How New IR35 Self-employment Rules Will Impact the Construction Sector
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.
What should construction businesses do to prepare for IR35 changes?
There are a number of steps businesses should take prior to April 2020.
- Determine if the new rules apply to your business.
- Decide who should be responsible for managing any changes required this may be someone in procurement, HR or legal.
- Inform and Train all those involved in hiring contractors about the new rules.
- Audit your contracting arrangements and labour supply chain to identify your contractors, which can include any individual that provides their services through a Ltd Company or regularly bills their time to an employer.
- Determine which of those contractors falls inside IR35. Companies are being advised to use the Check Employment Status for Tax (CEST) tool. The key areas include;
- whether the contractors are under the direction, supervision and control of the hirer. A high degree of control indicates an employment relationship.
- if the contractors can send a substitute to undertake the scope of works. Does the hirer require a named individual to fulfil the role or in practice can they send a substitute.
- mutuality of obligation, is there an ongoing requirement for both parties to continue to offer and accept work, for example where a contractor is hired to complete a defined project or deliverable with an end date
- There are also lower-level indicative tests, including the degree of integration the contractor has with the business, for example if the worker identifies themselves as working for the end client when interacting with the end client’s customers, the financial risk they assume, for example putting right work at their own cost, whether the contractor has multiple clients or just one, how long the assignment lasts, and if the client decides the schedule of working hours and the work location.
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.
- Determine the employment contract approach. The options include
- If you determine the status of the contractors to be outside IR35 it is recommended to review the contracts and the actual working practices to ensure that you comply with the employment status requirements. For example this may mean that you will allow substitutions, rather than requiring a service to be provided by named individuals, and to genuinely not have control and supervision over the worker.
- If you determine the status of the contractors to be inside IR35 you may decide to continue to hire the contractor through their Ltd Company. You will need to notify the contractor that you have determined the off-payroll rules apply to them and tax and NICs will be deducted from their future payments. Where you use recruitment agencies you will need to inform them of this determination and request that they make the necessary deductions. You should review the existing contracts to determine if any amendments are needed.
- If you determine the status of the contractors to be inside IR35 you may decide to terminate the Ltd Company contracts and engage the contractors as employees or workers under temporary or permanent contracts. Existing engagements may have long notice periods for termination and, if necessary, it is best to have the option to terminate before April 2020. New contracts will need to negotiated with the workers. Depending on the employment status this will give rise to extra employer costs and liabilities including holiday pay, pension contributions, redundancy and sick pay. You may decide to complete a current project by retaining your Ltd Companies rather than changing to temporary or permanent employment contracts.
- Inform and negotiate with your contractors. Determine your contingency plans should the contractors seek higher rates or if they decide to leave rather than accept the new contractual arrangements.
- Budget for the new arrangements. This may include higher rates, additional payroll, pension, levy or recruitment costs, employers national insurance of 13.8% and internal compliance costs.
- Determine your engagement policy for new hires. You should determine the best approach for hiring staff on future projects.
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.
IR35 issues that may arise
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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