Copy also sent by to: ONSHORE EMPLOYMENT INTERMEDIARIES: FALSE SELF-EMPLOYMENT

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1 6 February, 2014 Robert Burton, Esq HMRC 1E/ Parliament Street London SW1A 2BQ Copy also sent by to: Dear Mr. Burton ONSHORE EMPLOYMENT INTERMEDIARIES: FALSE SELF-EMPLOYMENT Introduction Thank you for allowing us a little extra time to finalise our response to your consultation document concerning the above, further to my earlier letter. The response set out below is submitted on behalf of the Building and Engineering Services Association (B&ES) and the Building Engineering Services Employment Agency Alliance a voluntary grouping of specialist employment businesses ( labour agencies ) established by B&ES several years ago. B&ES is a business advocacy organisation representing the commercial interests of specialist engineering sub-contractors in the construction industry. These are not labour-only supply operations, but professionally led engineering contractors, undertaking the design, installation, commissioning and maintenance of complex engineering systems in buildings. B&ES members are often sub-contracted to construction companies. The employment businesses in membership of the Alliance are not labour-only sub-contractors, nor are they intermediaries in the particular sense described at paragraph 1.7 of the consultation document. Alliance members are bona fide employment businesses as defined in the relevant legislation. They supply skilled manpower to B&ES members (and others), who need the flexibility of being able to match manpower levels to fluctuations in workload which is inherent in contracting, to supplement their own directly employed workforce. The Appendix to this letter ( Who We Are ) tells you about B&ES and the Alliance. Building & Engineering Services Association Esca House 34 Palace Court London W2 4JG T E peter.rimmer@b-es.org W

2 Our Response Neither B&ES nor the Alliance is opposed to the measures the Government has in mind to ensure the equitable and proper treatment of workers in the industry for tax and NIC purposes. Indeed, in many quarters these measures are welcome. However, we believe the immediate introduction of these changes will have an adverse effect on labour market flexibility and employment relations. Most of all, we are concerned about the effect of the changes proposed on the flow of money across the construction industry supply chain. This goes to the short-term feasibility of introducing the changes HMRC is proposing over a practically non-existent notice period, without an adequate lead-in time. The Potential Effect on Labour Market Efficiency and Flexibility Contractors such as B&ES members use manpower supply businesses because they need the flexibility of matching manpower supply to fluctuations in workload which is a key characteristic of contracting. They also require access to a wider range of skills needed to complete the design, installation and commissioning of increasingly complex building services systems as a result of the increasing technical complexity of the systems they are called upon to install. Maintaining the full range of skills required to undertake these functions using a permanently employed workforce would be economically impossible. For these reasons, the industry was pleased to note that, when your colleagues at the Department for Business Innovation and Skills initiated a public consultation in January last year concerning reforms to the regulatory regime for employment agencies and employment businesses, the Government said that it was committed to encouraging growth, to create wealth and jobs. The flexibility of the UK s labour market allows people to move between jobs and allows businesses to quickly respond to changing demands. The Government is committed to ensuring that the UK s labour market works effectively. The UK has a labour market that is flexible, efficient and fair. We believe the changes outlined in the present HMRC consultation document run the risk of jeopardising this labour market efficiency and flexibility, if the changes being contemplated by HMRC are introduced without an appropriate phasing-in period. The Effect of the Proposed Changes on the Cost Base of Construction The HMRC s recent proposals will undoubtedly raise the costs of individual construction projects. This stems from the requirement to pay 13.8% employers NICs and a further 20% to satisfy workers holiday pay entitlement. Recent Government statistics have shown that the construction industry is not recovering from the devastating effects of the recession anywhere near as speedily as other sectors of the UK economy. One of the factors which official 2

