Investigation finds that payroll companies advise firms to take on full-time employees as self-employed subcontractors to avoid paying benefits and tax
The construction industry is avoiding paying hundreds of millions of pounds in tax and depriving workers of employment rights by switching them to a self-employed status.
An undercover investigation by construction union UCATT has revealed that specialist payroll companies are helping construction firms to switch their workers from the status of employee to self-employed subcontractor, even though many are employed permanently by a single firm. Once they are classed as self-employed the workers are stripped of their entitlements to holiday and sick pay, company pensions and the national minimum wage.
Some payroll companies are also using tax relief claimed against workers’ expenses to fund employers’ national insurance and pay their own fees, which amount to millions of pounds according to UCATT estimates.
UCATT contacted a number of payroll companies posing as a family construction firm with 15 employees called Fairbrother Builders. Each payroll company was asked how it could help Fairbrother save money: the majority said it could switch its workforce to self-employed status without making any material changes to the way the firm operated. The workforce could continue working solely for Fairbrother Builders full time and it could continue to direct their work as before.
In a letter to Fairbrother one payroll company wrote: “We can save you money – 20% of your labour costs – by reclassifying PAYE staff, paying them through CIS [a construction industry tax scheme for self-employed people].”
It continued: “Last year this saved our clients over £25m in Employers NIC [national insurance contributions], placing tax and employment law liabilities with us.”
In a conversation recorded by the UCATT undercover researcher, a regional account manager for the payroll company claimed it could offer protection from prosecution by HM Revenue and Customers.
When the researcher said the workers would not really be self-employed because they were only working for Fairbrother Builders, the account manager said: “Correct … We eliminate the risk for you by our contract … And yes, the guys are working for you for as long as you want them to work for you really, and there’s nothing the revenue can do about it.”
Workers who become self-employed have to apply for a unique tax reference number and self-employed status under CIS; this allows companies to make deductions for tax from the pay of self-employed sub-contractors at source. The worker then signs a contract with the payroll company which declares that he or she is self-employed and is now being engaged by the payroll company, not the construction company for which he or she is working.
The payroll company’s fee may even be deducted from the now self-employed worker’s wages, rather than paid by the construction company.
Employers cannot force their staff to switch to self-employed status, but sometimes they offer an incentive such as a small increase in the hourly rate of pay. However, UCATT says this rarely compensates for the loss of employee benefits.
HMRC makes it clear that anyone who works continuously and uniquely for a single firm is not genuinely self-employed.
It challenged payroll firm Hudson Contract in the high court in 2007, claiming there was an implied relationship between the construction company and the “freelance operative”. But the court ruled against HMRC, saying that at the time the contract is signed both Hudson and the former worker (now freelance operative) intend the contract to operate as it states. However, the court also acknowledged that after the contract was signed, a contract of employment could be implied if circumstances changed.
UCATT’s general secretary, Steve Murphy, said fake self-employment was costing the exchequer almost £2bn a year. He admitted that construction workers frequently had to change sites and employers throughout their working lives, and that the level of self-employment in construction was much higher than that in other industries. But he added: “A large percentage of self-employment in construction is false. Workers have all the attributes of an employee but none of the rights.”
Despite the high cost to the exchequer UCATT says there is little sign of government action to crack down on these practices. The number of employer compliance reviews opened by HMRC about employment status issues has fallen from 1,205 in 2009/10 to 433 in 2011.
In a statement, HMRC said: “False self-employment across all sectors is a recognised risk and we deploy compliance resource to police the risk, proportionate to other risks … The government is determined to tackle both tax avoidance and tax evasion and committed £900m over the spending review period to enable HMRC to tackle arrangements that seek to minimise or evade taxes.”