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§ Mr. Michael Clapham (Barnsley, West and Penistone)
I shall first declare an interest, as I am a member of the Union of Construction, Allied Trades and Technicians. I want to make four points. First, I want to explain what false self-employment is, and look at its extent in the construction industry. Secondly, I want to look at the reasons why the system has become institutionalised in construction. Thirdly, I want to look briefly at the cost of self-employment to the industry and society. Finally, I want to suggest a way in which the problem could be remedied.
False self-employment describes work situations in which workers are classified as self-employed primarily in order to reduce their tax liabilities. That is the Organisation for Economic Co-operation and Development definition. False self-employment is endemic throughout the UK construction industry. It has cost UK taxpayers tens of billions of pounds during the past 30 years, and has been a major contributory factor in many of the construction industry's problems. The rise in atypical work patterns such as self-employment is often attributed to new patterns or new methods of work. However, the experience of the UK construction industry shows that false self-employment was encouraged by employers and then became institutionalised by changes introduced by various Governments.
The current situation is unique—a system is in operation in construction in which self-employed workers have their tax deducted at source. There has always been a great deal of legitimate self-employment on building sites. My argument is not against genuine self-employment. There will always be a place for genuine self-employed businesses in the construction industry. However, evidence clearly shows that the level of self-employment in the UK construction industry is out of step with that in comparable countries. That statistic comes from work over the past few years by an academic called Mark Harvey.
In Europe, self-employment in construction ranges between 6 and 10 per cent. In the USA, it ranges between 17 and 19 per cent. In Korea, a developing country with almost total deregulation of its labour markets, the self-employed constitute only 7 per cent. of those employed. In the UK, by comparison, self-employment in construction reached a peak of 45 per cent. around 1995. For manual workers alone, the figure rose to nearly two thirds of the total labour force in construction. Even today, self-employed manual workers make up half of the labour force. That is despite the tightening of the tax system by the Inland Revenue in 1997.
The boom in false self-employment started in the 1960s with the growth in tax evasion. To counteract the growing influence of trade unions following a series of disputes in London, employers encouraged a shift out of the standard form of employment. It is estimated that the total number of self-employed workers in the industry grew during that period from about 200,000 to 400,000.
In 1970, the Government introduced legislation to try to cut tax evasion in construction by creating two categories of self-employed. The first category was the 273WH independent self-employed business for those who could demonstrate a business case. The second was the dependent self-employed who had tax deducted at source by the contractor or subcontractor for whom they worked. Despite the tax legislation that was introduced from 1970, tax fraud and tax avoidance remained rife within the industry. However, under the Conservative Government in the 1980s, false self-employment became the dominant form of labour organisation on most sites. As part of the liberalisation of labour markets, that Government accepted that workers were self-employed for national insurance purposes if they could produce a self-employed tax-exemption certificate 714 or a subcontract certificate 60. That important change meant that self-employment became a matter of self-declaration. Over the next 15 years, the switch from direct employment to self-employment grew alarmingly.
The policy continued until it became unsustainable in the mid-1990s. The United Kingdom economy was in deep recession and a number of employers were nervous about potential liabilities for backdated tax and national insurance payments. Therefore, the Inland Revenue reinstated the self-employment test. Contractors were given until 1997 to classify their work force correctly. That resulted in between 180,000 and 250,000 construction workers switching from self-employment to direct or payroll employment.
In 1999, the tax system was further tightened with new tests for tax-exemption certificates and the introduction of a card system for businesses and the self-employed. Since the introduction of that system, around 1,063,700 cards have been issued.
Such changes unwittingly reinforced the existing system and did little to tackle the underlying problem of false self-employment. Consequently, the swing to direct labour has come to a halt. A recent survey by the Government-sponsored Construction Industry Training Board suggested that there has been a reversal back toward self-employment.
It is not easy to estimate the current level of false self-employment. Union regional officers, industry leaders, main agency organisations and several companies gave evidence to a union investigation of the widespread use of false self-employment. The managing contractor of the channel tunnel rail link. Bectel, accepted that at least 25 per cent. of the labour force on the project was employed on a self-employed card with tax deducted at source. A later survey by regional officers of UCATT at 88 sites that were managed by the largest contractors in Great Britain found that 55 sites had over 50 per cent. of workers self-employed, and that 33 sites had 80 per cent. self-employed. That provides evidence of the continuing dominance of self-employed labour on building sites.
In an effort to bottom the size of the problem, the union undertook a further survey of false employment, which resulted in a more detailed analysis. A 1999 survey of 10 major contractors by Mark Harvey showed that 85 per cent. of the total work force was self-employed. Following detailed interviews with subcontractors, operatives and an examination of documentary evidence, the survey concluded that at least 80 per cent. of the self-employed were falsely self-employed in accordance with the definition that I gave. From that survey, it can reasonably be assumed that the vast majority of the self-employed in construction are 274WH falsely self-employed. Based on the current average level of self-employment in the industry, the union estimates that there are between 300,000 and 400,000 falsely self-employed workers in construction, and that they are costing the UK taxpayer at least £2 billion per year.
The incentives that are built into the present tax system are a crucial factor in sustaining the current level of false self-employment. For example, the deductions for a self-employed worker are as follows: an 18 per cent. deduction at source for tax; a 7 per cent. national insurance contribution, based on profits; and a class 2 national insurance deduction of just £2 per week. That compares with an employee or payroll worker's deduction of 22 per cent. for income tax, and a 10 per cent. national insurance contribution. That illustrates the difference between the two classes of workers. The ability to use the tax system in that way allows workers who are self-employed for tax purposes to boost their average level of earnings, making self-employment an attractive option for building operatives, even during a recession.
Contractors have been the main beneficiaries of the scheme. They have used falsely self-employed workers, rather than payroll labour, to avoid paying an 11.9 per cent. employees' national insurance contribution, as well as other costs such as training, welfare and safety. Instead, those costs and responsibilities are dumped directly on to the falsely self-employed, and they fall indirectly on to the rest of society, as construction workers who leave the industry due to illness or injury become reliant on state benefits.