3 statistics do not show, of course, is that the industry s tender prices are still at rock bottom. Contractors have been under enormous pressure to squeeze their already very thin margins to win what work might have been available following the 2007 collapse. We believe therefore that the economic situation of the industry is not yet sufficiently robust to withstand an escalation of this order of magnitude in its cost base. In any event, complex engineering projects of the kind in which B&ES members are involved require long design, tender and lead-in times. Against this background and in the light of our experience of business in the construction industry, our particular concerns are: Clients and construction companies, which traditionally tend to exploit their dominant contractual position in the construction procurement chain in their treatment of specialist sub-contractors, and to which specialist businesses represented by B&ES are likely to be sub-contracted, will refuse to add to their project costs, preferring to push responsibility for payment down the contractual chain. Specialist sub-contractors, such as those represented by B&ES, undertaking work for clients and construction companies will, therefore, be unable to add to their costs part way through a project. Employment businesses, such as those represented by the Alliance, will also be similarly affected. Individual workers will face higher tax and NIC liabilities, and will feel powerless to obtain the degree of recompense they feel justified in demanding. This is likely to lead to tensions in the supply chain and to employment relations problems, which could be especially serious on major, high-profile (publicly funded) projects. Either of these unwanted and unforeseen outcomes stands adversely to affect the good reputation of the UK construction industry which is extremely well respected, both nationally and internationally. Some comments we have received from members have even suggested that introducing these changes on the timescale envisaged in the current consultation document could jeopardize the extremely tentative improvement in the construction industry s fortunes. We are also concerned that these sudden and significant increases in the cost base of manpower supply will have a detrimental effect on the ability of employment businesses such as those in membership of the Alliance to survive, thereby also jeopardizing the very labour market efficiency and flexibility which contractors need and which the Government said only twelve months ago it wished to see preserved. 3

4 Conclusion Our analysis is that the key problem behind the state of affairs which HMRC is seeking to address here are the intermediaries as defined in paragraph 1.7 of the consultation document and in the red hexagons in the diagrams at paragraphs 2.7 and 2.9. We would urge Government action in that particular regard instead. However, we note that this does not seem to be part of the immediate plan of action being proposed. In the light of the considerations outlined above, therefore, we would caution that the changes outlined in the consultation document should be implemented only after appropriate prior warning, and public guidance and training for all parties in the industry the need for which does not, regrettably, appear to be envisaged under the current proposals. We believe there would be significant financial problems without a minimum of twelve months clear notice of the proposed changes. In any event, change of the order of magnitude described in the consultation document will be difficult to put into effect successfully within such a short timescale as that implied by the consultation document. Accordingly, we would urge the Government to give careful consideration to our advice for a transitional/phase-in period of this duration. Yours sincerely, P. D. RIMMER Head of Employment Affairs Direct Line: peter.rimmer@b-es.org CC: Dr Denis Walker - BIS 4

5 APPENDIX THE BUILDING AND ENGINEERING SERVICES ASSOCIATION (B&ES) and THE BUILDING ENGINEERING SERVICES EMPLOYMENT AGENCY ALLIANCE - WHO WE ARE Building and Engineering Services Association (B&ES) The Building and Engineering Services Association (B&ES) represents the interests of UK companies active in the design, installation, commissioning and maintenance of heating, ventilating, air conditioning and refrigeration systems, products and equipment including low and zero-carbon renewable technologies. Our 1,400 members have an annual turnover in excess of 4bn and a combined workforce of more than 50,000. Building services engineering, such as that carried out by our members, accounts for the largest component of commercial building projects by value. We are, therefore a specialist industry within the construction sector. B&ES is also an employers organisation, with a collective agreement which recognises Unite as the trade union for directly employed workers in our industry and which puts in place a level playing field as regards wage rates and other employment conditions for hourly paid workers in the sector. Building Services Engineering Employment Agency Alliance In 2008 the Association established the Building Services Engineering Employment Agency Alliance as a voluntary grouping of employment businesses ( labour agencies ) which supply skilled personnel to contractors across building services engineering. Formation of the Alliance recognised the integral role employment businesses play in the sector s supply chain. The Alliance is administered by B&ES. Compliance with recognised industry standards is a fundamental condition of Alliance membership. Verification of such compliance involves regular auditing of an employment business s activities and this is undertaken by an independent auditor, with Alliance members subject to an audit every three years and an annual compliance inspection in each intervening year. The Agency Alliance is, we believe, a unique model of employment business selfregulation. The Alliance sets standards of business conduct; it enforces those standards through a rigorous audit process; and it works closely in conjunction with representatives of the clients (contractors) served by the employment businesses concerned. The work of the Alliance and its insistence on proper standards have recently been commended by the Minister for Employment Relations and Consumer Affairs, Jo Swinson MP (see letter attached). 5

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