The tax authorities are set for a new clampdown on tax saving arrangements in the construction industry, an expert has warned.

Sarah Moss, tax director at PKF Accountants & business advisers in Birmingham, warns that hundreds of millions of pounds are at stake.

HM Revenue & Customs (HMRC) recently issued a consultation document setting out its intention to introduce new legislation under which some of those working in the sector would be deemed to be employed, rather than self-employed, for tax purposes.

There is particular concern about so-called "false self-employment".

This refers to situations where individuals are dealt with by contractors as self-employed, despite the fact that the way in which they carry out their work on a day to day basis demonstrates that there is an employment relationship. HMRC estimates there could be between 200,000 and 400,000 individuals in this situation with the cost to the Exchequer estimated to be in the region of £350 million per year.

Ms Moss said: "HMRC has taken various measures in recent years to encourage individuals and contractors to disclose employment arrangements in the construction industry including the existing Construction Industry Scheme (CIS).

"It considers that none of these has proved fully effective."

The new legislation would deem a worker to be in receipt of employment income unless he or she can demonstrate that at least one of three criteria is met:

• The person provides the plant and equipment required for the job he or she has been engaged to carry out. Tools of the trade, which it is normal for an employed worker to provide, would be excluded.

• The person provides all materials required to complete a job. For example, if a glazier is appointed to install windows in a new house, they would need to provide everything required to do so. If the glazier just provides their own labour then the criterion would not be met.

• The person provides other workers to carry out the operations under the contract and is responsible for paying them.

Another suggestion included in the consultation document is that only people in the construction industry who have registered for VAT can be classed as self-employed.

Ms Moss said: "Unsurprisingly, criticism of these proposals has been widespread. There is a large body of case law regarding the distinction between the employed and self-employed status of individuals which has indicated that a much wider range of factors need to be taken into account than those identified by HMRC. The requirement regarding VAT registration is particularly worrying as this would remove self-employment status for the vast majority of traders running small businesses in the construction industry.

"The proposed measure would have a significant impact on the workers concerned, both in terms of accelerated liability to income tax and an increase in NIC costs. It would also increase costs and the administrative burden, beyond the current CIS paper-chase, for building firms deemed to be employing those workers. In particular, PAYE would need to be operated for them and employer's NIC liabilities would arise."

However, she added: "Fortunately, HMRC acknowledges the impact that the economic downturn has had on the construction industry and intends that any new measure would not take effect until the industry is in a stronger position."