The UK construction sector appears to be very fragmented with domination of small firms and large number of sub-contracting. Construction Statistics Annual (ONS 2009) shows that 87 per cent of all construction firms in the UK have up to 7 employees and 39 per cent of enterprises are one-man firm. Statistical records (ONS 2009, DETR 1997, DETR 1982) indicate that the number of firms with more than 1200 employees dropped from 80 in 1973 to 38 in 1997 and then rose to 59 in 2008. In contrast, the number of firms with fewer than 7 employees has risen continuously from around 70,000 in 1973 to 175,000 in 2008.
Myers (2008) points out that a large number of very small construction businesses is almost uniquely British feature. Morton (2008) argues that there are three reasons for the dominance of small firms:
Type of demand: 'the fact that so much work required is small-scale repair and maintenance.'
Demand for construction product is location and project based. 'Local clients required small-scale work will usually contact local builders and contractors tend to hire local sub-contractors.'
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Extensive use of sub-contracting. 'Single tradesmen or small groups of tradesmen, each of whom can be classified as self-employed, can hire themselves out to work for others.'
The levels of self-employment in construction are much higher compared to the other industries (Figure....).
The numbers of self-employed construction workers are quite scattered across continental Europe (Figure ....). Netherlands and Spain are leading the table with 47 per cent each, whilst France is way down with 21 per cent. Jorens (2009) noted that the low numbers of self-employment in France are achieved via elimination of bogus self-employment. This became possible through introduction of harsher penalties and higher levels of trade unions' influence in that particular country.
Law on self-employment.
The issue of distinction between an employee and someone who is self-employed is a recurrent one in the construction industry. Although it is of fundamental importance distinguish between contracts of employment and self-employment but the formulation of the test of employee status has come from the courts and tribunals rather from the statue.
The Employment Rights Act 1996, s. 230(1), quoted in Painter(2008), defines an 'employee as 'an individual who has entered into or works under (or, where the employment has ceased, worked under)a contract of employment' but other acts contain different definitions. For example, Bernard (2008) point out that The Sex Discrimination Act 1975, s. 82(1) refers to' employment under a contract of service or of apprenticeship or a contract personally to execute any work or labour'. According to LRD, (2009) the law defines an employee as someone who works under a contract of service and a worker (or a self-employed) as someone who works under a contract for service but it has been up to judges to explain the difference. Ryley (2008) quotes the judge in Stevenson Jordan v Harrison Ltd who stated that:
It is almost impossible to give a precise definition ... It is often easy to recognise... [an employment contract] when you see it but it is difficult to say wherein the difference [between it and self-employment contractor status] lies.
The classification is of paramount importance, continues Ryley (2008), because only 'employees' qualify for employment protection rights such as unfair dismissal, redundancy payments, minimum notice on termination etc. Self-employed contractors usually only benefit from the entitlements that have been expressly agreed. The distinction is also important in terms of vicarious liability. Where an employer is responsible for the wrong-doing of his employees during their employment, a company is not usually liable for the acts of a contractor.
Harrison (2006) points out to the various tests that the courts have constructed over the years to determine employee status.
The control test
Painter (2008) noted that the original test for employment status was applied as early as 1880 in Yewens v Noakes. If an employer could tell his workers not only what to do, but also how, when and where to do it, then the worker would be regarded an employee. The control test is considered to be an important factor but not the determinative.
The integration test
The test indicates whether the worker is fully integrated into the employer's organisation and forms in integral part of the business, i.e. 'part and parcel' of the organisation (Painter, 2008).
The economic reality test
Always on Time
Marked to Standard
The approach was originally adopted by Coche J in Market Investigations v Ministry of Social Security in 1969. The test poses a question whether the worker is 'in business on his or hers own account'. It also asks if worker provides his own equipment, employs other people and has a financial stake in the business (Benneyworth 2007).
