What does IR35 mean for Construction & Property?
posted 06 Dec 22
The IR35 reforms in the private sector came into effect in April 2021. Whether you’re a freelancer or with a limited company or private services company (PSC) or a firm in the construction industry that hires contractors in, they will almost certainly have an impact on your business.
Under IR35 the rules, self-employed contractors are likely to face higher tax and National Insurance deductions, without any significant change to their day-to-day role. Businesses will find the tax liability has shifted onto their shoulders, with severe consequences for non-compliance.
We spoke to our Managing Director for Construction & Property at Search, Paul Kynaston, to find out more about the impact of the IR35 reforms on the construction industry.
A shake up for construction professionals
A large percentage of construction management professionals currently operate through their own personal services company (PSC) or limited company. This is a somewhat smaller percentage in construction trades, but still could be an issue.
According to research by Kingston University commissioned by the Association of Independent Professionals and the Self Employed (IPSE), the number of UK contractors and freelancers has grown 35.1% since 2008, up to around 1.88 million.
Previously, the rules allowed self-employed contractors to determine their own tax status. However, as of April 2021, the responsibility to determine a contractors’ tax status and their subsequent income tax and National Insurance deductions now lies with the end client.
As a result, the IR35 reforms have shaken multiple markets, including construction, transport and healthcare.
What do construction companies need to know?
Using temporary contract staff operating through a PSC has been commonplace for many years, particularly in London. However, because of IR35, hiring staff in this way is now much more of a risk for businesses. End clients have the administrative burden of having to assess roles, and issue the necessary Status Determination Statements along with supporting evidence.
The concern we have is that some major building companies in the sector are going down the route of a low risk ‘blanket ban’ on PSCs. Whilst a ‘blanket ban’ might avoid the burden of carrying out IR35 determinations, and the potential tax risks, it may present other risks. There are worries that not having a flexible approach to PSCs could restrict access to particular unique skill sets, and that workers are being panic pigeonholed into PAYE when they might legitimately be able to continue to operate through a PSC. IR35 needs to be managed with balance against other risks, such as losing top talent in the industry, or finding that a company’s approach to IR35 sends PSC contractors in the direction of the competition.
Rather than apply a ‘blanket ban’ to all, Paul recommends trying to review each contractor or assignment on a case-by-case basis. Although time consuming, it could save businesses a recruitment headache at a later date.
Having a robust but commercial IR35 strategy in place and operating best practice procedures to comply with the new legislation should enable companies to continue to engage contractors ’outside IR35’, if the circumstances of the role allow.
“Talk to your freelancers to establish what their future tax status should be,” says Paul. “Evaluate all your major contracts. Remember that the ultimate responsibility to determine IR35 status lies with the end client, which is the business itself, and any promise of ‘work arounds’ should be viewed with suspicion.”
If a previously self-employed contractor is working ‘inside IR35’, they could start to demand higher pay rates in attempt to recoup the shortfall to their net salary, as a result of the increased tax and NI demands.
Hirers may have to take a commercial view of how far they are prepared to go to soften the blow for the contractor. This will need to be weighed against the need to retain necessary resources to mitigate the risk of skills and people shortages, which become even more expensive to fill in resource-scarce sectors where urgent staffing requirements will command premium prices.
Paul also recommends handling the issue of IR35 directly, rather than relying on an insurance company or tax lawyer to try and smooth things out once a business has been caught out by HMRC.
IR35 insurance products seem to be flooding onto the market at the moment, but I’d recommend that businesses proceed carefully. Some of these seem almost too good to be true; they should be thoroughly investigated with appropriate legal advice and treated with caution. A breach of IR35, particularly if you are seen to have acted without using reasonable care, can be a very high price to pay, and would likely invalidate any insurance cover. There really aren’t any workarounds.
What can freelance construction workers do?
Luckily, those who find themselves impacted by IR35 do have a few options.
“If you find your role is inside IR35 then there are options available other than PAYE, including umbrella and CIS. I’d advise anybody considering the CIS route to seek advice from HMRC as you will have to evidence your self-employed status,” advises Paul.
He adds, “Umbrella companies are not necessarily the attractive option that they once were, now that they are subject to extremely tight controls from HMRC, especially around the concept of ‘supervision direction and control’, and the payment of expenses.
“I’d recommend anybody considering this route to take advice and ensure they register with a reputable company. Search Construction & Property has relationships with a number of established and reputable umbrella companies, which we can put you in touch with.”
Search Construction can help
“Compliance is at the heart of our business,” says Paul. “We’ve been doing this for a long time, and have seen this IR35 change affect the public sector in 2017, so we’re understand what this means. We have the contacts and the expertise to truly help.”
Whether you are an end-client looking to manage your contractors, or perhaps find permanent staff, or a contractor worried about being forced into an unsuitable tax arrangement, get in touch with the team today.
Looking for more guidance on IR35?
Check out our IR35 hub for more information and useful resources to help you navigate the off-payroll working rules.
