qualifies as construction operations, not the repair of it.
So if the plumber concerned normally does small jobs for householders, and now is called on to do a larger job for which he needs the help of Pete the plasterer, the work probably still should not fall within the new deeming provisions even if it would itself be ‘construction operations’, because the main business of the plumber is not the carrying out of construction operations.
The net result of this is that Pete will mostly have work which is deemed to be employment, where he is working for builders. Tax and NI will be deducted under PAYE on this, but probably without proper cumulation.
This will probably mean that he is overtaxed, because allowances for periods when he is not working, or working other than for builders, will be left out. Then he will have some work which he definitely has to return as self-employed because it was carried out for householders, etc.
Finally, there will be some work where neither he nor his engager will be entirely sure if the deemed employment rules should be applied.
To claim that this accurately identifies those who are employees when they claim to be self-employed is evidently incorrect.
That, however, does not mean that the problem exposed by the document is illusory; and it is here that I might part company with some of my readers.
Gordon the groundworker
For every Pete the plasterer there is probably at least one Gordon the groundworker. Gordon is a man with a shovel. He’s not the sharpest tool in the box, so you have to give him quite precise instructions on what to do with his shovel, but once you have he’ll keep digging for as many hours as you can afford to pay.
In the past six years he has worked on four different building sites for four different contractors. The longest he has stayed on any one site is 18 months; the shortest is six months.
Gordon works through an umbrella company. When he first applied to them, he was offered the choice of being self-employed under a CIS scheme, or being an employee of the umbrella company. He didn’t really understand the difference, but he chose being an employee because it seemed a bit simpler.
Whenever Gordon finds himself work, he gives the details to the umbrella company. The contract for his work is between the umbrella company and the engager, to provide Gordon’s services, and payment is made by the engager to the umbrella company.
It then deducts its fee before paying the balance to Gordon, part tax-free to meet the expense claim that he submits and the rest paid under PAYE.
Gordon has a single A4 sheet from the company which explains what expenses he is allowed to claim. The main one is travel, particularly motor expenses. Gordon claims 40p a mile for the first 10,000 miles a year and then 25p a mile thereafter.
On one contract he and a mate who lived nearby used to take it in turns to drive, but they both claimed the full allowance. In fact, to be honest, (which, as you will have gathered, Gordon isn’t), he claims a bit more than the full allowance.
He normally ‘rounds up’ his mileage, so if his daily journey is 25 miles each way he’ll claim for about 70 miles a day. On the six-month job, where it was too far to drive home every day, he stayed with his sister and paid her £30 towards the food bills.
However, he got an invoice pad from a stationers and wrote out some bed and breakfast bills for £160 a week (including evening meals) which he submitted as expenses, plus another £20 unvouched for four nights subsistence, and the receipts for his lunches since he was away overnight.
Gordon also throws in a few invoices for work clothes, even though they are really for ordinary clothing, and he does seem (according to his expense claims) to lose a lot of shovels.
Since the umbrella company is only paying Gordon his own money as expenses it gives the claims very little attention and simply processes them. The fact that the bed and breakfast invoices and the claim form are both in Gordon’s handwriting therefore goes unnoticed.
False employment
Now, if you have only read the articles we have published and not the consultation document itself, you may be wondering why Gordon is affected by a consultation on false self-employment. Gordon isn’t claiming to be self-employed, he is employed by the umbrella company.
Granted, it also offered him the choice of operating as self-employed through CIS, which is a bit disconcerting, but since he is an employee surely he will be unaffected?
The key to Gordon claiming his expenses is, of course, the overarching contract of employment through the umbrella company. Because he is engaged to work at temporary locations, but under what is theoretically a single contract of employment, he can claim the travel and overnight expenses. Rather hidden in the consultation document is a provision which would change that.
The point is that Gordon would fall foul of the tests as set out, because they don’t actually require the worker to be claiming to be self-employed in order for them to be applied.
He does not meet any of the three criteria, and he is working for an engager who is in the business of carrying out construction operations. As the document says: ‘It is the activity that the worker is actually performing for the engager to which the criteria would be applied, regardless of who pays the worker’.
If the payer and the engager are the same, then the full amount of payment will be treated as the employment income. If an intermediary is involved, as in Gordon’s case, then ‘the definition of payment in the managed service company legislation (Income Tax (Earnings and Pensions) Act 2003, Chapter 9, Part 2 … may be adopted.’
Not set out, but key to this is Step 2 in ITEPA 2003, s 61E. This allows a deduction only for expenses that would have been deductible if the worker had been employed directly by the client. If Gordon had been employed directly by each of the engagers, he would have only had one place of employment for each job, and that cannot, by definition, be treated as a temporary place of employment.
So it would seem that the new proposals are actually far more wide-ranging than those who are claiming to be self-employed, negating the benefits of employment-based umbrella companies for construction industry workers as well.
What’s it all about?
At this point it is probably wise to stop and try and remember what this is all about. HMRC’s case is that it only takes a few cosmetic adjustments to present a worker as self-employed rather than as employed.
As it stands, that is probably not true, and it is certainly not true that the criteria provide a way of establishing whether someone really would be self-employed under the case law.
What is true is that there is often little obvious reason for the different tax treatment of those near the borderlines of either employment versus self-employment, or working in a temporary workplace versus a permanent workplace.
It is therefore quite reasonable for HMRC and the Treasury to try and come up with a solution to this. One does not have to take HMRC’s figures of around 300,000 ‘falsely self-employed’ as accurate, since that is based on the number of subcontractors with no deductions for plant or materials.
Pete the plasterer would fall into that class and is clearly self-employed; Gordon the groundworker would not and yet he is getting a deduction for travel expenses when he would not if engaged directly by the contractor.
A more reliable approach is just to look at the charges made by businesses offering umbrella companies. They are typically charging workers around £20 or more a week gross for operating the schemes.
Even accounting for tax and NI deductions, that must mean that each worker is saving well over £500 a year in tax by using them. The number of companies in the market, and (perhaps counter-intuitively) the fact that none of them seem to want to brag about the number of clients they have would suggest that this is a major area of lost tax for HMRC.
Unfortunately the way they have chosen to counter it will also catch a lot of people in the net who don’t deserve to be.
Surely it is time to go back and look at this whole issue afresh. The rationale for not allowing the employed to claim travel expenses for home to work is that the expense arises from the choice of home, not the duties of the employment.
For the same reason, a temporary workplace does give rise to a right to deduct travel expenses, because it is unreasonable to expect someone to move for just a few months.
What about giving those whose pattern of working life is actually successive short contracts at different workplaces the right to deduct their travel expenses even when employed? That might well get rid of umbrella companies and false self-employment at a stroke.
