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Construction businesses with more than 50 employees or a turnover of more than £10.2m have until April 2020 to prepare for changes to the IR35 self-employed tax rules that shifts the burden of categorising contractors’ tax status on to the companies that hire them. Companies will be required to make and justify decisions on the IR35 status of each off-payroll worker, communicate with individuals effected and manage the workforce planning and recruitment implications.
IR35 legislation was introduced in 2000 as a tax avoidance measure to prevent those who should be deemed employees working through intermediaries such as their own Ltd Company. The tax authorities had taken a light touch approach due to the significant resources that would be required to enforce disguised self-employment, the difficulty in successfully bringing these cases to court and the fairness of targeting a small number of the estimated half million businesses that could be impacted.
Under the current rules, the intermediary, for example Ltd Company, determines whether IR35 applies. This means the tax risk currently lies with the intermediary rather than the client. Under the new off-payroll working rules, it will be the responsibility of the engaging business to determine whether IR35 applies and, if so, to make the necessary deductions for tax and NICs which would also mean paying employers’ national insurance contributions.
There are a number of steps businesses should take prior to April 2020.
It should be noted that in some circumstances the CEST tool may not be able to determine the employment status and recent law cases have shown that determination through the courts may lead to a different result.
While blanket-assessing everyone as inside IR35 would effectively eliminate the tax risk, businesses need to be able to show they have taken reasonable care in their assessments. They must provide the worker with not only the status determination but also the reasons for the determination. Workers may dispute this determination status and every organisation has a legal obligation to have a status disagreement process where they must respond within 45 days or risk becoming liable for tax and national insurance liability themselves. What is vital is there is a clear audit trail to justify any decision that has been made.
Contractors may look to increase their pay rates to compensate for the reduction in take-home pay. Employers will have to start paying Employers National Insurance at 13.8% on these workers and some clients might look to decrease the contractors rates to reflect this extra cost. This may lead to construction businesses having difficulty in retaining their contractors.
The tax status and employment status rules are separate, however, a contractor whose status is determined to be employed for tax purposes may claim they are also an employee or worker for employment status purposes. Contractors may therefore demand additional rights and/or payments on this basis.
If the hirer decides that the contractor is now inside IR35, the contractor may be concerned that HMRC pursue them for past income tax and NICs. This is likely to depend on the individual circumstances of the worker concerned.
The increase in the employer’s payroll bill will increase its liability or potentially qualify it to pay the CITB and apprenticeship levies.
The changes will apply to payments made on and after 6 April 2020. You can see the draft legislation here and the government policy paper here. The final legislation is expected around November 2019.
A2O People produce a regular series of articles designed to keep people informed about the Construction Industry, the UK Energy Sector, the UK Nuclear Sector, the Hinkley Point C project, and HR / Employment Law issues impacting the Construction sector.
Shane Keaney is a director of A2O People a Recruitment and People Consultancy specialising in the Nuclear and Energy Construction sectors. You can follow or connect with me on LinkedIn.
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