False self-employment and health and safety in construction

False self-employment is used by many employers to evade taxes and engage workers without having to respect employment rights and entitlements such as holiday pay, sick pay and pensions. Construction union UCATT argues that sites where workers are directly employed rather than being falsely self-employed are safer: “Workers are better organised, safety laws are more likely to be properly observed and there is a stronger likelihood of independent safety reps working on sites.”

The union highlights the fact that direct employment and proper engagement with trade unions about safety was the primary reason why London delivered a safe Olympics. London was the first ever Olympic Games to have been built without a single construction fatality.

UCATT says false self-employment is “undoubtedly, the biggest employment rights challenge in construction.” Today, the union estimates that over 50% of those working in the industry are falsely self-employed and it identifies the CIS scheme as the main facilitator of false self-employment. The scheme is a stand-alone tax scheme for the industry. Workers paying tax via CIS are considered to be self-employed but are taxed 20% of their earnings at source; workers can then claim a tax rebate. It allows companies to deduct tax at source and avoid employing workers directly.

In December 2012, UCATT published a report, The great payroll scandal, exposing an explosion in the use of intermediaries, including employment agencies and payroll companies, in construction. The report highlighted abusive practices aimed at avoiding tax, national insurance and employment liabilities through the use of false self-employment. In 2013, a similar report, The great rail payroll rip-off, focused on false self-employment in the railway infrastructure and maintenance sector. The report, by railworkers’ union RMT, estimated that around 67,000 out of 88,000 personal track safety cardholders (76%) were not directly employed by Network Rail.

UCATT’s report showed that some payroll companies use aggressive marketing to actively encourage construction firms to switch their directly employed workforce from direct employment to become “self-employed sub-contractors” on the books of the payroll company. Employers are tempted with potential “savings” in Employer’s National Insurance Contributions (NICs). Workers have little practical choice but to accept their “self-employed” status. “They either go along with the terms laid down by the employment agency, or they do not get the work”, says the report. Having signed the new contract terms, the worker is then held out to HMRC as “self-employed”, losing basic employment rights. Some workers even have the payroll company’s weekly charges deducted from their wages, and some companies use tax relief against the worker’s own expenses to fund Employer’s National Insurance Contributions.

False self-employment in the construction industry is estimated to cost HMRC around £1.9 billion per annum, made up mainly of lost Employer’s NICs.

In its 2013 Autumn Statement, the government announced that HMRC would be targeting its compliance efforts at false self-employment in the construction sector and new rules were promised.

Under the old rules, a construction worker was either:

• an employee or agency worker and subject to PAYE and National Insurance Contributions (NICs); or

• “self-employed” and registered through the CIS scheme (see page 198).

If the worker was an agency worker working through an intermediary, such as a staffing agency or payroll company, then the agency had to deduct PAYE tax and national insurance at source. However, if the worker was registered as “self-employed”, the staffing agency was treated as a CIS sub-contractor, and could receive payments with a reduced tax rate and without paying the 13.8% Employer’s National Insurance Contributions.

Before April 2014, HMRC could only compel employment agencies to deduct tax and national insurance from the earnings of agency workers at source (PAYE) where there was a contractual obligation to provide personal service. CIS payroll companies and agencies took advantage of this rule by ensuring that workers were engaged on written contracts that did not require personal service. However, as already indicated, in reality many of these workers were not genuinely self-employed.

In April 2014, HMRC changed the rules. From that date, where any worker provides personal services, or is involved in providing personal services to a third party, under arrangements in which an agency is involved, PAYE tax and NICs must be deducted at source. The agency will be treated as the employer.

Where several intermediaries are involved, liability for the tax and national insurance will lie with whichever company holds the contract with the hirer/end user.

The agency can only pay gross without deducting NICs if it can prove that there is no supervision, direction or control of the worker by any person (in other words, if it can show that the worker is genuinely self-employed). An agency that cannot show this must operate PAYE. Agencies must also report quarterly to HMRC, providing details of any workers who are not subject to PAYE/NICs and the reason why tax is not being deducted.

HMRC has produced guidance as to what it means by “supervision, direction or control”.

Initially, unions cautiously welcomed this rule change as a step towards stamping out false self-employment. However, as pilots’ union BALPA told the House of Lords Select Committee: “In our experience, where legislation has been introduced or updated in the past in such scenarios, the end client, in collusion with the onshore employment agency, simply changes the structure of the arrangement in order to avoid their PAYE and NIC responsibilities.”

Predictably, the changes have led to fresh abuses, in particular a rise in the use of “umbrella companies”. These are companies inserted in between the worker and the employment business, so that the employment business can avoid responsibility for national insurance.