The long-term impact of false self-employment on the construction industry is clearly visible on every building site. Construction has one of the worst safety records of any industry. For example, in 2000, there were 105 fatalities, and it is estimated that, over the past 10 years, almost 1,000 workers have been killed on construction sites. Despite those shocking statistics, it is estimated that only one in 20 construction accidents involving the self-employed is recorded. Responsibility for the health and safety of workers has been shifted by the contractors and subcontractors on to those in the most vulnerable positions.
With regard to the training of construction workers, damage has been done because of the industry's reliance on falsely self-employed labour. The major contractors reduced apprenticeships and training opportunities during the 1980s. After the recession of the early-1990s, the industry lost a generation of building workers. Over the past five years, the industry has picked up, but there is currently a huge skills shortage in all of the main trades. That has made efforts by the industry to improve training and safety standards more difficult than they would otherwise have been.
I have tried to show that the problem of self-employment in the British construction industry is as deeply ingrained as ever—I have mentioned that there are between 300,000 and 400,000 falsely self-employed workers in the industry. The recent changes in the construction industry tax scheme have reinforced a flawed system.
The shortcomings in current arrangements have been graphically highlighted by the transposition of the working time directive into UK law. For the first time, hundreds of thousands of building workers became 275WH entitled to paid holidays. Building operatives who were self-employed for tax purposes were classified as "workers" under the working time directive, which helped to show the false nature of the construction industry tax system. Many operatives have won their cases in tribunals following action by the union.
The current confusion in the UK's construction industry could be resolved by the abolition of the special self-employed category that allows tax to be deducted at source. When the Minister replies, I hope that she will indicate that she is prepared to review the situation. Abolition of that category would have to be accompanied by rigid enforcement of compliance rules to ensure that those who were classified as self-employed were involved with genuine businesses. That would tackle the immediate problem, but in the long term there would need to be further work across Departments to deal with the confusion that surrounds employment status in the UK.
Employment status classification has become confused because of its reliance on case law. Case law judgments are based not on broad principles, but the facts of each case. A discriminating factor established by one case does not erase discriminating factors established in previous cases. The result is that test cases used in case law conflict with each other, and no test or set of factors is decisive in establishing employment status. The confusion has been worsened by the addition of the concept of the worker, which has extended employment protection to people who could be described as dependent self-employed.
A further element of confusion in the UK legal system relates to the differences between legal and taxation status. Employment law is generally concerned with employment protection and the safeguards afforded by that, whereas taxation law is primarily concerned with the relationship between the taxpayer and the state. The same person can take several different status classifications depending on which legislation or regulation is being applied. That confusion has been compounded in the construction industry by the development of a unique tax system that allows self-employed operatives to have their tax deducted at source by a contractor or subcontractor. In my view, that institutionalises mass self-employment, a great deal of which is bogus or false.
The Government are planning a review to assess the impact of employment status on statutory employment rights, and perhaps the Minister can enlighten us on that. Presumably that has come about because of the introduction of the National Minimum Wage Act 1998 and the Employment Relations Act 1999, which defined the status of the worker.
The problem of false self-employment must be tackled by harmonising employment status classification across employment law, common law and taxation classification. That would separate genuine and false self-employed businesses. It would be an extensive exercise, and it would require work across the Department of Trade and Industry and the Treasury. If tackled in that way, the self-employment test would become a display of economic independence.
276WH By clarifying the issue of self-employment, the way would be clear to define employment contracts that have a dependent relationship with an employer, contractor or subcontractor. Harmonisation of employment status classification should be accompanied by an extension of employment and social resources rights for workers whose current employment status falls into a grey area. Again, many in the construction industry are in that situation.
False self-employment has undermined the British construction industry for the past 30 years. Rather than tackling the problem, the Government have unwittingly institutionalised mass self-employment by creating a tax system that is unique to the construction industry. Major employers rely on that system to supply building site labour, and as is clear to anyone who studies the industry's history of the past 10 years, the consequences for the work force and the industry have been disastrous.
False self-employment has led to fragmentation of the industry, a skills shortage and an appalling level of accidents. The industry would support change, and I hope that the Minister will say that she is prepared to review the tax system as it applies to the construction industry.
§ Mr. Stephen Hepburn (Jarrow)
I congratulate my hon. Friend the Member for Barnsley, West and Penistone (Mr. Clapham) on securing this debate on the construction industry in general, bogus self-employment in particular and related issues, such as health and safety and low pay. I should declare an interest, in that I, too, have been a member of the Union of Construction Allied Trades and Technicians for many years.
Past debates have concentrated on employers and how to improve, and engender greater wealth in, the industry. There has been little discussion of how the industry affects its workers and, in that sense, today's debate is unique. For that reason, I emphasise my congratulations to my hon. Friend.
Construction is an important industry, and it is only right that workers receive some of the benefits that they generate through the profits that they make for their companies. It is also a particularly wealthy industry, with a turnover of £65 billion a year. The industry employs some 7 per cent. of the national work force; almost 1.5 million people. It is also playing a vital role in delivering the Government's modernisation agenda by improving the quality of housing and other buildings such as schools, universities and colleges. The Government were elected on the promise to modernise society—a promise that included modernising the buildings and fabric of society—and I see no reason why we should neglect the workers in that regard. We should modernise the terms and conditions of those in the construction industry in particular.
As we know, despite its importance, the construction industry has one of the worst health and safety records of any industry, and in large part that can be attributed to bogus self-employment. Every year, there are many thousands of serious accidents and many deaths. In the past decade alone, there were almost 1,000 deaths in the construction industry. Last year, the death rate was the 277WH highest in more than a decade. Some 106 people were killed simply doing an honest day's work, leaving behind their families and loved ones. Surely we should be doing something about that.
Those figures, however, do not take into account industrial diseases. We could mention asbestos disease, which kills some 4,000 people a year, many of whom are building workers. One of my lingering memories as a branch official in Jarrow is of trying to get compensation for a man with asbestosis, who had worked for many years on his building site, before he died so that he could rest in peace knowing that his family were taken care of. He had worked all his life in a hard industry and contracted the disease, and nothing could be done except to make sure that his family did not suffer.
The construction industry has a tarnished reputation, in part due to cowboy builders, who are rife throughout an industry that also has many good builders. Unfortunately, the image that people get is the old one of "Auf Wiedersehen, Pet" from the television. If anyone in the street were asked for their image of the construction industry, they would describe long hours, dirty and dangerous conditions and outdoor, hard, physical work. I have some knowledge of that, because I was branch president of the Jarrow branch for more than 12 years. Changes need to be made, not least to the terms of self-employment, if we are to get improvements in working conditions and in efficiency for employers in the industry.
