Clampdown threatens 13% hike in labour costs

All construction work done by individuals will be taxed on a PAYE basis under a government plan to be unveiled next week.

This would mean bigger tax bills for contractors and housebuilders, who would have to make National Insurance contributions for all individual subcontractors. If adopted, the plan is expected to come into force between mid-2010 and 2011. A consultation will be launched next week.

The tax change, proposed by HM Revenue & Customs (HMRC), aims to end the practice of hiring workers who have registered themselves as companies rather than putting them on the payroll, thereby avoiding National Insurance. The new rule would not apply if:

• The person is paid for supplying materials as well as labour
• The person is supplying other people’s labour as well as their own
• The person is providing a substantial amount of plant.

Industry commentators predict these conditions are unlikely to be met in most cases.

Contractors and housebuilders can calculate what the change could cost by adding 13% to their weekly bill for labour-only subcontractors, who do not employ others or buy materials.

Mark Nichols, a tax partner in CMS Cameron McKenna, said: “This is quite an attack on the construction industry. It is a way of disguising a tax increase.”

Liz Bridge, secretary of the Joint Taxation Committee, which includes the UK Contractors Group, said the plan was likely to go ahead: “The head of steam behind this in government is such that this will happen.”

The move may hit housebuilders hardest, as they would have to raise the cost of their homes.

John Slaughter, policy director at the Home Builders Federation, said: “Adding costs and reducing flexibility would hinder recovery and amount to a tax on jobs.”

The plan also has implications for the Construction Industry Scheme (CIS), which sets out the rules for subcontractors’ pay, as many will go under PAYE, leaving fewer companies on the scheme. This could lead to the CIS being scrapped, which would result in administration costs.

The industry will have eight to 10 weeks to respond to the plans.