Rate hike may force exodus of subbies

Business adviser Grant Thornton has warned a hike in the construction industry standard rate of deduction (CIS) for subcontractors could exacerbate the skills shortage, forcing some self-employed workers to leave the industry altogether.

The firm said the 2% increase, which it said had been "buried" in Chancellor Gordon Brown's Pre-Budget Report, could have a "major economic effect", even though the self-employed will not pay any more tax overall. Grant Thornton partner Kathryn Hiddleston said: "My concern is that in an industry with average margins of around 3%, adding 2% is going to cause massive cash flow difficulties." Subcontractors will face a standard deduction rate of 20% under the new CIS from next April, to be offset against income tax, National Insurance Contributions (NICs) and allowable expenses. The current rate is 18%.

HMRC said it increased the rate because it was too low and resulted in too many subcontractors having to pay a further tax bill at the end of each year. But Hiddleston said she thought the move was designed to force self-employed construction workers into full-time work by reducing the amount of money they received each month.

She said: "HMRC believes the industry is not good at policing whether individuals are employed or not. It would prefer more workers to be on PAYE." She warned the move could be counter-productive, pushing significant numbers of workers out of the profession altogether. She said this would "place a great strain on the labour market in the industry" at a time when there was already a skills shortage.

But Construction Confed-eration director of taxation Liz Bridge welcomed the announcement: "We have a problem in the industry where many workers want to be self-employed, rather than going into employment, and anything that evens the pitch and makes take-home pay similar is a good thing." She dismissed the idea that reduced cash-flow would push people out of the profession, pointing out: "People who pay the rate of deduction generally don't have staff to pay. They are workers, not employers."

CIS programme director at HMRC Mark de Brunner defended the move: "The current rate leaves more and more subcontractors facing a further tax bill at the end of each year. A bill which, if not planned for, could itself affect cash flow."