That is not to decry the Government. They can take a lead in bringing about such changes, and have delivered on that to a certain extent. They brought about the Egan report, under the Deputy Prime Minister. It was a good report on the construction industry, but we need to go further and give that report power. The Government are the powerhouse behind the construction industry. More than half the value of the industry and capital works in the country is generated by the Government. They pay the piper, so they can call the tune. I do not see why the Government cannot enact changes to the industry to benefit the workers.
One such change would be a law on corporate manslaughter, which is critical. That is not the subject of debate today, but it is very relevant to the construction industry because of deaths on building sites. Self-employment must also be looked at. Private builders encourage it, and bogus self-employment accounts for more than 300,000 workers in the industry at present. That practice not only deprives workers of the conditions and pay that they need, but deprives the Chancellor of the Exchequer of more than £1.5 billion in receipts. I believe, and many construction workers agree, that that would be better put to improving hospitals and schools.
By encouraging that self-employment, the industry encourages an environment of low skills, low wages, low productivity and poor health and safety. A typical example, in the north, has come to light following the transfer of Beazer Homes to Persimmon Homes, making the largest house-builder group in the country. Those homes are traditionally built by direct labour, and Persimmon Homes encourages self-employment. Since the takeover, UCATT has been involved in a protracted tribunal case to protect the rights of those directly employed, under the TUPE regulations.
278WH UCATT believes that Persimmon Homes intends to move the labour force from pay-as-you-earn to self-employment and subcontract labour. Persimmon Homes' intentions are highlighted by a checklist sent out by the company in the north-west to comply with the current regulations governing self-employment. It has 16 points of advice, and I will mention the main ones: employees must not be given holiday pay or sick pay; they must rectify defective work at their own cost; no minimum amount of work is to be guaranteed. The list goes on. Many workers have no choice. They either sign away their rights and become self-employed or they do not work at all. In the current environment, obviously, people will choose work because they need to provide for their families.
The checklist has been drafted to ensure that the contract employs the cheapest, and not the most efficient, form of labour. That denies workers their employment rights. It is a scandal and a disgrace. Is it right that a private employer should deprive workers of their basic rights of employment and trade union representation? Such rights are discouraged by self-employment. Is it right that a private business that makes millions and millions pounds of profit should deprive the Exchequer of money that is robbed from the taxpayers?
Other issues surround bogus self-employment in the construction industry. We need to ensure that the industry offers young people careers that are worth taking up. They should be careers of dignity and not the bogus self-employment offered by cowboy builders. That ideal was espoused by the Egan report, but it has sadly been lost since. None the less, the report is valid to this day. We need to encourage younger people to enter the industry and we shall not do that by encouraging self-employment. Ten years ago, more than a third of the work force were under 30. Now we find that less than a quarter are under 30.
Although I appreciate and support the aims of Government legislation for trade union reform, I remain firmly of the view that certain industries need to have compulsory trade unions if we are to tackle the problems that we face today. The mining industry, in which my hon. Friend was involved for many years, is one such industry and, given its health and safety record, so is the construction industry. That is a radical approach—perhaps too radical for the Government—but it should be considered.
At the very least, the Economic Secretary should address the issue of contract compliance. Surely, as a minimum standard, we should expect contract compliance to be part of all Government procurements. Sadly, however, that does not happen at present. How on earth will the Government be able to give a lead to the argument that working conditions should be correct if we do not maintain minimum standards in our own contracts? We have that power through the strength of procurement—more than half the capital projects in this country are Government led—and through our ability to impose contract compliance. We should use that power because, if we do not, the private sector will not. What sort of example will that set the private sector? If the Government do not maintain such standards, why on earth should the private sector?
279WH I congratulate my hon. Friend once again on instigating the debate at such a crucial time for the industry. As far as the Government are concerned, capital expenditure will double in the next few years and it is crucial that reforms are implemented so that we have a modern construction industry that is geared not only to improving the profits of employers—I have no problem with that—but to ensuring that the workers receive the rightful fruits of the industry in which they work. As well as receiving their rightful fruits, they should be able to work safely and to return home safe and sound to their families at the end of the day. Surely, that is the very minimum. We look to the Government to provide the lead and the direction.
§ Mr. Ian Davidson (Glasgow, Pollok)
I congratulate my hon. Friend the Member for Barnsley, West and Penistone (Mr. Clapham) on securing this debate. It is an important issue that has been neglected for far too long. I also congratulate UCATT and the Institute of Employment Rights on producing the report, "Undermining Construction", which has provided many of the case studies that support the arguments that we are advancing. If the Economic Secretary does not have a copy of the report, I am perfectly prepared to ensure that she receives one that has been autographed by the author and everyone else who attended the press launch. The launch went down extremely well and everyone who was present now expects her to take account of the evidence and to do something about it.
I do not have a direct interest in the building industry or in UCATT, but I want the Government to be able to spend the capital moneys that they have allocated to construction project on schemes in my area. I recognise that skills shortages are likely to cripple part of that programme and to result in an escalation of costs. That means that the Government will not receive value for money on many of their projects.
One of the reasons for that problem is the scams and the fraud that make up the construction industry's taxation system. It has already been said that the estimated tax loss to the Government resulting from fraudulent self-employment is £1.5 billion to £2 billion. I find it difficult to understand why the Government are prepared to turn a blind eye to that.
Like my hon. Friends, I am aware that there is a clear correlation between the high rate of self-employment and the rate of accidents and injuries in the construction industry. It is clear from the statistics that have already been outlined that one in two accidents in the employed category are reported, but that only one in 20 are reported by the self-employed. They face deadlines and are under pressure that reputable firms often do not place on their employed staff. Those deadlines and that pressure clearly result in an explosion of accidents and deaths in the industry. It has about the worst safety record in the United Kingdom.
I am sure that the Economic Secretary will explore that issue. However, when she does, she could ask her staff to examine why the rate of fatalities in the construction industry in Scotland is approximately twice that in England and Wales. The rate for major 280WH accidents in Scotland is one and a quarter times that in England and Wales, and that means that certain issues must be explored. The rate for minor accidents in Scotland is one and half times that in England and Wales. The different rates are partly the result of climate but another factor is the way in which employers behave under the self-employment structure.
