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KEY POINTS
- Should most construction workers be brought within PAYE?
- Other industries have special PAYE rules.
- There will be benefits to the employees as well as costs.
- The business ‘playing field’ should be more level.
- HMRC’s proposals may have advantages.
The point of this Comment piece is to make a robust reply to Allison Plager’s article False consultation. 
Her views reflect those of an accountant and someone interested in legislation as a pure science. They are not the views of someone trying to run a construction company who must try to engage workers fairly, compete for contracts, and avoid paying tax settlements and hefty accountants’ and solicitors’ bills.
The proposals that have been drawn up by HMRC for legislation to tax many construction workers as employees are welcomed by many in the construction industry.
But before jumping to conclusions about whether the proposals are good or bad it is important to consider who is arguing for or against them and why.
So let me lay my cards on the table: I was the head of tax of the Construction Confederation and now run the Joint Taxation Committee of Construction, which carries out tax policy work and operates member advice lines for many organisations: the Federation of Master Builders, the National Federation of Builders, the UK Contractors’ Group, the National Federation of Roofing Contractors , the National Access and Scaffolding Contractors, the Association of Interior Specialists, the Irish Construction Employers Federation, the Electrical Contractors Association and the Heating and Ventilators’ Contractors Association.
I list them all to show the range of firms that phone me with tax problems: large and small, north and south, main contractors and specialist traders.
Present problems
The problems that come up around employment are twofold.
First, there are the firms that have been challenged by HMRC and are trying to defend themselves against claims for arrears of PAYE. The sums in dispute can be very large, and the costs for an ordinary business of settling or of paying accountants and tax specialists to defend a case are painful.
Frequently – although we can never admit this to HMRC – the case for PAYE is overwhelming. Workers have been engaged to do what they are told with an employer’s materials and kit.
They cannot decide how to do the work, their work is supervised, and they do not look for other work, relying on their employer to keep the flows of work running.
The second complaint that arises in this area of tax and employment law comes from firms that have lost contracts to competitor firms who have only self-employed workers in their workforce – often a workforce working for a long term for the same contractor, but paid via a middleman.
There is anger and surprise that the state apparently allows construction firms to move their workforce to third parties simply for the avoidance of PAYE.
Let me give you some reasons, if not to support the detailed proposals, to at least be open-minded about new legislation that may impose PAYE on those humble workers who are not VAT-registered and who are not risking their own capital in buying materials or providing plant, and who do not have all the worry and anxiety of employing men.
A tax on entrepreneurs?
There are many bits of tax legislation that single out an industry or a group for special consideration: share fishermen, the film industry and sportsmen, to name but three.
Where there is avoidance that is causing the general tax regime to fall into disrepute it is perfectly reasonable to focus rules to address a problem. It is only too easy to scaremonger and shout out that thousands of firms would be affected.
There may be thousands that have rising costs, but equally there are many thousands who currently pay all their taxes and engage their workers on proper terms who will find themselves advantaged, and yes, affected for the better.
Why should it reduce entrepreneurship? Are there no entrepreneurs running shops where all employees are in PAYE?
Is it an appropriate time?
We are in the depths of a recession and workloads are very low. The number of engaged self-employed is at low ebb. Now that the prospect of this legislation is out in the open, contractors can chose, as work levels build up, whether to engage workers on employed terms or self-employed.
It is far better to meet a change like this when the levels of workers engaged are low than to try to move them across from self-employed to employed terms.
With goodwill and good sense the industry and its representatives can plan and give warning to make the adjustment in an organised way. Timing is something that can be negotiated; the government has already indicated a willingness to be flexible.
Will there be significant costs
Yes, the proposals will result in increased costs. The cost of a single worker who is not currently in employment would go up by the cost of the employer’s contribution.
This means that wages will go down, many say. They may – the employers’ National Insurance contribution must be found from somewhere. It is likely that the real answer, short term, will be a three-way split: construction prices will go up, contractor’s margins will be squeezed and workers will take home less pay.
But this will only hurt those firms whose workers are predominantly self-employed. They will have large added costs as they make the change.
Those firms that now have a predominantly PAYE workforce will not be paying much in added costs; few of their workers will see take-home pay go down and their prices to customers will need to rise far less than others. We could come out of the recession with one enormous problem solved.
And perhaps there will be savings from the demise of the number of agencies and middlemen which currently feed off the problem, supplying services that are really only schemes of tax avoidance.
Will families suffer?
At the moment ordinary construction workers can be very vulnerable. They have no contribution record for contributory pensions and no rights to jobseekers’ allowance if unemployed. The accident record for the self-employed is poor and the training record is pitiful.
Personally, I would prefer that my husband or son (it’s a predominantly male-orientated industry) worked for a good employer with security of employment and rights to sick pay and holiday pay, unemployment benefits – and some skills training – than the insecure life of a self-employed man at the bottom of the construction heap. I am talking labourers here – not specialist skilled traders.
If construction jobs provided a proper National Insurance record, with training and security, perhaps families would be pleased and proud if their offspring wanted to go into the building industry. It might even become easier to attract new workers – at the right pay rates – than it is now.
Legislative objectives
Does the legislation address the original objectives of those that sought it? I think it will. At the moment the proposals rather cleverly make no one an employee. They simply subject pay packets to tax and National Insurance under PAYE.
This will inevitably result in more workers being taken into employment by their contractors.
When a worker only does what he is told to do with his contractor’s materials and kit he is hardly going to pay an employed earners National Insurance contribution without demanding all the employed rights that go with it.
Prudent employers will understand that if the engagement terms of the worker were ‘borderline’ anyway, employment is safer than a confrontation which they are doomed to lose.
I think that in the real world – and construction is usually a very real world – the number of workers who have to be taxed under PAYE but are engaged on genuinely self-employed contracts will rival the number of hen’s teeth.
The tax take
There is an argument being put about that many construction workers will disappear into the black economy and that there will be no increase in the tax take. We must first remember the group who are most likely to be affected – those who never buy materials, nor pay others and own no substantial tools.
Can they enter and survive in the black economy? It is a pretty vibrant market. If you want your house painted there are a lot of one-man bands already out there and these people already have established customers, builder’s merchants and tools.
There are not vacancies for 100,000 new traders to earn a living for 52 weeks in the year. No, this legislation will increase the tax take.
I have no fear of that.
The current system is fair
I beg to differ. Ask any member of the National Access and Scaffolding Contractors for their view.
Members of this federation carry out the vast majority of quality scaffolding projects in Britain. Their men are trained to very high standards, they have excellent safety records. But these contractors are constantly undercut on smaller projects where clients will not pay the prices that are needed to run a PAYE workforce.
Scaffolding is an industry beset with seedy companies with poor safety and poor training: firms that compete because they keep their wage costs low with self-employed scaffolders. The current system is not fair.
An unfair attack?
So is this an unwarranted and unfair attack? Well it will hurt the labour agencies that take falsely self-employed workers and manufacture them into self-employed workers for a fee. It will also hurt the firms that have no employees at all.
But for all the firms in construction that struggle down the law-abiding path, trying to keep as many employees as they can afford, using a few self-employed labour-only workers for short periods – firms like that should smile.
We may be going to have increased costs – but increased costs for all at the same time – and it will be far easier for those firms who have always tried harder to comply with the law. That is neither unwarranted nor unfair.
In conclusion, my advice to accountants and practitioners is, ‘Don’t jump to conclusions. Think before you judge!’
Liz Bridge is secretary of the Joint Taxation Committee of Construction and can be contacted via email.