The multiple test
More recently the courts have stated that no one test can be determinative. Instead they adopted approach that involves viewing all of the circumstances of the case to determine the status. The factors that point to employment status are balanced against factors that point to self-employment status. Honeyball (2008) cites the judgement in Ready Mixed Concrete Ltd v Ministry of Pensions 1968 as the clearest example of such application. Ready Mixed Concrete were claiming that a lorry driver in question was self-employed because there was a contract for services in place as well as the fact that there were no requirements about hours of work and the times at which the driver took holiday. Ministry of Pensions pointed to the facts that he had to paint the lorry in the company colours, he had to use exclusively for company business and he was required to obey reasonable orders. But the fact that the driver was not required to drive the lorry personally and could arrange for a substitute driver to take his place was regarded as a decisive indication that the driver was self-employed under a contract of services.
Ryley (2008) argues that in recent cases courts have developed a requirement for another two characteristics to be present in order to indicate an employee status. Absence of either one of these two will show that there is no contract of employment.
Mutuality of obligation
It is an understanding between an employer and an employee that they have an ongoing relationship under which work will be offered and personal service will be provided.
The Court of Appeal decision in Ready Mixed Concrete confirmed that the right to employ a substitute is inherently inconsistent with status as an employee. A contract of employment must necessary contain an obligation on the part of the employee to provide services personally.
The view of the European Union on the individual establishing himself as a self-employed in any European country is that there are no formal restrictions to such act. Article 43 of The Lisbon Treaty provides that 'restrictions on the freedom of establishment of national in the territory of another Member State shall be prohibited' (Barnard, 2008). In practice this means that the self-employed have the right to establish themselves in another Member State. The Treaty does not define 'self-employed' but in Jany the Court explained that, unlike workers, the self-employed work outside a relationship of subordination, they bear the risk for the success or failure of their employment and they are paid directly and in full.
View of HMRC on self-employment
So what is the driving force behind the formation of contract of self-employment between the employer and the worker? Firstly it may be the employer's requirement so the individual is engaged under the contract for service. Another reason is that the willingness to work as self-employed comes from the workers themselves. Having registered as self-employed provides a significant drop in the amount of the National Insurance and tax paid from the individual's income. Both reasons are of major concern for Her Majesty Revenue and Customs and Her Majesty Treasury.
Table.... demonstrates NI payable by both parties to employment contract.
In the first instance the engager is liable for National Insurance Contributions for every employee (Secondary Class 1 Contribution) which is 12.8% on earnings above £110 per week for tax year 2009/2010. By declaring the worker self-employed and making him effectively a sub-contractor the engager does not have to pay any amount at all. This is on top of any holiday pay and pension fund deposits that usually form part of an employee salary package.
Bennyworth (2007) claims that the high levels of self-employment have led to creation of Construction Industry Scheme (CIS) which sets out the rules for how payments to subcontractors must be handled by contractors and how they should be taxed. HM Revenue & Customs (HMRC, no date) specifies that self-employed are liable for Class 2 and Class 4 National Insurance contributions. Class 2 National Insurance contributions are a flat rate of £2.40 a week as shown in Table.... Class 4 National Insurance contributions are payable on
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profits generated by subcontractor - '8 per cent on annual profits between £5,715 and
£43,875 (2010-11) and 1 per cent on any profit over that amount.' The tax of 20 per cent is
Table . National Insurance. Employer / employee rates & allowances. Source: HMRC
deducted by contractor at source and then adjusted by HMRC according to the sole-trader's revenue. House of Commons report (House of Commons, 2008) states that individuals, claiming to be self-employed can reduce their tax burden by allowing themselves generous expenses that can be offset against trader's income. This works by including various items in person's annual Self Assessment that have little or no relevance to their professional activity. The validity of such claims is very rarely checked and challenged by the HMRC simply due to lack of human resources for this manual operation. In 2007/08, the Government estimates that there were 300,000 subcontractors operating within the CIS who did not claim any deduction for the costs of materials, nor for plant and equipment (HM Treasury, 2009). These subcontractors provided none of the materials or plant and equipment which would form a substantial element of any contract and provided only their labour. The Government believes that a large proportion of these subcontractors, who represent approximately one third of the active subcontractor population, and are operating as sole traders, will in fact be working under employment terms. This problem is officially recognised as 'false self-employment' by the Treasury and HMRC.
