黑洞社区

George Osborne used last week鈥檚 Budget to confirm the go-ahead for a clampdown on tax avoidance which looks set to have far-reaching consequences for the way the construction industry operates. He confirmed measures, first outlined in December, that will in most cases prevent temporary site workers from claiming to be self-employed, potentially adding up to 30% to the cost of employing site labour.

And what鈥檚 more, there is no transition period to help the industry get used to this change in the rules. Indeed, the government will only publish legislation on what it calls false self-employment, estimated by HM Revenue & Customs to affect up to 200,000 construction workers, on Thursday this week. It will then take effect from 7 April.

The cynics may say we have heard all this before: the government has made numerous attempts to tackle this problem over the last 20 years, with the most recent made in 2009. All of them have either failed to be implemented or been pulled at the last moment. This time, however, it seems different. Well-known labour intermediaries - basically specialist agencies - which have made a business out of contracting 鈥渟elf-employed鈥� workers for construction sites are already shutting up shop. The remaining intermediaries are having to adapt fast, with their clients telling them they will be moving wholesale away from using 鈥渟elf-employed鈥� labour. So is this finally the time when everything is going to change? And what does it mean for the industry if it is?

That the construction industry still operates with a large proportion of its workers registering as self-employed marks it out as an anomaly. Around 10% of the workforce is registered as self-employed via intermediaries. This means they benefit from a wholly legal system to govern how subcontractors pay tax - the Construction Industry Scheme (CIS) - despite the fact the Treasury suspects that most of these 鈥渟elf-employed鈥� individuals are actually employees.

The biggest difference the CIS makes is that the employer is not expected to make national insurance contributions (NICs), saving 13% on the ultimate cost of employing them, and meaning these workers are often able to command a higher pay rate than those classed as employed, who are paid via PAYE. In return for this potential benefit, workers sacrifice all basic employment rights, including holiday pay, sick pay, redundancy pay and notice periods. Many work in this 鈥渟elf-employed鈥� no-man鈥檚 land for many years for the same firm.

From 2007 construction employers have had to confirm workers are genuinely self-employed, a rule designed to discourage bogus self-employment. Instead, this stipulation has simply led to the creation of myriad intermediary agencies who manage their workers鈥� tax status, protecting their ultimate employers from this tax risk.

According to an HM Revenue & Customs consultation on this issue late last year, these intermediary companies - around 10,000 of them - are now used on an 鈥渋ndustrial scale鈥� to place workers, via employment agencies, in jobs on construction sites. Some of these intermediaries are large businesses, with the likes of Gabem and the Sterling Group simply the best known.

Liz Bridge, secretary of the construction industry鈥檚 Joint Taxation Committee (JTC), says: 鈥淚n other industries it would be regarded as an odd question to ask if the employers provided holiday and sick pay - of course they do. In construction it鈥檚 not an odd question.鈥�

The system is designed to give the industry maximum, and necessary, flexibility to respond to the need for project teams to be quickly assembled and dismantled as projects go ahead.

However, many in the industry, including the construction unions, feel that the situation has to change as it takes advantage of the desire for what are mainly young, relatively poorly educated men to get the highest possible salary they can, at the expense of their employment conditions.

Phil Whitehurst, national officer for construction at the GMB union, says: 鈥淭hey鈥檙e preying on people鈥檚 natural greed, but it鈥檚 just a way for employers to circumvent their employees鈥� rights. The workers don鈥檛 realise they haven鈥檛 got any rights or Ts and Cs. It鈥檚 rife in the construction industry, rife.鈥�

While for the unions the issue is one of workers鈥� rights, for the Treasury the issue is largely financial: it estimates making the change will net it around 拢520m in 2014/15, mainly in additional National Insurance contributions. Essentially it is saying that from April any worker who can be told how to carry out a task and will be supervised, is a form of employee. Only those who are simply told what outputs they need to produce and are left to do that in their own way and in their own time, will be judged to be self-employed. In total the Treasury thinks this simple change will bring in 拢2.2bn to its coffers over the next five years.

They鈥檙e preying on people鈥檚 natural greed, but it鈥檚 just a way for employers to circumvent the employees鈥� rights. The workers don鈥檛 realise they haven鈥檛 got any rights. It鈥檚 rife in the industry, rife

Phil Whitehurst, GMB

Neil Hollister, managing director of one of the most successful of the intermediaries, Gabem, says that in response recruiters are planning to change the way they supply staff wholesale.

