According to the Department for Business Innovation & Skills, there are currently over two million ‘contractors’ working in the construction industry in the UK. Just to confuse things, a ‘contractor’ in this context is not a construction business – like Balfour Beatty or Costain – but an individual trader who provides services to a client (which of course might indeed be a building contractor such as Balfour Beatty or Costain).
Genuine sole traders will not be affected by changes to the IR35 tax rule but for others IR35 is likely to have a huge impact when it’s rolled out to the private sector next April.
IR35 isn’t new; it was introduced in 2000 to ensure that self-employed contractors paid the correct income tax and national insurance. Until recently it was the contractor, or worker, who was held responsible for evaluating his or her own tax status – but therein lay a strong incentive for the contractor to cook the books. Because if the IR35 rules are found to apply, the individual will receive a net amount far less than if normal company tax rules apply.
The HMRC believes that there was widespread tax avoidance as a result. So in April 2017 it changed the rules so that where a contractor was hired by a public authority, the obligation to determine tax status and the associated tax risk moved from the worker to the client.
Now, from April 2020, the HMRC is extending these changes to the private sector, a move that will affect all businesses except for the smallest companies.
Employers are required to take “reasonable care” when assessing whether the freelance workers they employ fall within or outside the scope of IR35. It should be noted that the new rules coming into force next April will take precedence over the Construction Industry Scheme (CIS).
In March of this year, the government published a policy paper, Off-payroll working rules from April 2020, and started consultation on how the reform to the off-payroll working rules should be implemented within the private sector.
Although the roll-out has met with significant opposition, the government published draft legislation as part of the provisions for the Finance Bill 2020, confirming that IR35 is going ahead in the private sector as planned.
The new rules are designed to apply to contractors who operate through their own ‘personal services company’ (PSC) and will not apply to genuinely self-employed sole traders. Over the years, a fear of employment rights claims on the part of clients, coupled with the individual’s desire to maximise net income, has encouraged more and more companies to employ people through their own PSC.
Law firm Brookson Legal, which specialises in the IR35 tax rules, recently published a report, IR35: A Ticking Timebomb, that predicts considerable upheaval in the construction industry as a result of the new IR35 rules.
The study found that 75% of the construction, engineering, building and architectural businesses surveyed believe that the new rules will affect the number of contractors they hire, while 78% added that they are concerned that all or some of their contractors previously not captured by IR35 will now be.
More than half (51%) of firms also confirmed that IR35 is likely to encourage them to reduce the number of contractors they hire – potentially resulting in thousands of people losing out on work. Because of this, a further 42% believe there will be fewer contractors available.
This could have major consequences in terms of productivity and output as the sector is hugely reliant on the self-employed workforce. When Brookson Legal asked about the main benefit of hiring contractors, 64% of businesses cited their flexibility on projects and support at peak times.
The report found that the biggest fears about IR35 were losing skilled contractors and freelancers (44%), wrongly placing workers inside or outside the IR35 rules (31%) and an increase in costs (26%).
But what about these self-employed contractors themselves? One self-employed electrician told Brookson Legal: “Forcing contractors into paid employment would destroy the construction industry. However, the impact won’t just be felt solely by us as contractors, but the whole economy. Firms will struggle as they won’t have the cashflow they need.”
But it’s not all doom and gloom, says Brookson Legal’s managing director Joe Tully. “We also found that over half (56%) of construction, engineering, building and architectural businesses understand their exposure to IR35 in terms of the proportion of contractors that will fall inside IR35.”
To help prepare for the changes, a company’s first priority should be to conduct an audit of its contractor workforce, says Tully: “For many, an audit will bring a sigh of relief with limited IR35 exposure, while others may find the employment status of some of their contractors much harder to determine.”
Tully recommends seeking out legal advice to help lift the burden of responsibility and provide peace of mind. “By undertaking proper audits and seeking expert advice, firms will be able to illustrate that they are taking ‘reasonable care’ with their IR35 assessments and will almost certainly find that the impact of IR35 is not as far-reaching as they first feared,” he says.