Impact of IR35 reforms on construction businesses
New IR35 regulations being introduced in April 2020 will have significant impact on construction bosses and contractors. IR35 is tax legislation designed to combat tax avoidance by individuals who supply their services via an intermediary (such as a Personal Service Company ‘PSC’, partnership or other individual) but who otherwise would be a direct employee of the company if the intermediary was not used.
In the public sector, public authorities have been responsible for deciding if off-payroll working rules apply to contractors since April 2017.
What will change?
In April 2020 the Government’s IR35 payroll reforms will come into effect in the private sector too. As a result of the huge number of contractors used within the sector it is anticipated that a high number of construction companies will be affected.
In short, it will become the construction firm’s responsibility for determining the employment status of their contractors and also for deducting any tax and NICs if they are due.
What is the potential impact?
The changes will potentially place a significant tax liability on many construction businesses who use contractors through intermediaries and at the very least compliance costs will increase. Smaller employers, workers who are genuinely self-employed and businesses which engage self-employed contractors through direct agreements shouldn’t be affected.
What action do construction companies need to take?
Businesses need to review their contracting arrangements covering all contractors engaged through an intermediary. Whether contractors are engaged under short-term contracts, or integrated into the organisation to deliver ongoing services will affect their status.
Construction bosses will then need to decide if existing arrangements with contractors are sustainable or whether payments should be taxed as if they were employment income.HMRC will be influenced by the actual nature of the working relationship, and not simply the terms of a written contract. For example, if the contract states that the contractor may send another person in their place but it is obvious that the construction company would not accept the substitution, HMRC would reject this and find that IR35 status applies. Many contractors have structured their services with tax savings in mind and they may be resistant to the new arrangements and construction businesses may need to consider alternative compliant options.
These may include a gross rise in contractor fees where skills are highly valued; a move to a managed service or agency provision; or offering to employ contractors directly although this would result in paid holiday leave, pension contributions etc. Conversations with contractors need to begin as soon as possible and company budgets reviewed to take account of the changes.
It is essential that construction businesses take steps now to ensure they will be compliant with the new tax regime. Businesses who don’t risk the prospect of disputes with contractors as well as with HMRC and disruption to their core operations. It’s anticipated that given its significant use of contractors, the construction industry will be a likely target for compliance checks by HMRC.
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