In July 2009 the Treasury and HMRC jointly issued a consultative document entitled "False self-employed in construction: taxation of workers" where they are proposing the introduction of three new provisions to identify the worker as self-employed:
Plant and equipment which is required for the job - this does not just mean
traditional hand tools, but all major items.
All materials required to complete a job.
Other workers to carry out aspects of a job, but only where the worker is
personally responsible for paying them.
The responsibility for applying the criteria lies with the payer (contractor) rather that with the end user (self-employed worker).
The consultation period ended in October 2009 and despite the overall criticism of the proposal from the majority of respondents the legislation will go ahead. But the government understands that it will affect the flexibility of the labour market and place an additional burden on the weakened construction sector. So it has postponed the implementation indefinitely until the economy fully recovers from the recession (HM Treasury, 2010).
To block the proposed legislation the Home Builders Federation (HBF) and the Federation of Master Builders (FMB) have formed a coalition (http://sub-tax.com/sites/sub-tax.com/files/SUBTAX%20Press%20Release%20-%204%20Dece%2009.pdf, 2009). They campaign for Government to fundamentally rethink the plan to reclassify the workers. The coalition claims that the problem doesn't even exist and the proposal will add costs and more red tape to already struggling industry. The Recruitment & Employment Confederation joins the coalition and the website is formed that allows supporters to sign a petition against the legislation (http://sub-tax.com/sites/sub-tax.com/files/SUBTAX%20REC%20Press%20Release%20-%20Feb%2023%202010.pdf, 2010).
The absence of legislation however is not stopping HMRC from applying the test it has set up to individual cases. Contract Journal (2009) reports on a case when a medium-sized contractor was hit with £800,000 tax fine. Revenue inspectors found that its 100-strong workforce should be classified as employees despite the fact the self-employment contracts drawn-up by accountants were in place.
Migrant workers have become very visible in the construction sector. Their share of the construction workforce has risen from 2.7per cent in 1998 to 7.7per cent in 2008(BEC, 2008). The same paper states that in the South and London migrants form 42per cent of the workforce. Self-employment is particularly prevalent among migrant workers. One research carried out by UCATT on Polish construction workers (BEC, 2008), revealed that almost all of them were self-employed. But Chappell (2008) reports that 'migrant workers make up only around 4 per cent of the total construction workforce, and foreign nationals as a whole only 6 per cent.' Research carried out by Andersson (2010) also found out that an individual whose parents were immigrants and self-employed is also likely to be self-employed. Jorens (2009) insists that free movement of labour is one of the causes for the increase of bogus self-employment. Self-employment is the only legal reason for the presence of Romanian and Bulgarian construction workers, due to loophole in legislation, reports Contract Journal (2006). If they are stripped down of sub-contractor's status this may initiate their mass exodus and put large number of construction project in the South-East in jeopardy.
There is a number of published studies that looked at the self-employment in construction and analysed reasons and consequences of this phenomenon.
Forde and McKenzie(2007) used the findings of Labour Force Survey as well as their own survey to demonstrate the reasons behind use of sub-contractors and self-employed workers in UK construction industry. Their research concluded that that although the amount of sub-contracting and indeed self-employment had risen during the study period this was predominantly caused by the lack of alternative to the employers. The study connected rising levels of self-employment to the increasing problem of skills shortage within the industry.
This evidence confirmed by Clarke (2006) who argues that relying on self-employment leads to very low levels of investments, whether in labour (through training) or in plant and equipment. Clarke (2006) also points out to differences in firm structure between Britain and continental countries .If UK construction industry mainly consists of one-man and small construction companies, European countries such as Germany have a prevailing number of medium-sized companies on the market.
BERR (House of Commons, 2008) estimated that around 600,000 of UK construction sector workers operate in so-called informal economy and, therefore do not pay taxes.
Bresnen et al. (1986) carried out a survey of 43 large construction firms and found ot that workers in medium and small construction companies (annual turnover below £20 million) are more likely to be employed directly. The study is also confirmed civil engineering firms employ individuals directly in much more often rather than use contract for service towards them. The main determinative factor was the low level of skill within these segment of the industry and the firms are tend to be larger.
Statistical surveys and databases
There is a number of statistical instruments that analyse numbers and trends in the construction industry.
