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Construction Industry (Tax Treatment)

Volume 407: debated on Tuesday 24 June 2003

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Motion made, and Question proposed, That this House do now adjourn.[Joan Ryan.]

9.33 pm

I am pleased to have the opportunity to bring this important matter before the House. Although I have no direct experience of the building industry, I come from a family who for generations worked in that industry. My father was a lifelong member of the Amalgamated Society of Woodworkers, a predecessor union to UCATT. One of my earliest memories is of attending the union's Christmas party for children at the Oakleigh Cooperative hall, probably in 1950. My next memory was of my father building a council estate in Didcot in 1951. He was a general foreman on a construction site for Laings, and I spent a week down there with him as he patrolled the site giving directions to the people working there, all of whom I understood to be the employees of the contractor.

That was a long time ago. This Government and previous Governments have wrestled with the problems over the past 40 or 50 years. Reform of the Inland Revenue construction industry scheme was announced in the Chancellor's pre-Budget statement in November 2002, together with the publication of the consultation paper entitled "The Inland Revenue and the Construction Industry—Working together for a New Scheme". That may be said to be a first. If its aims can be achieved, there will be considerable progress.

The revised scheme, which is to be implemented in 2005, sets three broad aims: to reduce the regulatory burden on the industry; to improve compliance, particularly with regard to tax obligations; and to assist businesses properly to assess the proper status of their workers. Reducing paperwork is linked to the introduction of computerisation. At present, "employers" issue slips or vouchers supposedly every time a payment is made to the "self-employed man or woman", and that is then sent off for tax reconciliation at the end of the year. One of the major problems has been that employees often do not receive the vouchers, or they receive them en bloc, as a result of which they have considerable difficulties in assessing the tax calculation at the end of the period.

The proposal is that the Inland Revenue computer system will simplify that enormously. Provided that it works—and that is what used to be called a conditional clause—it should make some considerable progress but the Revenue over 30 years has been trying to overcome tax evasion in the construction industry without any real and lasting success. My fear is that, unless we are careful with the revised scheme, there will be further disappointment and public confidence will wane further.

The consequences of failure are not just a loss to the Inland Revenue, which has been estimated by Dr. Harvey, who was engaged by UCATT to assess the position, to be about £1.2 billion to £2 billion per year, but a loss to every taxpayer in the country. I recently tabled a parliamentary question to my right hon. Friend the Paymaster General, and I believe that there are no clear figures or estimates from the Government as to what the loss is, although I suspect that they will concede that there is a loss. However, false self-employment has further consequences. It goes to the heart of the industry. It fragments the work force and denies workers in the industry employment rights. The man who is said to be self-employed but in reality is not loses all the protections that the employed man would have, and risks losing social security benefits if he fails to pay his national insurance contributions.

On the face of it, there is a short-term gain for contractors in employing the self-employed. That comes about because they escape liability for employers national insurance contributions. Nor are they obliged to offer many of the rights and protections that they would have to offer to those who are on the payroll. The whole system is essentially false. It is a fantasy world. One can go to building sites, look at the men employed and they will all appear to be doing the same job, working there week after week. They will all appear to be on the same terms but some will be employed and some will be purporting to be self-employed. The working man is in a difficult position because if he complains, he may risk losing his job. It is not unknown for contractors to insist on self-employment rather than to offer any choice.

There may have been some progress over the past two or three years but even today, a union official in my division, Ron McKay, told me of a building site close by. He believes that 100 per cent. of those working there—it is quite a large site—are purporting to be self-employed.

I suppose that the problem really started back in the 1960s. Before then, the majority of workers were on the pay-as-you-earn scheme. They were engaged perhaps by a subcontractor, but predominantly by a main contractor, and they were paid weekly. At the end of the week, the employer sent to the Exchequer the tax deducted and the national insurance contributions. The workmen were protected by the labour laws then appertaining and by the benefits flowing from the social security system.

