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LITRG express concern that HMRC’s proposals to tackle employment status fraud in the construction industry will penalise the low-paid unrepresented worker more than the contractor or the Exchequer.

Introduction:

Generally, LITRG share HMRC’s distaste for the practice of ‘dressing up’ an employment relationship as one of self-employment in order to take advantage of more favourable tax treatment. While the engager may avoid or postpone payment of tax and NICs, the low-paid worker (who often has no choice in the matter) stands to lose out on contributory benefits entitlement, employment rights protection, and sometimes even the certainty of knowing that the right amount of tax has been paid on their earnings. So, in principle, trying to do something about the abuses is fine. But LITRG are not happy at all at HMRC’s proposed solution. They fear that the people who could be put at a disadvantage by the proposals in the consultative document are not the contractors, nor the exchequer, but the low-paid, unrepresented worker.

So what’s wrong with HMRC’s proposal?

In the consultative document False self-employment in construction: taxation of workers, HMRC want to tax all workers in the construction industry as employees ‘unless one of three simple, clear and easy to apply criteria’ is met. LITRG think that there are many things wrong with that approach:

• It is an over-simplification. The tests evolved by the courts over the years to distinguish employment from self-employment income for tax purposes are by no means simple, but they do aim to reflect the true nature of each engagement. To add, as the Government seeks to do, a new artificial test for one ill-defined group of workers to the complexity of the existing rules will complicate the whole system yet further.
• It is as much a fiction as false self-employment. The abusers seek to escape tax and NICs by pretending that workers who are in reality employees are self-employed. HMRC seek to counter that by pretending that all workers are employees, whatever their true legal status. One fiction replaces another, both equally at odds with reality.
• It ignores the rights of low-paid workers. By deeming workers who are in reality self-employed to be employed, it will deprive them of the tax advantages of self-employment, but it will not give them the legal rights (employment protection, statutory payments, and so forth) that genuinely employed workers have. A lose-lose situation for the low-paid.
• If things go wrong, the low-paid worker risks having to pay the tax that the contractor ought to have paid, but did not. This could involve a retrospective tax bill going back several years.
• And it just makes the tax system more complex. As if we didn’t have enough complexity already.

Is there a better way?

HMRC have invested millions of pounds in devising an Employment Status Indicator on their website to follow the sophistication of Court decisions and to make accurate decisions on employment status in the construction industry. This has been trumpeted by HMRC for some years as the solution. Is this new proposal another admission of failure? Or is it just an acknowledgment that it is too difficult or expensive for HMRC to carry out the compliance activity necessary?

If HMRC introduce this new test what makes them think that an industry noted for its fleetness of foot will not suddenly change work practices to meet the new test?

If HMRC officers genuinely experience difficulties because of the complexity of the rules, would it not be better for the exchequer in the long-term to work at reducing or eliminating the incentive to dress-up an engagement as one of self-employment rather than employment? We appreciate that is not the easy way out but greater alignment will ultimately produce savings in compliance costs and the benefit of certainty for the taxpayer.

You can see the LITRG response to the consultation document on the LITRG website.