The Chartered Institute of Purchasing & Supply (2101) publishes Purchasing Managers Index (PMI) as an indicator of construction activity. It reflects the percentage of purchasing managers within the construction industry that reported better business conditions than in the previous month. A PMI Index of 50 and higher means that the majority of respondents feel that the conditions are improving and, therefore, indicates that the sector is expanding. It is very useful in terms of timing as it released 1-2 days after the month to which it refers. The survey is not of particular interest to the research as it does not cover employment status.
Workplace Employment Relations Survey (WERS)
WERS, and its latest edition of 2004, is a national survey of people at work. According to DBIS, there are three main parts to the survey:
1. The cross-sectional survey of managers includes questions about training and recruitment, flexibility and payment systems, work-life balance etc.
2. The cross-sectional survey of employees includes questions about working arrangements, training and skills, working hours and job satisfaction, employee representation, pay etc.
3. The cross-sectional survey of employee representatives includes questions about on structure of representation at the workplace, means of communication with employees, relations with managers, time spent on representative duties etc.
The next survey is due to take place in 2011.
Family Resources Survey (FRS)
'FRS is a continuous survey of private households and was commissioned by the Department for Work and Pensions (DWP)' (Ormerod, 2007). The survey does not generate any statistical outputs but serves as a base for Family Resources Survey Publication which supplies figures on the total amount of self-employed as a proportion of its sample size.
British Household Panel Survey (BHPS)
The BHPS has been interviewing members of the same of households annually since 1991. Ormerod (2007) comments that during the survey, among other factors, individuals are classified as employed or self-employed.
Annual Population Survey (APS)
Office for National Statistics (2009a) states that 'APS combines data obtained by Labour Force Survey with the results from English, Welsh and Scottish Labour Force Survey boosts which are carried out on behalf of the Department for Work and Pensions, Department for Education and Skills, the National Assembly for Wales and the Scottish Executive'. They provide more accurate picture as the combination of them covers 170,000 households. Labour Force Survey (LFS)
This is major quarterly sample survey that provides information on the UK labours market. It is carried out by surveying respondents living at the UK private postal addresses (ONS, 2007). It asks questions about respondents' employment patterns and status during a specific period prior to the interview. 'The survey covers 60,000 households chosen at random and includes persons aged 16 and over'(ONS, 2007). Labour Force Survey is the method of choice by Office for National Statistics for collecting various labour data. It is the main source of regular and up-to-date figures on labour statistics.
Data sources (databases)
Economic & Labour Market Review
Updated and seasonally adjusted results from LFS are included in monthly Economic & Labour Market Review (ELMR). ELMR, in its turn, 'draws together expert research and analysis to build an up-to-date, comprehensive and unique statistical picture of the UK economy and labour market' (ONS, 2010).
Construction Statistics Annual (CSA)
Office for National Statistics (2010a) gives the following description of this compilation:
'Brings together under one cover a wide range of statistics that are currently available on the construction industry. It gives a broad perspective of statistical trends in the construction industry in Great Britain through the last decade together with some international comparisons and features on leading initiatives that may influence the future.
Contains construction output and new orders, tender price, output price and cost indices, data on building materials, floorspace statistics, local and central government expenditure, lottery funded projects, international comparisons, employment statistics, workload of professionals, planning applications, health and safety statistics.'
NOMIS is a web-based database run by the University of Durham on behalf of the Office for National Statistics. It 'houses an extensive range of government statistical information on the UK labour market including employment, unemployment, earnings, Labour Force Survey and Jobcentre Plus vacancies' (https://www.nomisweb.co.uk/home/about.asp). Custom made data series can be created for a particular sector of the economy upon request.
Economic and Social Data Service (ESDS)
ESDS is a national data archiving and dissemination service which came into operation in January 2003. It provides support for an 'extensive range of key economic and social data, both quantitative and qualitative, spanning many disciplines and themes' (ESDS, 2006).
