Articles

HMRC edges closer to major construction industry change

LNB News 16/10/2009 31
Published date: 16 October 2009
Jurisdiction: UK
Related digests: Construction Firms Using Contractors Will Be Hit Hard by New Bureaucracy and Tax Bill LNB News 09/10/2009 63

Analysis: If HM Revenue & Customs (HMRC) really wanted to, it could get legislation into place next year through the 2010 Finance Bill for its proposals to increase the proportion of employed workers in the construction industry.

In its consultation document False Self-Employment in Construction: Taxation of Workers, HMRC says that 34% of construction industry workers are treated as self-employed, compared to an average of 11% elsewhere. Under its proposals, which involve simplified tests of what it means to be employed, it predicts that "a large proportion" of the 300,000 workers who now describe themselves as self-employed would move over to being employed. For the Exchequer, this would increase the receipt of employer's National Insurance and speed up receipt of taxation through PAYE.
But David Heaton, tax partner at accountant Baker Tilly, thinks the whole proposal is "poorly thought-out" for many reasons. For a start, the terms of this proposal would not confer the full benefits of employment on these workers. "They certainly would not be able to claim redundancy or unfair dismissal," he says.

HMRC has proposed this change mainly to make it easier for itself, he says. HMRC has special teams looking at the employment status of workers for construction companies, and some of these have been criticised in tribunals by judges for the blunt way they approach their investigations. Heaton says that there has been a tendency to treat all workers in one company in the same way, rather than looking at the workers on an individual basis.

The consultation period finished on 12 October. Heaton thinks HMRC will now push on despite receiving many negative comments on the proposals. "I can't see them backing down completely on this," he says. But he thinks that it will have poor consequences. "There is a danger it will antagonise the construction industry," he says. "If they bring it in, the number of businesses which will struggle with the administration is going to be ridiculous." It will, for instance, become commonplace for workers to be employed on just two-week stints (as many painting, carpentry and other jobs last this time). There will also be many people employed by two or three companies simultaneously--a situation that the UK tax system has never coped well with. "You end up with a complete mess of tax deductions," he says.

Replacing the employment tests built up over the last 100 years, there will be three criteria: workers will be deemed employed if they do not provide the materials they use, their own equipment or other workers.

One clue that the consultation is aimed at making life easier for HMRC rather than considering the rights of workers lies in the fact that the consultation came from HMRC alone, says Heaton. Otherwise "there would be some joined-up thinking here, the Department of Business, Enterprise and Regulatory Reform would have been involved as well", he adds.

Heaton believes that the logic underpinning this proposal--that the construction industry has more self-employed workers than others--could be used as a precedent for pushing through similar changes elsewhere. "It could spread to other areas,", he says, citing hairdressers and taxi drivers as obvious potential targets.

 
Landlord must compensate former business tenant

LNB News 09/10/2009 47
Published date: 9 October 2009
Jurisdiction: UK
Related legislation: Landlord and Tenant Act 1954
Related cases: Betty's Cafés Ltd v Phillips Furnishing Stores Ltd [1958] 1 All ER 607; Inclusive Technology v Williamson [2009] EWCA Civ 718, [2009] All ER (D) 63 (Sep)

Analysis: In Inclusive Technology v Williamson [2009] EWCA Civ 718 the landlord served a section 25 notice under the Landlord and Tenant Act 1954 (LTA 1954). He relied on the ground under section 30(1)(f) of the Act that provided he notified the tenant that on termination of the current tenancy he intended to carry out substantial refurbishment which he could not reasonably do without having possession of the premises the tenant did not have the right to a new lease. The landlord also sent an accompanying letter explaining that he would need vacant possession. The tenant entered into a new lease for other premises.

When the notice was served the landlord's intention was genuine however, because of concerns over the cost of the work he decided to "hold fire" although "he still intended to carry out the work in the future when the circumstances were right". But he did not inform the tenant of the change of plan. The tenant discovered that the work had not been carried out and brought proceedings for compensation for possession obtained by misrepresentation.

Dowden, solicitor and LexisPSL property author, says: "The Court of Appeal accepted that a statement of intention is not necessarily a statement of continuing intention, but ruled that the landlord had made a continuing representation that had become false, and awarded the tenant compensation under section 37A of the LTA 1954."