The increasing lack of trained staff in the construction industry flows directly from the existing tax arrangements. Employers have no direct interest in training for the future when a high proportion of their staff are self-employed and are likely—indeed, encouraged—to move on. There is a regular pattern according to which good employers are forced to cut costs, to economise and to move towards the practice of the worst; otherwise they will carry overheads that cannot be sustained in a competitive environment. Allowing some firms to get away with malpractice, as the Government are doing, has knock-on effects on everyone else in the industry.
We are creating enormous difficulties for ourselves in the future not only in terms of the shortage of trained staff that is already evident throughout the industry, but in terms of the lack of pension provision made by many of the self-employed and employers. In years to come, a substantial proportion of the work force will have built up no occupational pension whatever and they will end up falling back on the state for support and succour. As I understand it. that is not the intention of the Government's general policy, but it is another reason why they should examine the issue closely.
As my colleagues have said, employers encourage as high a proportion as possible of their staff to become self-employed for reasons of profit. By cutting overheads, they are able to drive out direct labour organisations and many of the better and more socially responsible firms. They are also able to save on training costs and other elements of expenditure. I find it impossible to understand why the Government, by their inactivity, are prepared to condone that. I can only presume it is a hangover from the days when the major players in the construction industry had substantial political clout with previous Conservative Governments. However, I cannot understand why a Labour Government—even a new Labour Government—continue to allow employers to get away literally and not just figuratively with fraud and murder.
I want the Economic Secretary to clarify the Government's view of some of the allegations made in the "Undermining Construction" report about the Inland Revenue's lackadaisical approach to the problem. From what is alleged in the report, it appears that the Inland Revenue has been co-conspirator with the industry in tax and national insurance fraud. I want her to clarify why she is prepared to allow that to go on. It is clear from the report what has been happening and we are entitled to receive a response. It seems to me, as a simple outsider to the industry, that the Government appear almost to be in the industry's pocket. I cannot understand why that is the case.
As I said before, the Government's inactivity condones malpractice, which results in fraud, death and injury on building sites, and leads to a skills shortage. I recognise that the Economic Secretary is an impeccably new Labour Minister, but I understand that she is not the worst—[Interruption.] I am being contradicted: 281WH perhaps she is among the worst. Although I am not as close to new Labour as some of my colleagues, I do not think that it condones tax fraud, insurance scams, a higher rate of construction accidents or the removal of pressures to train within the industry.
I am sure, as are my colleagues, that the Economic Secretary will have the answers and will send us away happy in the knowledge that for the first time she will take serious action to deal with the problems in the construction industry, which will be resolved quickly at her behest.
§ Dr. Vincent Cable (Twickenham)
I, too, congratulate the hon. Member for Barnsley, West and Penistone (Mr. Clapham) on securing the debate and on receiving such able support from the hon. Members for Jarrow (Mr. Hepburn) and for Glasgow, Pollok (Mr. Davidson). I see the problem as being specialised, especially the tax arrangements, and do not claim to be an expert. My attendance has as much to do with being educated as with pontificating on the answers, and I learned much from listening to the hon. Member for Barnsley, West and Penistone.
I have tried to get a perspective on the dimensions of the problem. The construction industry employs about 2 million people. That is a mid-winter estimate, so the figure is probably larger in the summer. Official figures suggest that almost a third are self-employed, and the hon. Gentleman estimates that half of those are falsely self-employed. That gives us an idea of the magnitude of the industry.
My difficulty in talking in general about the construction industry is that it is not only very large—it makes up more than 5 per cent. of the British economy—but very complicated. It varies a great deal. On the one hand are the big multinational companies—the Balfour Beattys of this world—that are involved in dam and road projects all over the world and exposed to international standards; on the other are the majority of companies that are employed for house extensions or to do jobbing work for local council repairs and so on. Trying to encompass all those businesses within the circle of the construction industry is inherently difficult. The industry also covers specialised and proudly guarded craft traditions in, for example, plumbing and electrical work, which have different professional groups and different standards of training. They all form part of the big pot called the construction industry.
Although hon. Members focused on the tax issues, it was interesting to hear them put it in the context of the wider problem. A couple of years ago the Department of the Environment, Transport and the Regions set up a cowboy builders working party to address some of the problems that have been described, and it is recognised that the tax problem is part of a bigger picture. A substantial number of operators in the industry are not just evading taxes, neglecting their work force and ignoring training and safety, but giving consumers a bad deal. In our private lives we have all experienced the guys who knock on the front door and, for example, try to persuade us that our drives need asphalting, or the people who embark on a house extension and mysteriously disappear halfway through. The problem is rampant throughout the industry, so there is a consumer protection issue as well as a worker protection issue to consider, both of which are valid.
282WH I am not entirely sure that the same companies are responsible for all the failings, but the industry clearly has poor standards at the bottom of it. We need to consider how to address those standards properly. The hon. Gentleman has suggested doing that through the tax regime. I am not enough of an expert on the details of taxation to know whether that is the right way to proceed, and I wonder whether it is feasible. The first problem is how easy it is in practice to separate self-employment and employment in tax terms. The Inland Revenue cannot operate on a discretionary basis; it needs rules. There has to be, therefore, a test of control. I think the hon. Gentleman used the word "dependency".
§ Mr. Clapham
There are two categories of self-employed: the independent and the dependent. The independent self-employed tend to be employed by a contractor or subcontractor. The unique feature about the industry is that tax is deducted at source from the so-called dependent self-employed. The tests that have recently been implemented—the SC4 for the dependents—also involve cards, of which 1,063,000 have been issued. The problem is rife throughout the industry and it comes back to the tax system and bogus self-employment.
§ Dr. Cable
I understand that we are discussing a unique situation and that tax tests have been devised to deal with the construction industry. I am trying to understand how in practice we determine the people who are falsely registered. To do that, we need to get at their motives and consider whether they are trying to evade the system or are genuinely self-employed.
The Treasury is still struggling with an analogous problem that arose a couple of years ago with IR35, which relates to other industries such as computer software. It appears that there is genuine doubt about whether people are engaged in self-employment to fiddle the tax system or because the nature of the employment is such that they have opted to be self-employed. I do not know whether the Treasury is confident that it can make a distinction with confidence.