History of Self-employment Trends
Government departments have been tracing numbers of self-employed in construction for e period of time. ONS website provides data up to 1978(ONS, 2010) but it was possible to trace it back to 1969 using Housing & Construction Statistics publications (DETR, 1979). Department of the Environment, Transport and the Regions was in charge of construction statistics until 2000. From 2000 they were managed by, what is now known as Department for Business, Innovation and Skills (BIS).The previous names for the department included Department of Trade and Industry (1970-2007) and Department for Business, Enterprise and Regulatory Reform (2007-2009)(PM's Office, 2009). Finally in 2008, with establishment of UK Statistics Authority, Office for National Statistics is now in charge of all construction related figures.
When looking at self-employment figures over a period of time a noticeable difference appears (Figure ...). The numbers presented by departments prior to the ONS occur to be slightly lower that the data published since ONS took over. The head of Construction Statistics at ONS (Crook, 2010) explains that this is due to the coverage - ONS has a
Figure.... Self-employed as a percentage of all construction workforce, 1978-2009.
slightly different business register to the one used by BIS and a different source of employment data. ONS uses the Labour Force Survey when BIS used a business survey and an estimate of 'employees not on register'.
Crook (2010) points out that the 'new' numbers was found to be more accurate and currently being used as official figures.
According to Van den Brink (2010) ways of measurement employment in the economy as a whole and construction industry are differ. To assess general employment figures two types of survey used: household and employer-based surveys. Upon results the Workforce Jobs
(WFJ) series is created. WFJ is constructed from the number of employee jobs (obtained from employer-based surveys) and self-employment jobs (obtained from household survey, the LFS). When it comes to construction, employee jobs are measured in a different way. They are not derived from employer-based surveys, but, unlike many industries, the same Labour Force Survey used for both categories. For long-term trends in employee jobs the LFS is benchmarked against employer-based the Annual Business Inquiry (ABI). In the short-term, however, all employee jobs are solely derived from the LBS (Table...).
When enquiring about individuals' employment status, the Labour Force Survey uses the International Labour Organisation's (ILO) definition as benchmark (Ormerod, 2007). The definition was adopted by The 15th International Conference of Labour Statisticians in January 1993 (ILO, 2010) and as follows: 'Self-employed jobs are those jobs where the remuneration is directly dependent upon the profits (or the potential for profits) derived from the goods and services produced (where own consumption is considered to be part of profits). The incumbents make the operational decisions affecting the enterprise, or decisions affecting the enterprise, or delegate such decisions while retaining responsibility for the welfare of the enterprise. (In this context 'enterprise' includes one-person operations.)' The fact that this definition is not read out by the interviewer leaves it up to the interviewee to establish his or hers status.
To determine the status of the individual during survey the interviewer asks 'Were you working as an employee or were you self-employed?' The person can respond self-employed, employee, unpaid family worker or government scheme. It is not possible to apply HMRC or courts definition to the respondents as 'international requirements state that self-classification should be used' (Ormerod, 2007).
To identify to which industry the individual belongs a Standard Industrial Classification (SIC) is used. Construction industry covers Section F of Standard Industrial Classification 2003 and includes companies specializing in demolition and site preparation (including earth moving and test drilling), building of new structures or parts thereof and civil engineering (including construction of water projects), building installations (including plumbing, electrical and insulation work), building completion (including finishes to soffit, walls and floor, joinery and glazing) and renting of demolition and construction equipment with operator (ONS, 2007).
Government's data collecting agencies use 2003 version of the classification at the moment even though newer 2007 version has been adopted in 2008. ONS plans to switch construction related statistics to the newer version later in (Van den Brink, 2010). Having said that, there is no significant change, if any at all, to the construction related activities in the latest edition (Prosser, 2009), hence the delay in transfer to new version. It was 1992 version that brought radical changes to the system industries are classified and SIC 2007 only added minor changes to the industries, other than construction, to be in line with European requirements. However, some authors argue that the definition should be widened to include materials manufacturers and suppliers as well as architectural and surveying practices (Morton, 2008) and Pearce (2003), in its report, suggested using 'broad' and 'narrow' definitions to cover these extra activities.
The current recession is not the first time Great Britain has experienced a major economic downturn. In the last century the UK entered the periods of negative growth on five occasions. Dow (1998) illustrates the key numbers and consequences of these recessions:
1919-1921. GDP fell by 25%. The post-World War I recession that hit much of the world in the aftermath of World War I.
