Productivity: The key differentiator between freelance builders and those who are on PAYE

I studied with obvious interest the summer budget, and focused particularly on Chancellor Osborne’s ideas about employment taxes.  It seems the Treasury is still preoccupied with employment status, with its talk about  ‘…how two individuals doing the same job, in the same way, can end up paying the different levels of tax’.

This ties in with views on employment status published by the Office of Tax Simplification – which it sees as problematic to business because:

1. The tax differential between employees and the self-employed is significant, mainly because of NICs
2. Employee rights are often of paramount importance to business
3. The blurred dividing line for employment status causes uncertainty

I’ve already communicated my views to the OTS (and continue to await a response) but for what it’s worth, here’s what I think the organisation needs to know about the construction industry and the freelance builders who work within it:

1. The rates paid to freelance workers are usually linked to productivity and as a result, the perceived saving for the ‘engager’ of Employers NICs is simply not realised. It’s usually the freelancer who gains, with better rates of pay and a higher income, generated as a direct result of his or her own skills, risk and endeavour.
2. Employee rights are not an issue for 99.9% of those who choose to work on a freelance basis. They are, however, both an issue and a safeguard for all employers and employees.
3. Yes, the employment status dividing line is often blurred, but proper understanding and application of the rules gives the correct outcome . . .  although this outcome is often unwelcome to the many people who have the pre-determined belief that false self-employment is present on all building sites and in great numbers.

There’s also one glaring omission from this simplified analysis – an aspect the Chancellor also mentioned in the budget – and that is productivity.

Ask any construction professional why there are many freelancers on building sites and you’ll hear the same three answers over and over:  Productivity, de-risking of projects, and cost management.

Productivity is the differential between two people doing the same job.  And that is what justifies the tax differential.  Freelance builders working on measured rates achieve higher productivity than those on PAYE . . . their higher productivity is a direct outcome of their right to opt for self-employment.