On the tax side, we have to consider how easy it is to enforce tax arrangements even if we can make the distinction. The enforcement of value added tax was tightened in the construction industry a couple of years ago. Construction companies explained to me that they were having to chase around the country to collect pieces of paper in person to demonstrate that they were not falsifying VAT. It got to the stage at which the industry was not able to function properly. We have to work out how to disentangle companies' motives and how easy it is to enforce the arrangements without being too counterproductive. I have an open mind and I am sure that if the hon. Gentleman's concerns can be met, his suggestion to use the tax regime would be the best way to proceed.
The hon. Member for Jarrow suggested compulsory unionisation as part of the picture, but perhaps there is another solution. As I said, I am not an expert on the construction industry, but I know that Australia has a different approach, which operates rather like the old system of guilds. To operate legally within the construction industry a company or individual has to be the equivalent of an acknowledged member of the 283WH Federation of Master Builders. In order to be legally registered, some tests have to be passed. Employers or self-employed people who do building work have to demonstrate that they have the right qualifications and right training commitment to their employees. They also have to demonstrate that they are observing basic safety standards and obligations to the consumers, to whom they give an indemnity that they will not simply walk off the site. Part of the package is to ensure that they are properly attributed for tax purposes.
The Australian system is tough. It is illegal to operate as a builder unless someone is part of the federation. That may be too extreme for the UK situation, but from what the hon. Gentleman said there may be a half-way house whereby a test such as that in Australia must be satisfied by anybody who is bidding for public sector contracts, which I believe account for about 40 per cent. of all new work and only slightly less of all repair work. Companies that bid for public sector work should satisfy that Australian test. I have discussed the matter with people in the industry. The good companies are as embarrassed by bad practice as is everyone else and would like to encourage such an approach.
There is an analogy with the medical profession. It has been recommended that the building industry should operate like the British Medical Association, which gets its own house in order and sets its own standards, but has legal backing. Perhaps the medical profession is not quite as reputable as it was, but it may be a model worth considering as an alternative way of dealing with the problem.
My final query is to the Treasury Minister, who I am delighted to see here. I had thought that this was an issue for the Department of Trade and Industry, and I had not appreciated the balance between the tax and the non-tax concerns. It would be useful to know whether the Treasury is working with Departments in examining this industry in a holistic way. This is not just an issue of tax evasion. There is a bigger picture in terms of standards of labour practice and consumer protection. How will those elements be integrated?
§ Mr. Christopher Chope (Christchurch)
I join everyone in congratulating the hon. Member for Barnsley, West and Penistone (Mr. Clapham) on introducing the debate. He and his two Labour party colleagues have poured scorn on much of the Government's policy on the construction industry, and I am sure that the Minister will try her best to respond.
§ Mr. Clapham
Neither I nor my colleagues have poured scorn on the Government's policy. We have drawn attention to a problem that this Government began to tackle in 1997. The real problem was caused in the 18 years of the Conservative Government, who allowed a total liberalisation of the labour market in construction.
§ Mr. Chope
I have given the hon. Gentleman the opportunity to get back on track with his Whips and to turn his attack on the Conservative Government. But he must face the reality, which he and some of his 284WH colleagues mentioned, that the most important issue in construction is that of health and safety. The increase in the number of fatalities in the construction industry over the past year, to its highest level for 10 years, is appalling. It is remiss of him and his colleagues to blame that increase in fatalities on self-employment. During those 10 years, the number of self-employed people in construction has declined. One could argue—although I do not do so today—that the decline in self-employment in construction has led to the enormous increase in fatalities.
The construction industry is six times more dangerous than any other industry. To have 105 fatalities in one year—an average of two per week—is unacceptable. I had expected the hon. Gentleman, knowing that a Treasury Minister was to respond to the debate, to refer to the useful report provided to most hon. Members by Prospect, the professional engineering union. The report draws attention to the way in which the Health and Safety Executive has got its priorities wrong by reducing the number of inspectors dealing with construction and increasing the number dealing with railway safety. The real problem with deaths and injuries is in the construction industry, not the railway industry. I hope that when the Minister responds she will comment on that useful report from Prospect.
The debate is also coloured by the hon. Gentleman's membership of UCATT. The hon. Member for Jarrow (Mr. Hepburn) is not just a member of UCATT, but an active participant in its conferences, paid for and all the rest. UCATT is a major sponsor of the Labour party. I have been in politics for the best part of the 30 years to which the hon. Gentleman referred, and I did not recognise the picture that he painted of the blameless, responsible, enthusiastic worker in the construction industry, which was heavily unionised under UCATT and unable to deliver good-quality services to the purchasing public, whether in the public or private sector. I recall, as I am sure does the hon. Gentleman, the construction of the three towers in Marsham street. Was not the work on that site stopped for three or five years, blacked by UCATT? That trade union ruined our building industry by allowing restrictive practices and totally unacceptable labour practices to prevail.
When I was a member of Wandsworth council, there was a major housing development at Kambala carried out by the direct works organisation under a Labour council. That housing estate was delayed for a long time, the costs escalated, and it was all about UCATT defending its employees' jobs irrespective of the wider public interest. Today we have heard comments about the interests of UCATT, which wishes to retain high union membership, rather than the interests of the wider building industry, which is such an important part of our national economy.
§ Mr. Clapham
The hon. Gentleman has been generous in giving way. During the 1960s, when the towers were being built, UCATT was trying to ensure protection for the people who worked there.
The hon. Gentleman says that he does not believe that self-employment was the cause of so many accidents in the industry. On a building site with 500 workers, that can mean 500 separate contracts. Co-ordinating those contracts and bringing the people together in a 285WH harmonious setting that is conducive to the job being completed is nearly impossible. It leads to unaccountability, and that is what causes accidents.
§ Mr. Chope
I am interested that the hon. Gentleman has not taken the opportunity to endorse the comments in the Prospect report that, in its view, one reason why the construction industry fatality rate has increased so much is the misdirection of resources by the Health and Safety Executive—arguably because the Treasury has starved it of funds. The report makes no reference to the fact that self-employment may be the cause of the appalling safety record in the industry.