For Gabem, which contracts staff both on a self-employed basis, and under another system whereby they are employees of Gabem acting as an 鈥渦mbrella company鈥�, it will mean moving nearly all its workers over to this second system in very short order. 鈥淗aving spoken to all our major clients what I鈥檓 seeing is a wholesale attempted migration from self-employment to the umbrella model,鈥� he says.

This is despite the fact that the impact of the legislation is only finally to be determined by future legal challenges to the new rules. Hollister says they feel it is not worth the risk that they will be liable for full PAYE and NICs from April. 鈥淭he government鈥檚 got a big enough baseball bat that the industry is not going to compete against this, even though operating a compliant self-employed model is theoretically possible for some,鈥� he says.

The problem for the wider industry is that if the changes are successful (from the Treasury鈥檚 point of view), this money will have to be found from within construction contracts - many of them already signed and priced. Bridge says: 鈥淏asically the government is looking to take another 13% from within the process. There鈥檚 another dog eating at the same bowl. Undoubtedly others will get squeezed, meaning possibly higher costs to the construction client, or the wiping out of the intermediary firm, or maybe lower take home pay for the worker.鈥�

While none of the major contracting bodies are objecting in principle to the changes - which don鈥檛 stop firms from having temporary workforces - they are objecting strongly to its implementation without a transitional period. Stephen Ratcliffe, director of the UK Contractor鈥檚 Group, says the industry is 鈥渄isappointed鈥� about the move, arguing its introduction should be 鈥渄elayed so that costs did not rise on contracts where the price was already fixed.鈥�  

The submission to the HMRC consultation by the 黑洞社区 & Engineering Services Association said the proposals would 鈥渦ndoubtedly raise the costs of individual construction projects鈥� - and raised concerns about doing this during a period when the industry is still recovering from recession. The submission also said main contractors may refuse to pay these additional costs, thereby putting pressure on specialists, and leading to 鈥渟upply chain tensions鈥� and 鈥渆mployment relations problems鈥� on 鈥渕ajor, high-profile (publicly funded) projects鈥�.

Rod Pettigrew, the organisation鈥檚 chief executive, says: 鈥淲e鈥檙e talking about the effect of this starting from a week鈥檚 time. The reality is that for those who are using this system, the change could impact seriously on their costings on projects.鈥�

Gabem鈥檚 Hollister says the impact is likely to be most serious for those employing the least skilled, least well-paid labour - those earning less than 拢8.50 an hour. For workers earning more, he says the umbrella scheme, while forcing them down the PAYE route, allows them to offset tax against expenses, mitigating the additional PAYE costs. But he says this is impossible for those on the lowest rates. 鈥淔or those working around the minimum wage level there is no doubt that employers will face a significant increase in costs to employ them. Many in the industry estimate it as in the region of 25-30%, once they include the impact of Agency Worker鈥檚 Regulations. That鈥檚 why intermediaries are wondering if they now have a business model.鈥�

According to consultant Core Five, site labour costs typically make up 35 - 40% of the cost of a construction project. So if these rises come about, the impact will be significant.

Hollister calls the two-week timescale for introduction 鈥渦tterly ludicrous鈥� and 鈥渏ust impossible鈥� - and he is already hearing of a number of intermediaries that are choosing to throw in the towel. 鈥淚 know of two businesses myself who have chosen to shut down. Others are scrabbling to launch an umbrella service, but they won鈥檛 all be able to do that. It puts the industry in an impossible situation.鈥�

And while labour campaigners support the government鈥檚 move, some workers will resent the likely squeeze on wages. Bridge says: 鈥淚n some ways the admin part will be the least of these firms鈥� problems. The real difficulty will be in trying to explain to someone who has always considered themselves self-employed that he鈥檒l be getting less money next week. Whichever place you look to recover the cost, no one will want to hear.鈥�

Despite all these problems, there are many who support the government鈥檚 actions, not least employment agencies who regard the 鈥渟elf-employed鈥� market as bogus and refuse to work in it - but have therefore often found themselves priced out of contracts. For the GMB鈥檚 Whitehurst, the changes can鈥檛 come soon enough - he describes the industry鈥檚 complaints as 鈥渦tter nonsense.鈥�

But contractors and subbies, already working on wafer-thin margins in many cases, will feel justifiably aggrieved.