Builders: 'contractors' or 'disguised employees?'

Representatives of the construction industry have asked the Government to consider redefining certain construction workers as 'employees' for tax purposes so that they are subject to both income tax through PAYE and Class 1 National Insurance Contributions, according to reports from the Treasury.

The Paymaster General, Dawn Primarolo, who introduced the concept of 'disguised employees' with IR35, has asked the Inland Revenue to discuss with the construction industry the feasibility of their proposal with a view to reporting back before the Pre Budget Report.

The Government announced in the Pre Budget Report that it was 'determined to tackle non-compliance in the construction industry by those contractors who routinely ignore their responsibilities to check whether workers are self-employed or employed and account for tax and National Insurance on the correct basis.'

As a consequence the Inland Revenue is stepping up its compliance activities in this sector to ensure that everyone understands and meets their tax obligations on whether a worker should be taxed as an employee or not. It also announced that the financial consequences for those that are found ignoring the correct status would increase.

The Treasury claimed that industry representatives have supported the compliance drive but have asked the Government for further measures to create the certainty they require and a level playing field to compete fairly for contracts with those who routinely use falsely self-employed labour.

In particular, they would like the Government to consider a wider reform to make labour-only sub-contractors subject to the same tax and National Insurance provisions as the employed.

Treasury view

In a statement which will ring true with freelancers facing the problems associated with IR35, the Treasury admitted that the law for tax and social security legislation does not define 'employment' and 'self employment', and that this rests with the precedents set by case law.

The Treasury said: "There is a general requirement on businesses to consider the employment status of workers. Whether a worker is employed or self-employed for a particular engagement is a question of fact. It depends on the terms and conditions on which they are engaged and on the way in which they organise their work. The law for tax and social security legislation does not define 'employment' and 'self-employment'. The principles which determine whether an individual is an employee of self-employed are derived from case law.

"The Government announced in the Pre Budget report that it would introduce a revised Construction Industry Scheme from April 2006. The scheme applies only to payments under contracts involving businesses and self-employed workers. If the contract with a worker is not one of self-employment the normal PAYE and National Insurance rules for employees should be applied. One aim of the new scheme is to help contractors get the employment status of their workers right through the introduction of an Employment Status Declaration. This will act as a reminder to all in the industry of their obligation to check the employment status of a worker.

"It has also proposed an end to the current concession whereby the tax deducted from sub-contractors under the Construction Industry Scheme is offset against any PAYE settlement from an employer who has failed to correctly tax their worker as an employee. The date of the withdrawal of the concession has yet to be announced."