The hon. Gentleman wants the self-employed to be the scapegoats for everything that has gone wrong in the construction industry. Let us consider, however, the benefits that come from self-employed people and the flexibility that they bring. The rules were tightened so that all self-employed people who work in construction have their pay deducted at source. That is different from most self-employed businesses. When the Labour Government came to office, they identified a reasonable level for deduction at source as 23 per cent. That was obviously far too high, and we welcome the much more realistic deduction level of 18 per cent. The hon. Gentleman seems to think that even that is far too high. If all the resources of a person or firm have to be expended in tax rather than invested in training, tools and equipment, it is counter-productive.
I hope that the Minister will respond to a practical point that has come to my notice. A constituent of mine came to see me last weekend. He has been made redundant three times in successive years in the telecommunications industry and has decided to become a plumber. He is paying for his own training to be a plumber, and travelling to Eastleigh technical college. He has been told that he is not allowed to set the cost of that training against the income that he received in this tax year before he was made redundant as an employee of Marconi. He has been told that only after he has qualified as a plumber will he be able to set the cost of his training against income earned from that trade.
My constituent is doing things the responsible way—trying to train as a plumber before offering his services in the marketplace. There are far too many cowboy operators who train on the job, in so far as they ever train, and as a result cause mayhem for many people who employ small builders in the belief that they will get a good job done, only to find that they do not. There is something structurally wrong with our tax system if somebody such as my constituent, who wishes to retrain as a plumber, finds that he must bear the costs of doing so without any tax relief. I hope that the Minister will be able to respond to that point.
The Government have been engaged in an exercise of "initiative-itis". There have been many initiatives but not much delivery. After the Government took office, we had the Egan report, the combating cowboy builders report and the cowboy builders working group, which reported in 1999. There was then a gap of almost two years, during which people wondered what would happen about the problems of cowboy builders. On 5 July, the Government launched the quality mark scheme, which has been piloted. The idea is that it places 286WH the names of builders and tradesmen who reach the required standard on a register, which can be assessed free of charge via a low-cost telephone number. Of course, builders are charged a registration fee.
Interestingly, the Financial Times, commenting on the launch of the scheme, said:The government's long-delayed scheme to put cowboy builders out of business will be launched in Birmingham today with only a fraction of the number of reputable builders originally envisaged signed up.About 60 builders are understood to have been approved for the quality mark scheme in Birmingham—with a further 40-plus in Somerset—which will be unveiled next week.The Government put enormous emphasis on that scheme and—apparently—had originally intended that several hundred builders would be on the approved list by the launch. However, the Financial Times goes on to say:The cost of joining, the red tape involved and the fact that most builders had enough work without bothering to take part have meant that the government has had to resort to a string of measures to make it more attractive.That is another initiative that did not succeed.
There have been any number of initiatives on and conferences to discuss safety in the construction industry. Most recently, a programme was launched earlier this year that set a target of reducing injuries and deaths in the industry by 10 per cent. per annum over four years. I hope that the Minister will be able to tell us today what progress is being made on meeting that target, or whether it is just another target set by the Government and then abandoned as soon as it is obvious that the policies behind it will never enable it to be delivered and, indeed, may be counterproductive.
This is a useful debate. I pay tribute to all those who work in the construction industry, which is one of our most important industries. There are a heck of a lot of unsung heroes in the industry, and too rarely does it receive a proper airing in debates in the House. I congratulate the hon. Member for Barnsley, West and Penistone on enabling us to do so today. It is a big mistake to try to tar all those millions of people who work in the construction industry with the brush of the relatively few who may still be able to abuse the tax and benefits system to the detriment of wider society. That is a small minority compared with the large mass of construction workers who deserve a lot better from the Government than they have been getting.
§ 12.5 pm
§ The Economic Secretary to the Treasury (Ruth Kelly)
I am delighted to speak while you are in the Chair, Mr. Winterton, and I congratulate my hon. Friend the Member for Barnsley, West and Penistone (Mr. Clapham) on securing this important debate. He raises some significant and important issues, and I very much welcome the opportunity to discuss them.
Hon. Members of all parties have raised issues to do with health and safety, the importance of protecting construction workers, training standards in the industry, and matters that are clearly of great significance to many workers throughout the country. I shall come to some of those issues, but I shall concentrate mainly on those relating to self-employment status and Inland Revenue treatment of 287WH employees and employers in the tax system. I congratulate UCATT on raising such issues. It is important that we highlight them, consider them and take them seriously.
The construction sector is clearly a major contributor to the British economy. Nearly 1.5 million people work in it at any time. It encompasses work ranging from painting and decorating to underwater tunnelling and from simple kitchen refits to Government private finance initiatives. Construction work is carried out by one-man bands, family firms, partnerships, small to medium enterprises, household-name companies and multinational consortiums. Workers in the industry can be full time, part time, occasional, permanent, casual, single or multi-skilled, gang members or individual craftsmen.
Despite that massive diversity, all workers in the industry, along with those everywhere, need to pay the right tax and national insurance contributions and have access to rights and benefits appropriate to their personal circumstances. That last point is very important.
I was pleased to hear my hon. Friend say that it is important that a place be kept for genuine self-employment, and that he recognises that there can indeed be such self-employment in the construction industry. The point about access to rights and benefits and tax and national insurance contributions that are appropriate to someone's personal circumstances is important, and it goes to the heart of today's debate, which is essentially about employment status—whether someone is employed or self-employed, the consequences that flow from the decision on employment status and the role of the Government in determining and regulating such status.
Employment status is quite a simple concept, but it is important in several different contexts. It affects the tax and national insurance contributions that people must pay, the benefits that they are entitled to claim and, of course, their entitlement to rights such as statutory sick pay, statutory maternity pay, holiday pay and so on.
As things stand in the UK, the question of whether a person is employed or self-employed is normally entirely one of fact. It depends on the terms and conditions on which they are engaged and on the way in which they carry out their work. The facts then have to be compared with various factors identified by the courts in order to decide a person's employment status. No single factor is conclusive. The list of relevant factors is not exhaustive. Therefore, the courts have said that, to reach a decision about employment status, all relevant circumstances need to be taken into account. A qualitative decision must then be made based on the accumulation of detail.