The court drew an analogy with contract law to illustrate the point. Carnwath LJ said that "a statement might be true at the time but which subsequently ceased to be true to the knowledge of the representor before the contract was entered into" and that in such circumstances, a failure to inform the representee of the change in circumstances "would itself amount to a misrepresentation, unless in the context it was quite clear to the reasonable recipient of the information that the party who gave it accepted no responsibility for its accuracy".

The court said that it was implicit in section 37A that there might be misrepresentation resulting from the conduct of a landlord, even when no application for a new tenancy was made, and the tenant simply took the landlord's representations at face value and acted on them.

"Significantly, the court ruled that the representation did not come from service of the section 25 notice but from the landlord's accompanying letter when read in the context of previous discussions between the parties. When that representation became false, the landlord had a duty to correct it," says Dowden.

He adds: "Inclusive Technology confirms that a section 25 notice acts as a warning; it must be given in good faith, but does not, of itself, amount to a representation of the landlord's intention, see for example, Betty's Cafes Ltd v Philips Furnishing Stores Ltd [1959] AC 20. Consequently, landlords can safely serve a hostile section 25 notice but should say as little as possible to tenants regarding plans that are liable to change, and be prepared to inform the tenant should plans change significantly before the tenancy comes to an end.

"However, the court accepted that landlords are entitled to explore other commercial options while, at the same time, progressing plans for reconstruction or refurbishment. The court also confirmed that landlords are not under a general duty to update tenants on progress in respect of any planning applications or negotiations with third parties."
 
Repossessions at only half of 1991 levels

LNB News 29/09/2009 38
Published date: 29 September 2009
Jurisdiction: UK

Analysis: Mortgage lenders are doing far better so far in this recession than in previous downturns to keep the number of repossessions down, according to research from the Building Societies Association (BSA)

Current repossessions are at under half of the levels of 1991, not even reaching 14,000 in the second quarter of this year--compared to an average of over 30,000 in 1991. Trying to establish some of the reasons, the BSA has just published a research report, Understanding Mortgage Appears, by the BSA economist Andrew Gall. It found that, since the start of 2007, 33% of borrowers who got into arrears have repaid them in full and that another 41% are still repaying. Only 3% lost their homes to repossession, but even a significant portion of them did so voluntarily--a process which is far more efficient and cost-effective in many cases than forced possession.
"Building societies learnt a lot from the 1990s recession," says Gall. "There is a greater appreciation that possession is not in anybody's interests, not in the lender's interests either."

But the greater awareness of both lenders and borrowers seems to have changed approaches more than the government initiatives put in place such as the Homeowners Mortgage Scheme and the Mortgage Rescue Scheme, ways of keeping people in their home, possibly with some government guarantee over payments to the lender. On the Mortgage Rescue Scheme, also involving social landlords buying the property, only five families were helped in the first six months of operations. It has never clocked up big numbers.

Even the Pre-Action Protocol, requiring courts and lenders to ensure all avenues are explored before repossession, has had little effect on building societies, says Gall. "That [exploring all options] was something they were already doing," he says. He does think that it encouraged some other lenders to change their ways, though.

But one by-product of these schemes has been the publicity surrounding them which helped educate consumers. Troubled homeowners were constantly told to approach lenders and advisers for help.
Borrowers have changed a great deal since 1991. Far more of them have savings which they could draw on in difficulty. In the future Gall wants to see more having savings and/or also buying mortgage payment protection insurance (MPPI).The problem with MPPI now is that it is regarded with suspicion, as an expensive and untrustworthy product, by many consumers. On savings, Gall wants to see more homeowners follow the example of those who both pay their mortgage and build up a savings buffer in case of problems. Families who got into trouble recently are more likely to be those "who focused solely on one asset" when "their house become their savings".

Another big help this time has been interest rates. In 1990 and 1991 they were above 10%, and as high at 13% at times. Now, the Bank of England base rate is 0.5%.

Gall believes that repossession rates will, however, go up. "They are very likely to rise despite the low level of interest rates and lender forbearance," he says. BSA research shows that 60% of people repaying arrears have done it from getting a new job or finding extra hours of work. Since unemployment is expected to rise this source of crucial help will be squeezed. But we are a long way off the dark days of the early 1990s, and hope not to go back there this time.

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