UK: HMRC Threaten To Treat Self-Employed Construction Workers As Employees

Last Updated: 17 August 2009
Article by Steven Sieff and Sarah Ozanne

Recent proposals by HMRC to tackle perceived tax avoidance in the construction industry would be likely to result in a substantially higher tax burden for many genuinely self-employed workers, result in a greater compliance burden for very small businesses and would put the construction industry at a disadvantage compared to other industries where no similar legislation exists.

Everyone in the Construction Industry will be familiar with the Construction Industry Scheme ("CIS" or "the Scheme"). The Scheme emerged in the 1970s as a way to tackle the tax evasion which HMRC perceived to be rife in the Construction Industry. Since that time the Scheme has been amended and updated several times, but the basis remains that those wishing to receive payments for construction operations must be registered with HMRC, or suffer a withholding tax applied by the payer.

Employed or Self-Employed

One of the key aspects of CIS is that it only applies where the person doing the construction is self-employed. So the first question that always needs to be answered is whether the worker in question is employed or self-employed. If the worker is an employee then they will be taxed in the same way as every other employee of that business, so that PAYE and employer's and employee's NICs will apply. This means that it is generally more favourable in absolute tax terms to be self-employed, as the self-employed pay NICs at a lower rate than the employed and benefit from more generous rules about what is deductible. Against that is the cashflow disadvantage of suffering a withholding tax as opposed to paying tax on the basis of your tax return, although this is only an issue for those workers not registered for gross payment.

Although crucial to deciding if CIS applies, the employed/self-employed question has never been a tax one. A large volume of non-tax case-law has provided principles to help determine if there genuinely is a contract of employment. HMRC provide some guidance based on these principles in CIS 349. Factors which may be relevant include:

  • The degree of control exercised by the engager
  • The financial risk taken by the worker e.g. are they paid per hour or on the basis of a completed job
  • Whether the worker has a right to substitute someone else to do the job
  • The length of the engagement
  • Whether the worker has other engagements at the same time
  • Whether the worker got the job through a tendering process
  • Whether the worker provides their own plant and equipment
  • Whether the worker provides the materials needed to complete the job

If these factors pointed to self-employment then there was previously no question that PAYE would apply, and we would have been firmly in CIS territory. That is set to change if the current HMRC proposals are implemented.

New Proposals

The new proposals will deem everyone doing construction operations to be an employee for tax purposes unless one of three exceptions apply. These 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; or
  • Provision of other workers - that a person provides other workers to carry out operations under the contract and is responsible for paying them.

In the consultation document, HMRC's expressed view is that 'these criteria bear the hallmarks of a person genuinely carrying on a business on his own account' without at the same time introducing 'unnecessary levels of complexity or uncertainty'.

It may well be the case that a worker who fits into the one of the exclusions would normally be self-employed but this is by no means certain in all cases, so even if an exclusion applies, the payer will still presumably have to confirm for themselves that there is no contract of employment on the general principles mentioned above.

Even more unsatisfactory is the fact that many workers who do not fit into one of the exclusions may well genuinely be self-employed on the normal case-law tests. HMRC state 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.' Yet they must be aware that by excluding the other tests for a contract of employment, they are going to sweep up many workers who would otherwise correctly pay tax on a self-employed basis.

There is also going to be an increased compliance burden for the paying entities as companies are forced to absorb thousands of workers onto payroll - a particular nightmare for micro businesses.

The consultation also anticipates the need for anti-avoidance provisions which might make payers or engagers secondarily liable for tax not levied on the worker. This would presumably encourage engagers/payers to take an ultra cautious approach where possible in order to avoid any possibility that they would become liable for the unpaid tax down the line.

Overall the proposed changes would have a number of negative effects. They would:

  • Impose more tax on some genuinely self-employed
  • Produce an uneven playing field within the industry between the self-employed who continue to be treated as self-employed and those who will be deemed employees
  • Disproportionately affect smaller businesses
  • Create an uneven playing field between a class of self-employed in the construction industry and self-employed in other industries, which may encourage workers to move into other areas

CMS Cameron McKenna intends to respond to the consultation along the lines outlined above. Any industry comments would be welcomed.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/08/2009.

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