Some issues considered when determining employment status include whether one works under the control of one's employer, the degree of risk associated with the employee and employer, whether one is part and parcel of the organisation, whether one must provide one's own equipment or whether the employer does so, and so forth. A huge range of factors is taken into account when determining status.
288WH That so-called case law approach to deciding employment status is by no means unique to the United Kingdom. The United States, Canada, Australia, New Zealand, South Africa and Ireland, for example, follow similar approaches, and our approach is recognised as workable and effective by various authorities.
§ Mr. Clapham
My hon. Friend says that case law is used to establish employment status and that countries other than the UK also use that approach. Does she agree that, such is the confusion, the Treasury must work with the Department of Trade and Industry on ways to create greater harmony? The tests to which she has referred are often contradictory; they overlap each other. A worker can have a great deal of control over his situation if he is integrated, as a doctor is within the NHS, but there are many examples of contradictions in common law. Does she agree that there is a need to examine those matters?
§ Ruth Kelly
I agree that many complex factors have to be taken into account in each case, but that is one of the reasons why it is difficult to produce general guidelines, and there is a strong argument that doing so might create an additional layer of confusion.
A research paper published in the Netherlands in 1999 reviewed a range of international approaches to deciding employment status. One of its conclusions was that the UK was top of the table of countries considered in terms of the clarity and consistency surrounding the making of decisions. The UK was ahead of four countries—the Netherlands, Germany, France and Italy—which define employment status in legislation instead of using a case law approach. Although we are always ready to consider the examples of other countries, such as those raised by the hon. Member for Twickenham (Dr. Cable), we remain convinced that the case law approach is probably the best way in which to provide clarity.
Earlier this year, Judith Freedman, professor of taxation law at Oxford university, published a detailed review of employment status on behalf of the well-respected Institute for Fiscal Studies. She concluded that the case law approach that we currently use providesflexibility to meet changing conditions".She acknowledged thata simple, objective test would be too rigid and arbitrary and open to manipulation".In 1999, the DTI sponsored a report that found that most people know what their employment status is. The report surveyed 4,000 people, concentrating on those who work in non-standard ways, such as temps, casuals and agency workers. It found that even among such non-standard workers, most of those surveyed could tell without difficulty—and without taking professional advice—whether they were employees or self-employed. According to the report, less than 2 per cent. of those working in non-standard ways defined their employment status wrongly.
That is not much use to those individuals who are on the borderline between employment and self-employment and who are sold misleading advice by advisers with their eye on profit rather than on providing good-quality customer service, or who do not 289WH have the freedom to decide whether to be taken on as an employee or to act as a self-employed person, as sometimes happens in the construction industry. I recognise that the problems are real, and we are here today to discuss how such problems are reflected in the construction industry in particular.
The Government accept that there is an element of false self-employment in the construction industry. I shall examine those issues and the Government will keep them under close review. Dr. Mark Harvey's report has been mentioned extensively today. It gives a passionate account of issues in which there is clearly a strong interest, which has been expressed in this debate. It contains a lot of facts and figures as well as serious allegations about the approach taken by Inland Revenue and the Government. I will comment on the report today, albeit not in detail. We will take it seriously and examine it in detail. We will keep an open mind.
§ Mr. Davidson
I welcome the fact that the Minister is going to examine the report, keep an open mind, consider it and so on, but is she actually going to respond to the points it makes item by item, allegation by allegation, or will it simply be dismissed and swept aside?
§ Ruth Kelly
I certainly intend to respond to some of the allegations made in the report. The Government accept that it raises real issues that we have a responsibility to examine—although it should be said that the industry itself also has a responsibility to tackle those issues. When we debated similar issues in an Adjournment debate last year, we were assured that the industry would do more to help itself. Dr. Harvey's report makes a helpful contribution to those discussions, but at grassroots level contractors must recognise and act on their own responsibility, rather than pass the buck to the Government to take all the action needed.
A key issue is the roles and responsibilities of all those involved in making decisions on employment status. As I have explained, employment status is decided on the facts. It is for workers and those for whom they work to agree between themselves the terms and conditions under which the work is to be done. It is not for the Government to decide those matters or to interfere in essentially commercial decisions that are entirely the business of the parties involved.
If the agreed terms and conditions amount to employment, the employer will automatically have certain responsibilities to his employee. Those include operating a pay-as-you-earn system to collect the right amount of tax at the right time, deducting and accounting for class 1 NICs, and providing employment rights and benefits. If the agreed terms and conditions amount to self-employment, the worker assumes responsibility for his own tax and NICs through the self-assessment system. Generally, such workers have to provide their own financial cushion to cover holiday periods or periods of ill-health, and perhaps to pay into a stakeholder pension.
The role of Government is to ensure that all parties meet their respective legal responsibilities, so Government Departments have to provide help, 290WH support and advice on whatever aspects of those responsibilities are causing problems. In addition, Departments need to play a policing role to ensure that people do not avoid their various legal responsibilities. The Inland Revenue is one Department that has a particular role to play in employment status. I take this opportunity to put on record what the Inland Revenue has been doing in that respect in the construction industry for the past few years, and what it is doing now. However, as I said at the outset, it is not only for tax and national insurance purposes that employment status is important; other Departments have a role to play.
It has been claimed in Dr. Harvey's report that the Inland Revenue has not been doing enough to police so-called false self-employment in the construction industry. Worse, it has been alleged that the Inland Revenue has somehowsanctioned large-scale false self-employmentbymaking an agreement with major construction firms to enable them to falsely register directly employed workers as self-employed".I do not believe that that is correct. For many years, the Inland Revenue has provided extensive customer service support for the construction industry dealing specifically with issues of employment status, backed up by targeted compliance reviews to address evasion and avoidance.
Since the mid-1990s the Inland Revenue has, for example, published a range of articles and leaflets to explain how employment status is decided and how the case law tests apply to construction workers in particular. It has published an internal employment status manual that explains how its inspectors are expected to carry out employment status work. It has operated a dedicated construction industry employment status helpline. It has specified a date by which all contractors must have reviewed the employment status of their workers and put those who should properly be employees on to the payroll. It has targeted specialist status inspector resources to visit contractors and check that PAYE and class 1 NICs are being deducted and accounted for where necessary.
