It is clearly an attempt to extract more money out of the industry. They have estimated that of the 860,000 self employed subcontractors in the UK 300,000 have been wrongly described as self employed and if these workers were re-classified as employees the Treasury would benefit to the sum of £350 million per year.
The proposals are that to be classified as self employed the workers should meet one or more of three criteria:
1. The worker must provide plant and equipment, not just the tools of his trade.
2. The worker must provide all materials.
3. The worker must employ other workers. He will be responsible for ensuring the correct criteria are met for his workers.
The problems that these criteria create are wide ranging and as usual provide more questions than answers.
Most small contractors would like to have their own plant and machinery but do not have the finance to fund their purchase. What would HMRC's view be if for a few days per year the subcontractor hired a machine to assist him in his work?
Materials are often purchased by the main contractor where possible because of the financial benefits of bulk purchases. So if each subcontractor purchased his own materials the costs would escalate. Again we wonder how HMRC will react to the contractor charging the subcontractor for the material used and for the subcontractor to add this on to his own invoice.
The third criteria seems to penalise small businesses but we wonder how HMRC will react to partnerships?
On a positive note the subcontractor would only have to satisfy ONE of these new criteria. The subcontractor therefore may have to make some small adjustments' to his working practices to achieve compliance with just one of these criteria.
There are also other proposals to include in the new system all
workers who provide their services through Managed Service
Companies and Employment Agencies. Even workers operating through
their own Limited Companies are not exempt as they will be required
to operate PAYE on themselves if they do not meet one of the three
The Treasury have not given a date for the implementation of the new system but enigmatically say that the timing of the introduction of the new rules is critical which probably means as soon as possible. There is a consultation period up to 12 October 2009 and so it could be as soon as next April when these new rules come into effect.
The proposals will also have a VAT impact. Labour only sub-contractors at present are unlikely to be VAT registered but the requirement for one of the three criteria to be met, will undoubtedly increase the turnover so that it could easily reach the VAT Registration threshold thus creating a liability for them to register.