1930-1931 - 'The Great Slump'. GDP fell by 0.7% in 1930 and by 5.1% in 1931. Caused by global Great Depression that started with stock market crash in the US ('Black Tuesday'. As a result demand for British products collapsed, exports had fallen in value by 50% and unemployment reached 2.5 million. It was the largest and most profound economic depression of the 20th century for the United Kingdom.
1973 - 1975. GDP fell by 3.9%. Caused by 1973 oil crisis when OAPEC embargo forced the price of oil to quadruple by 1974. It took 14 quarters for GDP to recover to the levels prior to the recession.
1980 - 1982. GDP fell by 5.8%. Caused by the Monetarist policy of the Government and ultra high levels of inflation (27% by 1979). It took 13 quarters for GDP to recover to that at start of 1980.
1990- 1992. GDP fell by 2.5%. Caused by US savings and loan crisis. Unemployment rose to 10.7% of working population in 1993.
So how is this recession different and why it's of such big concern for construction industry?
The current economic slowdown has started in the United States when homeowners who had their mortgages from subprime lenders begun defaulting on their payments. US federal bank raised interest rates in 2007 and this caused house prices to fall leaving people with 100% mortgages with negative equity. As housing prices started to decline, major lending institutions that had large stakes in subprime loan companies reported significant loses. Negative equity triggered a wave of repossessions but because banks were unable to recoup the amount lent they became very reluctant to offer any loans. Unavailability of credit and high quantities of 'bad debt' that had to be written off caused many companies including international banking corporations to go bankrupt. Interbank lending became very expensive, lending to businesses and individuals was virtually non-existent. This became known as 'credit crunch'.
Although the United Kingdom did not have so many 'bad mortgages' the interdependency of UK and US financial sectors caused the similar problems over here. In the UK Northern Rock was the most prominent casualty of the sharply reduced liquidity in short term lending markets which emerged. Many financial institutions that survived were forced to borrow money from the government. Some were in effect privatized and restructured. It became notoriously difficult to obtain any credit including mortgages.
Council of Mortgage Lenders recorded an all time low of mortgage approvals for new homes in July 2008 - 33,000 - down from 114,000 in July 2007: a drop of 71 per cent and the lowest since the records begun in 1993(CML, 2010). According to financial website, Moneyfacts, the number of mortgage products on offer in the UK dropped from 13,027 in August 2007 to only 1,398 in March 2009, with average maximum loan-to-value (LTV) ratios falling from 90% to 75%. 100 to 125% LTV mortgages have disappeared altogether. The number of first-time buyers has dropped dramatically. Buy-to-let investors that were snapping up properties off-plan during the boom years has now been facing even tougher conditions as the average LTV for such mortgages is below 70% (Moneyfacts, 2010). Cost of borrowing has also risen significantly outgrowing the rental yields in many areas. These factors have led to a significant drop in demand for new housing. Homebuilders Federation reported that reservations were down 80% in July 2008 on the previous year. Private housing starts in Great Britain fell by 50% in the first half of 2009 compared to a year ago (ONS, 2010).
One of the hardest hit construction sectors during the recession has been the commercial sector. Commercial property enjoyed an unprecedented boom in the years prior to the economic downturn. From 2001 to 2007 the capital values of this type of property rose by 53% and the whole sector was valued at £23 billion (CPA, 2010). But in contrast the rental values rose by only 9% in the same period and the yields were hardening rapidly reaching the rock bottom of 5% in the first quarter of 2007, according to Reuters (2007). This created an investment bubble with the market for commercial premises being overheated. So when the crisis hit the economy, office and retail market suffered the most. In the last quarter of 2007, values fell at an annual rate of -34% (Parkinson, 2009).
The retail and entertainment sectors rely on consumer confidence and spending, which has been significantly affected by the economic crisis. Rising unemployment and fear of losing the job has created a situation where general public is holding on to their money and not willing to spend it.
Low consumer expenditure and crippling debt led to large number of insolvencies within the retail sector with Woolworths being the highest profile casualty. This created many vacant A1-type properties and, alongside low investment and falling capital values, weakened the demand for new developments in this category.
