False self-employment in the construction industry

Rhian Lloyd, Senior Manager, blogs on false self-employment in the construction industry.

While there has been plenty of attention on extended temporary labour supply chains, including those within the construction industry, HMRC seem to be focussing little attention on false self-employment in temporary labour supply chains which cause significant loss of revenue to the Exchequer.

Whilst legislation has been introduced over the years to mitigate false self-employment in temporary labour supply chains (i.e. s44 ITEPA – the Agency Legislation), employment status is still a “grey area” with three classifications of status: employee, worker and self-employed.

We saw a consultation in 2018 regarding employment status and more recently we have seen plenty of case law on the “gig economy”. However, false self-employment is still rife, particularly in construction, and it seems that HMRC are in no hurry to take action – on “the too hard pile” you may say.

Whilst the amendment to Chapter 10 ITEPA (IR35) may have bought some money back into the coffers, the prominent question is how many PSC workers now operate as a sole trader to avoid Chapter 10 ITEPA?

It is important to understand that incorrectly classifying a workforce as self-employed could have huge consequences for a business and also, could see HMRC raise liabilities on the “employers”.

HMRC are missing out on…

False self-employment reduces the following employer liabilities; Income Tax, Employee’s National Insurance Contributions (‘NICs’), Employer’s National Insurance Contributions and the Apprenticeship Levy.

HMRC could open an employment status enquiry and raise Section 8 Decisions for unpaid NICs, as well as Regulation 80 Determinations for unpaid tax.

This could equate to a liability of 45.85% of payments made to all “self-employed” individuals. (albeit for those working in the scope of the Construction Industry Scheme (‘CIS’) it is likely 20% will have already been deducted which will reduce the liability somewhat).

Whilst status enquiries are not too common these days, with HMRC’s ever shrinking workforce due to office closures, voluntary redundancies, as well as COVID backlogs and CJRS enquiries, these types of enquiries have the potential to be extremely lucrative to HMRC.

“Employees” are missing out on…

Being treated as a self-employed subcontractor as opposed to an employee or worker means no rights such as holiday pay and sick pay.

Whilst HMRC do not govern these payments, claims could be made by individuals to an Employment Tribunal. This could be a costly and time-consuming process.

Furthermore, plans for a new enforcement body to ensure workers’ rights might put pressure on this risk area of false self-employment and the GLAA also review employment status as some licencing standards apply to everyone and some apply to workers and employees only. 

The GLAA have received strong support from the construction industry in relation to promoting employment rights to vulnerable workers in the construction sector following launch of its Construction Protocol.

I have summarised some interesting case law regarding employment status in the construction industry;

Mr T Coffey t/a Coffey Builders; Dr M Selvarajan v HMRC

In an interesting turn of events HMRC argued that Mr Coffey was in fact self-employed and not an employee of Dr Selvarajan. Mr Coffey had been undertaking refurbishment works in the doctor’s surgery. HMRC claimed that additional amounts of tax were due for years where Mr Coffey worked on the refurbishment. HMRC also raised Section 8 Decision for NICs to Dr Selvarajan (albeit 0.00) so that Dr Selvarajan could lodge his appeal that Mr Coffey was not an employee of his.

The First-tier Tribunal (‘FTT’) agreed with HMRC and Dr Selvarajan that Mr Coffey was a self-employed on the basis that;

1. Dr Selvarajan did not direct Mr Coffey
2. Mr Coffey was not subject to appraisal or monitoring
3. Mr Coffey dictated his hours and days of work
4. He worked in the way he always had – self-employed
5. Documentation signed by Mr Coffey reinforced his significant responsibilities and control
6. Mr Coffey’s role went beyond “overseeing” the project
7. Mr Coffey dictated and controlled subcontractor’s payments who he took on to undertake the works
8. Mr Coffey could not be seen as “part and parcel” as he was not an integral, or even ancillary, part of the practice – he was engaged for a one off development

Castle Construction (Chesterfield) Ltd v Revenue and Customs Commissioners  

This appeal was allowed in part on the basis that it was found the majority of individuals were self-employed (314 out of 321) (however fork-lift truck drivers and lorry drivers were ranked as employees due to being subject to more control).

Castle Construction applied the CIS to the payments made to subcontractors and so, the case concentrated on the fact that Class 2 and possibly Class 4 NICs payable by the self-employed are lower than Class 1 primary and secondary contributions payable in respect of employees.

I have set out below why the other individuals (bricklayers, scaffolders, laborers, slinger/signalmen and foreman) were found to be self-employed;

1. Subcontractors were paid an hourly wage for work actually undertaken
2. They did not receive holiday pay or sick pay and did not get paid when weather or any other factor rendered work impossible
3. Some subcontractors were free to work the hours that they chose, others were required to work within regular hours
4. Subcontractors provided their own hand tools and transport to and from site – there was clear distinction between those who were employed (e.g. apprentices) and the subcontractors i.e. employees had their hand tools and visibility vests provided to them as well as transport to and from site
5. Whilst there was complete control over where, and in what sequence, walls should be built (dictated by the principal contractor), there were no instructions as to how the job should be done
6. Mistakes had to be corrected in their own, unpaid time – again, there was a clear distinction between employees and subcontractors as employees would not lose pay in this situation
7. The subcontractors were not part and parcel of Castle Construction
8. They could work for other contractors (and witnesses set out that they did)
9. They had the flexibility to enter into and leave engagements as they chose and often did for better money elsewhere or convenience of the site location
10. One of the subcontractors, who was a witness, confirmed that he was not paid when he took his child to medical appointments and did not need to obtain permission to take this time off
11. Many subcontractors worked for relatively short periods with only 6 reviewed (out of 60) having worked for periods of longer than one year
12. Invitations to work events (such as Christmas parties) were not extended to subcontractors

Whilst the determination was that the bricklayers were self-employed it is important to note the aspects in favour of the bricklayers looking like employees. These were;

1. They only supply their skill and work,
2. They only provide hand tools and
3. They work fairly regular hours.

This case was also peculiar on the basis that in 1999 and 2000 HMRC officers considered the status of the workforce and confirmed they were rightly treated as self-employed. In 2006 HMRC asserted it was likely that all workers should be treated as employees. Due to this, assessments were made for the year 2006-07 rather than any earlier years.

Conclusion

Can you confidently say your subcontractors meet the criteria of self-employment as set out above? Are you running a risk that your subcontractors are not genuinely self-employed?

Whilst some years have passed since the consultation in response to the Taylor review and HMRC seem somewhat preoccupied at the moment, we predict there will be changes to come… even if it is not for some years.

Remember, HMRC can raise assessments going back a number of years so, before the spotlight lands back on employment status, review your subcontractors working practices and your contractual terms. Give me a call if you wish to discuss further.