At some point in the 1960s, something known as "the lump" became almost a public scandal. I recollect television programmes on the effect of the lump—in other words, of payment in cash to virtually uncertified workers. The Revenue had virtually no idea whatsoever what the position was, how many people were employed and what tax should be paid. And of course, the workers themselves had no protection whatsoever against unscrupulous employers.

The then Government sought to get hold of the situation through the Finance Act 1970. A scheme was introduced involving issuing a 714 certificate in respect of those who were believed to be genuinely self-employed and genuinely independent contractors. They were paid gross by the main contractor, and had to account for tax in the normal way, as any self-employed person does. If they could not do so, they were issued an SC60 contract, tax was deducted at source and the matter was sorted out—or not—at a later date. Of course, the employer still did not pay any employers national insurance contributions.

It would seem that for many years, Governments did not have a clue as to how many people were employed and how many were self-employed. I recently tabled a parliamentary question on this matter, but figures for the self-employed in the construction industry could be given only from 1994. It seems that there are no figures for before that time, which is perhaps because there was a different system, or because the information was just unknown.

Governments have recognised the problems, and in that respect I give credit to the former Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), who in the mid-1990s sought to enforce the existing system. In essence, enforcement turns on proper definitions, so that a judgment can be made as to whether someone is properly self-employed or their status is in fact a charade. When such enforcement and compliance was taking place, a remarkable rise took place in the number of those listed as employed, rather than as self-employed.

The new construction industry scheme—the CIS4 scheme—involved the issuing of some 800,000 cards in a little more than a year. That is an enormous number of cards to justify the "ticket to ride" to self-employment. The problem appears to have returned to a considerable extent in the past few years. Indeed, in the mid-1990s about half of those in the construction industry were listed as self-employed.

On the face of it, the new scheme was an attempt to regularise the position, but it appears not to have worked. Other Members have dealt with this issue in recent times. My hon. Friend the Member for Chatham and Aylesford (Jonathan Shaw) has spoken of the effect of bogus self-employment, and my hon. Friend the Member for Barnsley, West and Penistone (Mr. Clapham), who is in his place, initiated a debate on this subject and on the work of Dr. Harvey in particular. Dr. Harvey's main contention was that mass false self-employment has damaged the construction industry. He argued that it has contributed to skills shortages, whereby major employers no longer invest in training. That and low capital investment are the classic ingredients for low productivity.

The Government have recognised the problems. As I said, a further scheme will be implemented in 2005. In 1998, my right hon. Friend the Deputy Prime Minister produced a report entitled "Rethinking Construction", which contained plenty of worthy ideas. Ultimately, however, unless we get to task with the issue of employment and self-employment, all the other matters will fall by the wayside.

One of those matters is health and safety. The building industry has acquired an appalling record over the years. Indeed, last year, there were 85 fatalities and 4,862 serious injuries. It is right to say that the Health and Safety Executive has taken dynamic action to bring that down by on-the-spot inspections of sites and by seeking a greater degree of compliance. The industry itself has set targets to reduce the fatalities and injuries by a considerable degree over the next five years.

The new scheme outlined by the Government is based on verification. It switches the burden from the subcontractor to the main contractor. If that is the case, it is a very positive move forward, which means that the buck will stop with the main contractor, who has many incentives to act in a responsible way. He will have a further responsibility to rein in the subcontractors who are not always so responsible.

Would my hon. Friend argue that the proposed scheme will, down the line, eventually lead to more direct employment instead of the culture of sub-contracting that we see at the moment?

I am grateful for that intervention, and that would certainly be my hope. Narrowing down the number of players, as it were, who are obliged to verify is bound to make the industry wonder whether it would be better off employing people directly, rather than going through a charade of self-employment through subcontractors or directly self-employing workmen. However, unless that is followed through by inspection, it will fail. If there is no rigorous check and verification of returns, there will be no incentive for people to get it right.