It is estimated that about a quarter of all materials and components come to the UK from abroad. In 2008 £12.6 billion worth of construction materials were imported. The falling exchange rate of pound against euro and US dollar made imported materials more expensive. The Pound sterling lost something between 25 and 30% of its value against leading currencies since mid-summer 2007 which effectively made building costs higher.
Below are the summarized consequences of the current economic slowdown and the impact it has on construction:
Single-stage competitive tendering virtually replaced all order procurement routes as clients looking for opportunities to further exploit falling tender prices
Tender prices are down 17% in the last quarter of 2009 compared their peak 18 month prior
Profit margins has tightened and in many cases close to or equal 0%, just enough to cover for overheads and keep the cash flow
The Government is very likely to curb spending on public projects which kept the construction afloat during the recent times
The numbers of self- employed in construction over the years have been affected by both events and legislations.
Van der Brink (2010) indicates correlation between construction output and workforce jobs in construction sector during previous recessions (Figure ....). Data provided in the Economic & Labour Market Review (ONS, 2010) allows for construction of another time series showing relationship between whole industry output and self-employment jobs (Figure...).
TH graph shows significant increase in self-employment during the 1980's, whilst direct employment showing the reverse trend. Briscoe et al. (2000) explains that one of the reasons for such dramatic increase is the introduction of a number of a statutory acts.
The Finance Act 1980 and the Planning and Land Act 1980 allowed labour only sub-contractors unrestricted access to public sector projects. The Employment Act 1982 made it easier for an individual to become self-employed. As rates for self-employed sub-contractors were rising faster than those for directly employed many employees switched into self-employment. Winch (1998) argues that the rapid increase of the self-employment in the 1980's was due to labour shortages and so-called `pay and poach' strategy of labour recruitment by employers was also to blame.
Figure ... shows as during the early 1990s recession the absolute growth in self-employment reached its peak. From that period self-employment, as percentage of the industry remained relatively constant until 1996.
Period from 1996 to about 2000 is marked with a significant decrease in self-employment numbers. This is when HM Revenue and Customs, which was known as the Inland Revenue and the Contributions Agency at that time, began its crackdown on self-employment abuse in the industry. Harvey (1995) reported that an estimated loss of revenue to the Exchequer due to the underpayment of tax and NI contributions as well as the abuse of gross payment conditions was between £1.2 and £1.8 billion each year. The purpose of the crackdown, according to Briscoe et al. (2000), was to 'to close existing loopholes, and compel firms to take many workers, who hitherto had been enjoying self-employed status solely for financial gains, onto their direct payrolls'.
To combat tax avoidance through the use of fraudulent certificates and vouchers the ne Construction Industry Scheme (CIS 1999) was launched in 1999 (Benneyworth, 2007). Pre-registration of sub-contractors (CIS4) and the system of issuing vouchers with each payment were introduced. This added pressure on already registered self-employed and put additional difficulties to obtain the status. And, despite the fact that the construction output, together with job vacancies was on the rise, the numbers of self-employed continued to fall.
Culture of the industry has had a significant effect on rise of self-employment over the years. The flexibility it allows not only to the contractor but also to the sole- trader have enough appeal to consider the change of the status. Marsh and Heady (1981) found out that 28% of labour-only self-employed sub-contractors choose it because of the independence. This was the most popular answer. In his research Oswald (2003) highlighted that self-employed are generally more satisfied with their jobs than the employed counterparts.
Tax and NI contribution savings aside, contractors chose to use of self-employed labour for its productivity. Productivity (measured in output per worker per hours worked) will usually is much higher in case of sub-contracting as employer does not have pay for non-productive time (Winch, 1998). Winch (1998) comments hat it is only true when the sub-contractor is paid lump sum but having self-employed worker on hourly rate eliminates the saving.
It is generally accepted that the increase in productivity may be achieved via investment in assets and production capabilities but the uncertainties associated with the construction process does not allow building companies to carry out such large-scale investments. So to raise efficiency construction companies choosing flexibility of the subcontracting over investment in fixed capital. Druker (1980) noted that labour-only sub-contracting becoming an alternative to technological change.
The low amount and quality of training in the industry has also linked to extensive use of 'always-ready' sub-contracting.