Sector - Finance & Legislation
IR35: How Will Construction Companies be Affected
Joanne Harris, Technical Commercial Manager at Parasol, explains the changes and potential consequences that construction companies must be aware of.
As the construction industry looks to increase activity in the coming months with lockdown restrictions easing, it also needs to brace itself for the challenges that 2021 may bring. One such challenge for construction companies that regularly engage with self-employed workers could be the off-payroll reforms, which came into play on 6 April.
Better known as IR35, the reforms are being used by HMRC to clamp down on what they deem as ‘disguised employment’, whereby a self-employed individual is providing their services through an intermediary (usually a limited company) in which they own more than 5% and working for a company in the same way as a permanent employee. The new legislation could prove incredibly challenging for businesses and contractors alike, particularly if individuals and companies are not thoroughly prepared and understand what the changes mean in practice.
What are the changes to IR35?
The much-anticipated IR35 reforms were rolled out in the private sector on 6 April, following similar public sector reforms that came into play in 2017. The reforms apply to all medium and large businesses. Small businesses with fewer than 50 employees, less than £10.2m annual turnover or a balance sheet totalling less than £5.1million, are the only ones unaffected.
The changes mean that the responsibility of determining whether a contract is inside or outside of IR35 sits with the end client rather than individual contractors, as was previously the case. The end hirer must now assess the status of off-payroll workers and produce a ‘Status Determination Statement’ (SDS), which will then determine what tax and National Insurance contributions are made.
How will this affect my construction business?
The biggest change for medium-large businesses is that the responsibility for determining the IR35 status of any contractor working for the company now sits with them. For these businesses, they must work compliantly with the IR35 changes or else could face the prospect of paying back taxes and facing penalties, although HMRC have confirmed that clients will not have to pay penalties for inaccuracies in the first 12 months relating to the off-payroll working rules, unless there’s evidence of deliberate non-compliance.
Therefore, businesses must make informed and accurate decisions on a contract-by-contract basis. Blanket assessments, whereby a business makes a status determination without conducting an assessment, does not constitute reasonable care.
Theoretically, if the contracts and working practices offered by a business to self-employed individuals providing services through their own company were deemed outside of IR35 pre-April, that should remain the case now too. However, the most important word in that sentence is ‘theoretically’ – this assumes that the assignment is being expertly assessed using reasonable care, both before and after the reforms.
What are ‘blanket bans’ and should a business use them?
In short, no, a company should not use blanket bans. Some businesses have stated that they will now refuse to engage with Personal Service Companies (PSCs), – essentially any self-employed people who work through a limited company set-up – because of the changes. However, this is short sighted and businesses risk losing access to a vital skilled workforce. With adequate preparation, the recent reforms are manageable, and there is no need to disengage from these workers. Investing in the systems and processes to allow your business to assess IR35 status accurately and engage with PSC contractors is the best approach.
Blanket bans have largely been implemented through fear of falling foul of the legislation and being penalised with hefty fines, however this is not an appropriate response. HMRC has pushed the reforms through because one-third of limited company contractors were previously reported to be working non-compliantly. However, this also means that two-thirds of contractors were working correctly, in line with HMRC’s guidelines. Therefore, using blanket bans unfairly penalises the majority of the UK’s contracting workforce and is not necessary.
Many companies use contractors for their expertise, or to plug a skills gap among their workforce. End-hirers are now more likely to attract the best talent if they are taking reasonable care when completing Status Determination Statements. An accurate outside IR35 SDS will mean the contractor maintains the same take-home pay.
The ramifications of blanket bans have the potential to be huge for all involved, yet this can all be solved with accurate assessments and compliance across the entire supply chain.
Is there a new recommended method of working in construction?
While it’s been a turbulent year for contractors and businesses alike, the IR35 reforms will cause some ramifications across the industry as everybody adjusts to the changes.
The best thing for businesses to do in this early period of the changes is to continue increasing their knowledge of the reforms and what it means for the way they work. With this, they will be able to take reasonable care when determining if the contract they are offering is inside or outside of the reforms.
There is no guaranteed way of working for any industry, but there are solutions out there to help construction businesses and contractors navigate this period of change and continue to play a crucial role in the UK’s economic recovery.
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