Rachel Reeves announces plans to stop construction firms attempting to reduce their tax bills by falsely listing workers as self-employed
In tough times like these when there is less money around, we cannot afford to leave loopholes in the tax system that allow vital revenue to be lost. It is also unfair on the majority who do the right thing play and by the rules if some are able to avoid paying their fair share of tax. After three wasted years of flatlining which have seen living standards falling and deficit reduction stalling, this is even more important.
The prevalence of false self-employment in the construction industry has long been recognised as a problem by employers and experts in the sector. It arises because the Construction Industry Scheme – itself established to tackle the historic problem of “off the books” lump labour being used to avoid tax – creates a way for employers to pay lower levels of National Insurance by classing their workers as “self-employed” even though most people would regard their relationship as one of employment.
This means that a construction worker – a scaffolder, for example – can be engaged by a company (often via a payroll company acting as an intermediary) to turn up on a site as instructed, and work as part of a team under someone else’s direction, supplying no tools or materials or their own and unable to arrange for anyone else to do the work in their place – and yet be treated as a self-employed subcontractor with no security or employment rights and without the full employee level of National Insurance contributions being paid.
In 2009 the Treasury estimated that around 300,000 workers in the construction sector were in this position, at an annual loss to the taxpayer of £350m – or more than £380m in today’s prices. The Tory-led government has taken no interest in this problem, and has been unable to provide an updated estimate of the extent of the problem, or the tax revenue lost as a result. If anything it is likely to have increased as a result to changes in National Insurance rates since then.
A year ago Ed Balls asked me to review this issue and, based on a thorough investigation of the available evidence and a widespread consultation with the industry and relevant experts, we have concluded that Labour must act on this issue. The last Labour government proposed criteria whereby workers would be automatically “deemed” to be treated as employed for tax purposes if they met criteria that most people would regard as obvious signs that they were employees, rather than self-employed subcontractors, and this will be our starting point.
We will of course consult further and work closely with the construction industry to design the criteria so that the right level of flexibility is maintained, that those who are genuinely self-employed are not hit, and that measures do not impact negatively on a sector that has been hit hard by the slump in infrastructure and housing investment we have seen under this government.
But it is important to note that this measure would not only close a costly tax loophole. Removing a perverse financial incentive for workers whom most would regard as being in an employment relationship to be classed as “self-employed” would be good for the construction sector and its workforce too.
Ed Balls and I, as well as colleagues like Chuka Umunna and Jack Dromey, have been clear that we see investment in infrastructure and housebuilding as critical to a sustainable recovery and a stronger and better balanced economy for the future. But this requires a construction sector that is fit for purpose and ready to step up. Britain’s construction sector has a great many strengths and is in many respects a world beater. But the problem of false self-employment has long been recognised as significant drag on the sector.
Baroness Donaghy’s report for the last Labour government pointed to it as a factor in low levels of training, job security, the likelihood of reporting serious accidents or unsafe practice or of encouraging team working in the industry”. And over-reliance on insecure labour and over-fragmented chains of subcontracting has been repeatedly cited as a drag on levels of long term investment in skills and innovation and ultimately the productivity and competitiveness of the industry.
As things now stand, the majority of employers in the sector who do the right thing and pay the right level of tax are vulnerable to being undercut by those who do not. This is not fair and it’s not good for the long term strength and sustainability of the industry.
False self-employment in construction is a scandal that is costing the taxpayer hundreds of millions each year at the same time, as undermining responsible employers and the sustainable development of the UK construction industry. The Tory-led government has ignored the evidence and refused to take action. A Labour government will put this right.