In addition, appropriate changes have been made to legislation. One of the first things that we did, by means of the Finance Act 1997, was amend the agency tax rules. Agencies that supply the construction industry with workers have to operate the PAYE system for workers who meet the conditions set down in legislation. The Inland Revenue's best estimates show that up to 250,000 construction workers have moved from self-employment to employment as a consequence of these various measures.
That is not the end of the story. More recently, the Contributions Agency merged with the Inland Revenue, so there are now more inspectors undertaking employment status work. The inspectors are fully supported by additional employer compliance staff. There are now 60 status teams throughout the country that advise on, monitor and enforce compliance with the employment status rules. These local teams are supported by the large business office employer compliance team, which reviews the very biggest employers according to a rolling programme. There are also the various special compliance offices that are responsible for prosecutions.
291WH The special compliance offices are likely to play a particularly significant role in pulling the rug from under any composite companies in the construction industry, or anywhere else, that might be used as a front for false self-employment. To do so, they will use the service company legislation—IR35—that we introduced specifically to ensure that those who should properly be employees pay tax and national insurance contributions on the right basis. That demonstrates that both the Government and the Inland Revenue have been putting a lot of time and resource into this important area over a number of years. It shows also that there has been no decision to ease off on employment status work. Targeting and proactive monitoring of employment status has not ceased, and there are no plans to change that.
So far, I have not mentioned the construction industry scheme—in some senses, for good reason. The scheme should not have anything to do with whether someone is appropriately defined as self-employed or employed. It is simply a scheme for collecting an amount of money on account of the tax and national insurance contributions that will ultimately be due from a construction industry worker who is already self-employed.
For the avoidance of doubt, I stress that the CIS does not confer any particular employment status. The CIS4 card, in particular, is not a certificate of self-employment. None of the literature, forms or documentation that the Inland Revenue produces says anything different. Contractors and others who are misusing the scheme lay themselves open to penalties for so doing. The Inland Revenue has dedicated teams with responsibility for ensuring compliance with the CIS, and they are separate from the dedicated employment status teams.
My hon. Friend the Member for Barnsley, West and Penistone said that perhaps the CIS adds to the confusion over status by putting workers into another category. Some people have suggested that if there were not a CIS, perhaps there would not be mass false self-employment in the construction industry. I reiterate the arguments that were advanced when the scheme was introduced. It was designed to avoid tax evasion and to ensure that construction workers do not slip into the black economy but instead pay their tax and national insurance contributions. In the past, there was mass evasion. Without the scheme, there might be a huge loss to the Exchequer. It is suggested that we are currently faced with such a loss.
The scheme does not create a separate category of so-called dependent self-employed, as Dr. Harvey suggests. Nor does it mean that self-employment is a matter of self-declaration. Employment status is purely a question of fact that is determined by case law. If a dispute arises over status, the matter can be taken to an industrial tribunal.
There is no evidence that scrapping the scheme would help overcome the real issues that have been raised during the debate. I accept that they are real issues for construction industry workers. I am not aware that 292WH anyone in the industry is calling for the abolition of the CIS. Of course, along with the industry we continue to keep the matter under review
§ Mr. Chope
Before the Minister resumes her place, I hope that she will address the real issues of safety. She has described the large army of inspectors from the Inland Revenue that deals with the issue of self-employment. Does the hon. Lady think that the Government have the right order of priorities when there is only one construction inspector for three London boroughs, and there are only 19 such inspectors for London as a whole? Does not she think that it would be better to put more resources into inspecting construction safety?
§ Ruth Kelly
The hon. Gentleman, who speaks for the Opposition, raises the real issue of health and safety in the construction industry, and the Government are determined to deal with it.
Health and safety legislation does not apply only to employees; it has a much broader application. The Health and Safety at Work, etc. Act 1974 places a duty on employers to conduct their undertakings in a way that does not expose people to health and safety risks, as far as that is possible. Construction companies that are using both employees and self-employed workers have a duty to ensure the health and safety of all their workers.
I will raise with Ministers in other Departments issues about the number of compliance officers and ensuring compliance in the construction industry. We remain committed to ensuring that there are the highest standards of safety within the industry. Consideration of the definitions of self-employment and employment is not the best way to proceed on that front.
Where does that leave us? What are we doing? What has happened since the publication of the Egan report? It was a key piece of work and we do not want to lose sight of its important conclusions. Another report, "Rethinking Construction", came out in July 1998. It concluded that capital costs and construction time could be reduced by about 10 per cent. a year, that performance could be improved by 20 per cent. a year and that productivity and turnover could be increased by 10 per cent. a year. If those things are to be achieved, the Government will have to support and encourage good management in the industry, innovative approaches to projects and performance measures.
There have been various initiatives since publication of the report, but it would be unrealistic to expect to see substantive improvements in less than five years. The report is too substantial and the implications are too significant to allow that to happen. We will clearly keep matters under review. Some of the issues raised during the debate were also debated during consideration of the Employment Bill, which received its Second Reading last night. The Bill will extend individual employment rights to more workers.
We have undertaken a review of the CIS and are considering options. We are not expected to change our fundamental approach. We are considering ways of reducing administrative costs of compliance with the scheme. We are also considering ways in which it can be extendable to e-business, for example.
293WH We have launched a review of employment status, and we expect a report in the early part of next year. The review will very much be focused on employment rights. It could have significant implications for many of the topics that we have been discussing.
The Inland Revenue has issued a leaflet, "Help your Business in the Construction Industry". It contains contributions from the Inland Revenue, Customs and Excise, the Benefits Agency, the Immigration Advisory Service, the Employment Service, the Health and Safety Executive and Companies House.
§ Mr. Davidson
Does my hon. Friend recognise that a new leaflet from the Inland Revenue, while no doubt a wonderful thing, will not necessarily go as far as we would wish in resolving matters? Her speech has not been all bad, but my pager, which doubles as a complacency meter, has recorded a fairly high reading. Are she and her advisers prepared to meet those concerned in the industry in the near future to discuss matters in perhaps a more informal atmosphere?
§ Ruth Kelly
I know that my hon. Friend has asked me to send everyone away happy, but I cannot pledge to do that today. I hope that I have shown the seriousness of the Government's commitment to tackling the issues. We keep these important topics under constant review. I will pass on my hon. Friend's representations to Ministers who deal directly with these issues. I am sure that they will be delighted to contact him.