The recent update to the consultation on tackling false self-employment shows that the Government and HM Revenue & Customs (HMRC) are to press on with the original proposals broadly unchanged despite a swathe of negative responses.

Chris Bond, tax director at accountants and business advisers PKF in Birmingham, says, "This is bad news for the whole construction industry so it is perhaps no surprise that it was released quietly before a politically charged Budget. But what is the point of consulting, if they are not going to listen to the industry?"

HMRC wants to prevent construction workers falsely claiming to be self-employed by establishing simple indicators of self-employment. The favoured indicators are:   

·      the provision by the worker of the plant and equipment required to complete the job

·      the provision by the worker of the materials used in the job

·      the employment or provision of other workers.

Many respondents to the consultation told HMRC that genuinely self-employed workers would be caught by these basic tests even though they would be quite properly treated as self-employed under current case law. HMRC says those 'genuinely running their own businesses' will not be affected, but its track record on such issues is worrying.

Chris Bond says: "Once HMRC's staff start to work to a new set of rules and guidance, they tend to use the strictest possible interpretation - this is bound to cause yet more disputes in what is already a complex area of tax law."

Using VAT registration as a further test of self-employment was roundly condemned by respondents, but HMRC has still not ruled out this idea entirely. It states that "further consideration needs to be given" to it and to other possible indicators such as the provision of own transport and public liability insurance, submission of invoices and working for only one engager. It has completely ignored the fact that such a test would unfairly discriminate against businesses that are too small to be VAT registered.

Chris Bond comments: "The key issue is that HMRC still says that whatever tests are finally chosen, each must be capable of standing on its own - in other words, meet one test and you are self-employed. This is an open invitation for those who want to bend the rules to do just a tick box exercise to remain self-employed. There would need to be so many new anti-avoidance rules to tackle avoidance that any new legislation would be unworkable from the outset. Those affected will be treated as employees for tax and NIC purposes, but will not be entitled to the employment law rights that normally go with that status. "

One point has been finalised, it will be the paying company who will be responsible for operating PAYE and NICs for those classified as employees for tax purposes under the new rules. Although the Government accepts that any solution will have an impact on the flexibility of the labour market, it plans to go ahead anyway once the construction industry has recovered from the current economic downturn.

Chris Bond says: "Construction companies scaling up as we come out of recession can look forward to some complex new rules, imposed just as the construction labour force is peaking, so that the changes cause the most disruption. The risk of incurring additional NIC costs if workers are classified as employees is bound to deter some companies from expanding and could slow down the construction sector recovery."