Dáil Éireann debate -
Tuesday, 3 Feb 1998

Vol. 486 No. 3

Adjournment Debate. - Tax Collection System.

Mr. Broughan

I am glad the Minister for Finance is present to listen to this demand from thousands of building workers and their families. The C45 system of tax collection for subcontractor employment in the construction industry should be ended in the forthcoming Finance Bill. At present building workers on Crampton building sites around the city who have fought hard against the injustice and unfairness of the system have had interlocutory injunctions taken out against them, have been photographed on building sites, have been harassed and are facing the prospect of jail. Despite the country's prosperity, it is impossible for many building workers to get direct employment in the city.

For many years serious allegations of abuses of the tax and social welfare codes have been made against employers and subcontractors who use the C45 system. More than 250,000 C45 forms were issued in 1997 for about 100,000 building workers. Many commentators and distinguished financial journalists pointed out discrepancies in the issue of the forms taking into account the numbers of unemployed in the construction industry. The C45 system is a godsend to employers who wish to operate in the black economy and evade paying tax and social insurance. There is also the prospect of massive loss to the Exchequer as a result of abuses in the industry.

There are disturbing allegations of the use of workers from Northern Ireland to facilitate the abuse of the social welfare system. The mass of carpenters, bricklayers, plasterers and their assistants wish to return to the PAYE and social insurance system. With the C45 system there is no provision for sickness, holidays, unemployment, retirement or pensions. Because of the iniquitous C45 system, the taxpayer must carry the can for those employers and provide for construction workers. In the long period of Tory rule in the UK the Conservative Government realised its system was a total disaster which facilitated the black economy and it abolished it. Even Mr. Major regarded such an approach as unfair and unjust.

Thankfully, a growing number of Irish builders, such as Rohan Holdings Limited and John Sisk and Sons Limited have returned to the PAYE system for their trades persons in recent years. However, the Crampton organisation, which is our biggest builder, has refused to negotiate with workers representatives in BATU and OPATS and have successfully sought injunctions to have workers sent to gaol.

There have been remarkable allegations. One document relates to a dispute on a £30 million Smurfit development using one of the oldest and biggest builders in Dublin. The bricklayers were employed by "Mickey", a 19 year old who went by no other name, who told them there would be no deductions for tax or PRSI, just cash in hand. When the workers disagreed with this illegal proposition, they were sacked on the spot. All those workers wanted was the right to work legally and pay tax like other workers.

We also had the unedifying spectacle of the national media being intimidated by rogue employers in this industry. The Sunday Business Post, for example, has also been prevented by injunction from photographing Crampton sites and there have been restrictions placed on RTÉ. Yet serious allegations of false identities, the 19 year old subcontractor and promises of cash in hand, have been made about these sites.

There is also the issue of health and safety. The Minister will remember the Taoiseach reacted vigorously to the death of a building worker in this city a few weeks ago. We brought to his attention and that of the Minister for Enterprise, Trade and Employment, Deputy Harney, that there have been 41 fatalities in this industry in three years. Many people believe the root cause of the problems with health and safety on sites is the illegal nature of the work practices there. This is a huge issue to be addressed.

I call on the Minister for Finance, the Minister for Social, Community and Family Affairs, Deputy Dermot Ahern, the Minister for Enterprise, Trade and Employment, Deputy Harney, and the Chairman of the Revenue Commissioners, Mr. Cathal MacDomhnaill, to investigate these serious allegations immediately.

In recent weeks there have been disgraceful allegations about offshore money and rampant £100 million tax evasion funds, yet down through the years there have been serious allegations about this industry. The Minister for Finance is the Minister responsible for this; he is the one in the hot seat. In the coming Finance Bill, I urge Minister McCreevy, who I know to be a fair politician, to abolish the C45 system for bricklayers, plasterers and carpenters and their assistants, for the trades which go on to a site and only offer the service of their labour, because there does not seem to be any logical basis for it other than to defraud the State.

Minister for Finance (Mr. McCreevy)

It will be useful in responding to the Deputy's request to give a resumé of the system of tax collection as it has developed in the construction industry over the past 20 years or so.

Persons employed in that industry are classified for tax purposes either as employees or subcontractors, and tax is deducted from each group on a different basis. Subcontracting itself is, of course, an integral part of the construction industry. Payments to subcontractors come within the relevant contracts tax system commonly referred to as the C2 or C45 system. Under this system, where a principal contractor makes a payment to an unregistered contractor, he or she is required to deduct relevant contracts tax from those payments at the rate of 35 per cent.

The RCT system was introduced in the 1970s to counter the growing incidence of black economy activity in the construction industry. Workers operating under the system known as "the lump" were being paid without tax being deducted.

Mr. Broughan

That is still going on.

Mr. McCreevy

This happened because the workers in question — mainly groups of tradesmen — were not employees of the main contractor making the payments and, accordingly, were not in the PAYE system. Under RCT tax is deducted at the rate of 35 per cent from relevant payments except where the subcontractor has produced a certificate of authorisation — C2 — to the principal contractor and the principal contractor has received a relevant payments card — C47 — from the inspector of taxes authorising him to make payments without deducting tax. To get a C2, a subcontractor must operate from a fixed place of business in the State and, for a period of at least three years prior to the issue of the C2, must have fully complied with all his/her taxation and reporting obligations under the tax code. The Revenue Commissioners have confirmed that RCT continues to play a vital role in combating tax evasion in the construction industry.