Successive Governments have lightly jousted with the problems of the construction industry for more than 30 years. During that time, workers have lost employment rights, sick pay, redundancy pay and pensions. Training has fallen away and apprenticeships have disappeared. Safety at work remains a mortal problem and the Exchequer has lost billions of pounds over that period. Now is the time to resolve the dilemma created by false self-employment. We need a test to determine self-employment that is open, clear, logical and obvious. At the risk of offending modernisers among Government Law Officers, I shall use a legal maxim that would resolve the conundrum: res ipsa loquitor—let the facts speak for themselves—or, to use a more current term, "get real".

9.48 pm

I congratulate my hon. Friend the Member for Braintree (Mr. Hurst) on securing the debate. He raises some important issues and I very much welcome this opportunity to explain to my hon. Friends and the House how the Government intend to carry forward this important work.

The construction industry is a vital sector of the British economy and central to the Government's commitment to public services. It is an industry that can offer great opportunities for employment and training, and for businesses to succeed. More than 1.5 million people work within the construction sector at any one time and it is clear that, unless the industry can encourage people to work in construction, there will be insufficient labour to fulfil the contracts.

Before I explain to the House the challenges that the Government clearly face, I want to outline the principles that we intend to follow. I am pleased to say that I am echoing what my hon. Friend touched on in his speech about the need to adhere to those principles.

The challenge for the Government is how to ensure that we have a framework in place that gives the industry the flexibility that it needs to respond to the varying commercial pressures that it faces, and the demands placed upon it. We also have a duty to ensure that that flexibility does not come at the cost of employment rights, safety, training or, indeed, the appropriate level of taxation.

Central to tackling the issues that my hon. Friend outlined in his speech is the issue of employment status, which is decided on the facts. It is for the workers and those for whom they work to agree the terms and conditions under which work will be done. If the agreed terms and conditions amount to employment, rights flow from that. The employer will automatically have certain responsibilities to the employee, including operating pay-as-you-earn to collect the right amount of tax at the right time, and deducting and accounting for national insurance class 1 contributions. They also include the provision of employment rights and benefits.

If the agreed terms and conditions amount to self-employment, the worker will assume responsibilities for their own tax and national insurance contributions through the self-assessment scheme, and the worker will normally have to provide their own financial cushion to cover holiday or sickness periods. In construction, we have enabled the self-employed to comply with their tax and national insurance responsibilities through the construction industry scheme.

My hon. Friend touched on Dr. Harvey's report, which was very interesting. Among other issues, my hon. Friend also touched on the amount of tax that Dr. Harvey identified as being at risk. While the Government do not agree with all of the facts that Dr. Harvey considered in order to reach that figure, we do not dispute that some tax and national insurance is lost. That feeds through into employment, training and safety in the workplace.

Employment status in the UK, as in many other countries, is determined on a case law approach for tax, national insurance and employment rights. The case law approach provides flexibility, but we also recognise that it can mean that it is difficult for some to determine the employment status of their workers. As a Government, we have always recognised that in construction, as with any business sector, there are those who do not pay the right tax and national insurance because they have got their employment status wrong. The consequences of that are important as they affect the individual's employment rights and access to certain benefits, and may also mean a loss of tax to the Exchequer.

There is a distinction, of course, between those who find it difficult to determine the employment status of their workers and those who make little or no attempt to get the status right. For most engagements, it is clear whether someone is working on an employed or a self-employed basis. But where there is doubt, the Inland Revenue provides extensive guidance and support to help to determine status. That is why the Revenue has a compliance regime to meet the challenge of those who do not meet their responsibilities.

