07 Apr What You Need to Know Now IR35 Is Here
After many delays thanks to the coronavirus crisis, IR35 has finally come into effect and is currently causing a ripple of changes across many sectors, but the heat is really being felt in the construction industry.
While many sectors have relied on contractors or freelancers, the construction industry has relied on subcontracting for decades, with ONS figures showing that nearly half of construction contracting jobs are self-employed and that a fifth of the self-employed in the UK are in construction.
Unlike other sectors, contracting happens both onsite and offsite in the construction industry, as people are hired on a self-employed basis to provide expertise or extra labour where there is limited resource in-house.
If you’re unfamiliar with IR35, it is two sets of tax legislation that are designed to combat tax avoidance both by workers and by the firms hiring them.
The aim of IR35 is to ensure that those who ‘work-like’ employees pay broadly the same tax and National Insurance as employees, regardless of the structure they work through.
The original legislation on IR35 required the freelance contractor to determine their tax status and notify HMRC, but non-compliance was rife. For example, HRMC claim that only around 10% of contractors comply with the current IR35 rules, which is a clear indication that reform was needed.
Public sector organisations have been required to make IR35 assessments since April 2017, however for private sector firms IR35 was meant to come into effect on 1st April 2020, but there were delays due to the covid-19 pandemic.
Now the roll-out of IR35 for large private sector companies is set to commence from April 6th 2021, which is estimated to raise £420m in tax and NIC receipts.
As many businesses and workers will be concerned about what these changes mean we’ve detailed how IR35 impacts both businesses and workers in the construction industry.
Please note that this is not legal advice, so if you are concerned about any of the changes to your work under IR35 we would suggest you seek professional legal advice.
How It Impacts Businesses
IR35 should not come as a surprise to businesses. In fact, IR35 was originally introduced in 2000 and designed to wipe out tax benefits for those who were essentially in what’s termed as “disguised employment”.
For private-sector construction firms, they will now have to renegotiate working arrangements with freelance contractors or get them on the books as an employee.
Under IR35 it is the company’s responsibility for working out the contractor’s employment status – not the contractor.
Some predict that the costs of staffing construction projects may rise as a result of IR35, but there is also concern that contractors may be harder to hire who do not want to be taken on as an employee.
In large construction firms, there is major uncertainty around whose responsibility IR35 lands on. It is difficult and unclear from the guidance provided by HRMC on whether IR35 is an issue for HR, legal, accounts, procurement or purchasing.
The penalties for not complying with IR35 have been wavered by the government for one year to support businesses in making the transition. However, the government has said that it will ‘name and shame’ those who deliberately default or underpay.
How it Impacts Workers
The biggest impact for freelance construction workers with IR35 is the pay. With a freelance contractor moving onto payroll on the same salary, it could mean as much as a 20% reduction in take-home pay.
As a freelancer who falls under IR35, the company can either switch them onto an employment contract or redraft the service contract that is in place.
The intention of IR35 is designed to combat those who are self-employed but are contracted predominantly by one company and who are acting as an employee.
These points may help you understand your IR35 status;
Equipment – HMRC try to argue that if the equipment is provided by the client, and you don’t use your own, you are a disguised employee
Payment – self-employed people are normally paid on a project only basis, which may mean you are only paid when the work is completed or at a particular milestone
Part of the organisation – HRMC argue that if you have become part of the structure of the organisation with the power to hire and fire, you are an employee
Exclusivity – you should be allowed to work for multiple clients, if this is not the case and you are only working for one client, again HRMC argue that you are a disguised employee
These are just a few ways you can understand your status but this is not an exhaustive list.
The Future of IR35
Unfortunately, IR35 still lacks much clarity and there is much ambiguity over the guidelines for employment. Including employment rights. This has been controversial, and there have been many public cases that have questioned HRMC on their current guidelines.
Most famously Uber has now been instructed to pay its workers as employees, and in 2019 TV presenters Kaye Adams and Lorraine Kelly successfully challenged HMRC in separate cases, providing they weren’t inside the rules.
Across the construction sector, there is a fear that insisting on this implementation puts the entire labour market at risk at such a critical time.
Many leaders in the construction industry such as Tom Hadley, director of policy and campaigns at the Recruitment and Employment Confederation, are calling on the government to delay IR35 and instead review how this will impact the sector.
As both a business or worker it is highly recommended that you seek advice from your accountant or legal professional to understand where you may sit when the legislation comes into effect from April 6th.