One of the forms of evasion to which the Deputy may be referring arises where an individual is working and also claiming social welfare benefits. To combat this type of evasion Revenue and the Department of Social, Community and Family Affairs regularly conduct joint investigations under the joint investigation programme to ensure that those engaged as employees fully comply with the tax system and to ensure that employers are not facilitating "working and signing" arrangements.

Following a comprehensive review in 1995 and 1996 Revenue issued guidelines to the industry setting out the criteria under which a person may be regarded as an employee as distinct from a subcontractor. Principal contractors and subcontractors creating self-employment contractual arrangements must sign a joint declaration to the effect that these guidelines have been considered by them and they are both satisfied that the contract created is a contract of self-employment.

This joint declaration was introduced in line with a recommendation of a subcommittee of the black economy monitoring group which looked at the construction industry. It is of interest at this stage to list the current membership of that group. Its members are drawn from IBEC, the CIF, ICTU and the SFA as well as the Revenue Commissioners and the Department of Social, Community and Family Affairs.

Mr. Broughan

It has gone to seed.

Mr. McCreevy

Both parties to the joint declaration certify that they have considered the guidelines issued by the Revenue Commissioners as to the difference between contracts of service — employment contracts — and contracts for services — self-employment — and are satisfied that the contract which they are about to enter is a contract for services.

RCT applies only to payments to self-employed subcontractors. PAYE applies to payments by an employer to employees. The application of the RCT regime to genuine employees would deprive such individuals of social welfare benefits to which they are entitled. It would also mean a loss in PAYE, PRSI and levies. Some employers may consider that, by operating the RCT system, the nature of the payments is changed from wages to payments to self-employed subcontractors. Of course, this is a mistaken view. Even where a joint declaration has been completed, the question as to whether the contract is one of self-employment or of employment will depend on the nature of the facts of the case.

Where the relationship between a builder and a person to whom he or she makes payments is that of employer/employee, the builder is liable for the PAYE, PRSI and levies which should have been deducted from those payments, even where the parties have completed the joint declaration — form RCT1 — and the builder has deducted RCT from the payments and issued a C45.

Revenue has advised me that it is currently engaged in a nationwide campaign to ensure that declarations made by principal contractors and subcontractors represent the true situation. Where an employment is considered to exist and PAYE/PRSI and levies are not being deducted, the principal is being advised to put matters on a proper footing. Where this is not done, the principal will become liable for the PAYE/PRSI and levies. Each principal classified by Revenue as an employer can have that decision reviewed internally in Revenue and has a statutory right of appeal to the Appeals Commissioners.

Mr. Broughan

Will there be an amnesty?

Mr. McCreevy

No. We must wait until the Labour Party is back in Government to have another amnesty.

In its ongoing drive to identify the correct basis of deduction of tax in respect of each individual, Revenue is happy to receive information from other organisations or individuals. In this context, for example, facilities have been made available to trade union representatives to report any cases where they consider that PAYE should have applied instead of RCT.

Revenue has received a number of representations about the growth in self-employment in the industry. There is a strongly held view that a great number of persons in the construction industry who supply labour only services, and who are currently being treated as self-employed by principal contractors, should be reclassified as employees. There have also been campaigns on certain construction sites to ensure that employers take on people as employees rather than as self-employed subcontractors where such people are more correctly classified as employees.

Mr. Broughan

What is the Minister's view?

Mr. McCreevy

This system existed long before the Deputy and I were elected to this House.

An Leas-Cheann Comhairle

Minister, I would appreciate if you would not answer questions which come by way of interruption.

Mr. Broughan

I worked on a building site.

Mr. McCreevy

I did too. This is the background against which the nationwide compliance campaign is being mounted. The Revenue Commissioners are determined that the prescribed RCT procedures will be complied with. However, Revenue cannot dictate the terms under which workers are engaged in any industry. RCT is in place to ensure that subcontractors in the construction industry do not escape their tax liabilities. While the increasing incidence of the RCT may mirror a drift to self-employment within the industry, it is not the cause of the drift. It mirrors the worldwide trend towards contracting out and reflects the increased flexibility of work practices.

Mr. Broughan

And increased tax evasion.

Mr. McCreevy

In this regard it is worth bearing in mind that, of the total estimated numbers at present employed in the construction industry, approximately 35,000 are employees compared to an estimated 21,000 certified subcontractors and 12,500 uncertified subcontractors. It remains the case, therefore, that, notwithstanding the drift to self-employment, the majority of persons employed in the construction industry continue to be taxed under the PAYE system.

The Revenue campaign to investigate possible abuses started in the Dublin area last November. Areas outside Dublin are being included in the campaign. Some staff have been moved from other duties to accommodate the campaign. It is intended that all principal contractors will be visited. The first phase, which consists of visiting the principal contractors and advising them of Revenue's view on the correct treatment of payments being made by them, is expected to take up to six months. Phase 2 will involve monitoring the response of principal contractors to the earlier visit and follow-up action, for example, entering assessments on the principal contractor. Early indications are that the compliance campaign started in November will be effective in regularising the employment status of individuals in the construction industry.

To end RCT for certain trades in the construction industry would mean that no system of tax deduction would operate in relation to self-employed subcontractors in those trades. The Revenue Commissioners consider the abolition of the RCT system would lead to an increase in black economy activity within the construction industry.

Mr. Broughan

That economy is large enough already.

Mr. McCreevy

It would not mean that everybody engaged in that trade would automatically become employees within the PAYE system. Accordingly, the Deputy will appreciate that the abolition of the RCT system would have the opposite effect to that suggested by him.