Despite that extensive support, there are still those who get employment status wrong. It would seem that the incidence of incorrectly determined status is higher in construction than in many other sectors. Therefore, I would also like to take this opportunity to tell the House about the work that the Revenue has done in the last couple of years. I have explained that an individual's employment status is determined using a case law approach. The Revenue has developed a computer-based tool to determine employment status. The tool asks a series of questions about the engagement and, after weighing the facts of the case, will provide guidance on the individual's employment status. The Revenue hopes to start making the software available to its staff later this year and to talk to industry about the possibility of making the tool available externally at some point in the future, perhaps via the internet. That would enable us to ensure that consistent advice is given on employment status, thus providing far greater potential to get it right in the first place. However, my hon. Friend is right to ask whether we are doing enough. Despite the help and guidance that we provide, and despite the threat of financial penalties, it is clear that some employers continue to perpetuate a culture where some workers are paying the wrong tax and the wrong national insurance contributions. That denies them access to the employment rights and benefits that they deserve. My officials meet regularly with representatives from construction and are told that the pressure for false self-employment comes from both contractors and the workers themselves. For instance, we are told that it is the only way that contracts can be won and then fulfilled, that contractors would be happy to tax on the right basis if all of their competitors did, and that the status is too confusing to get right.

I shall deal with those points. I have already told the House of the extensive guidance that is available, and of the compliance regime for the industry. I have also mentioned the new computerised employment status tool that is being developed, which will support the guidance even further. However, as my hon. Friend noted, it is time that all contractors took the issue of employment status seriously. Following a period of consultation on the review of the construction industry scheme, we announced measures that will bring employment status to the forefront of contractors' minds. I put that in a delicate manner.

A special tax deduction scheme for the construction industry has existed since 1972 to tackle the culture of a cash economy and tax evasion. The present construction industry scheme, known as CIS, was introduced by the Government in August 1999 to safeguard tax revenue previously lost through abuse of the last scheme.

However, CIS is a paper-based system that requires all subcontractors in the construction industry to hold a registration card—the CIS4 card—or a gross payment certificate. The scheme requires vouchers to be completed for all payments made by contractors to subcontractors.

Unfortunately, there is a myth in the industry that a CIS4 card is a certificate of self-employment. Rather as a growing child holds on to the idea of the tooth fairy, many like to believe the CIS4 legend—perhaps they feel that there is greater financial reward in perpetuating that myth. We are openly told on many occasions that contractors treat the CIS4 card as a certificate of self-employment, even though they know full well that it is not. The cards simply allow a worker to work on a self-employed basis, if that is their correct status.

My hon. Friend touched on the large number of CIS4 cards in circulation. There can be many reasons for that. For instance, we believe that many cards are not used regularly. The cards are issued to individuals, partnerships or companies and they do not have an expiry date. They are not supposed to be proof that a person is definitely self-employed, nor do they convey that status. Some people may have the certificate, but only undertake work at the margins of construction. However, they need the card for that work.

I turn now to the final point that my hon. Friend made. One of the main aims of the construction industry review is to help construction businesses to get the employment status of their workers right. The consultation paper therefore proposed a new employment status declaration. When the new scheme is introduced, contractors will have to declare that the subcontractors whom they are paying are correctly within the scheme and are not employees. That declaration will be policed—a point made by my hon. Friend—to ensure that it is not being made lightly and that it is being applied.

To touch on other points that my hon. Friend made, the new system will go further and will enable us—the Inland Revenue, as the tax-collecting authority—to improve risk assessment and trend analysis to find noncompliance on employment status and to deal with it quickly.

Where does that leave us? What will happen next? I hope that my hon. Friend will be encouraged to learn that we have no plans to change our approach. Determining employment status is the correct way to deal with the issue, although we continue to keep an open mind, as is shown by the initiatives that I have described. We continue to keep the matter under close review across Government to make sure that people are paying the right amount of tax and national insurance contributions and receiving the correct employment rights and training, and that they have access to benefits. All Departments will continue to work together. I can assure my hon. Friend that the Inland Revenue will not hesitate, and nor shall I, to encourage or enforce compliance as necessary.

I assure my hon. Friends that we take employment status seriously and that we will not hesitate to make further changes, if necessary, in the construction industry or anywhere else. It is vitally important that people fulfil their responsibilities and that an industry that supports many people can make progress with training, safety and proper employment arrangements. Dealing with employment status presents us with an opportunity and I intend to see it through.

Question put and agreed to.

Adjourned accordingly at one minute past Ten o'clock.