The Oncoming Storm. How the construction industry must prepare for IR35

As we slowly and painfully extricate ourselves from lockdown and look at the world around us. Many of our hopes and dreams have been delayed. Unfortunately, there are still some things that irrevocably moving forward despite this.

As I write all available information suggests that the amended legislation will take effect on 6th April as planned. Here’s what you need to know to prepare for IR35 in April 2021.

If  you read about IR35 in the trade press it seems a subject which is only really relevant to larger companies, but be assured it will impact itself in many ways on those of you who are also sub-contractors or micro limited companies that do work for big Construction Companies. The same with the recent Uber Judgement, just because it is about things with wheels, it all goes towarss the legal landscape regarding legislation.

Eventually though all this legislation will trickle down to affect all self-employed contractors and their engagers in this industry, so read on…

The IR35 legislation was brought in as anti-tax avoidance legislation, to reap back tax through national insurance. It is aimed at the situation where a worker is believed to be more like an employee, but they provide their service through a limited company thus avoiding the tax and NIC consequences of being employed.

Since its introduction in 2000, the onus was on the limited company contractor to look at their engagement to decide whether it would reflect employment were it not for the limited company.  IR35 is essentially a question of employment status: if IR35 applies, the limited company must pay the tax and NIC that would have been due if the contractor’s engagement were reclassified as employment by HMRC.

This has already been rolled out into the public sector, where it is the public sector body’s responsibility for deciding as to each contractor’s engagement, and then the limited company must be paid net of tax and NIC when an engagement is deemed caught by IR35. 

It is no secret that the change to the legislation in the public sector all but created chaos. This resulted in many departments issuing blanket ‘caught’ decisions across their workforce, with swathes of contractors terminating their engagements and seeking work in the private sector. it also fed into the hands of the many umbrella companies, who offer a legitimate ‘halfway house’, compliant and yet within the spirit of the legislation.

Because of this absolute chaos the Government of course decided that this change to the legislation was a success! And decided to roll it out to the private sector, the changed IR35 legislation is to be rolled out this year. 

So, who in this trade will be affected by the changes:

• ‘Small businesses’ are exempt: 

the new legislation will only apply to medium or large businesses, and public sector organisations, that engage limited company contractors either directly or via an agency. Note that the legislation replaces that which currently covers public sector engagements.

• Just to be clear a small business has
  • Turnover of less £10.2 million
  • Balance sheet under £5.1 million
  • Less than 50 employees 

• A medium or large business (as per the definition within the Companies Act 2006). Falls within the definition, therefore:
• • Over £10.2 million t/o
  • Balance sheet over £5.1
  • Over 50 employees

However please remember that for all subcontractors, any limited company contractor engaged will need to make their own decision as to whether their engagement is caught by IR35 under the existing rules. 

If you are a medium or large business, you will have a legal obligation to decide as to whether each contractor’s engagement falls within IR35 using the traditional tests of employment status. This is the case for each and every contractor – no blanket decisions.

You have an obligation to use ‘reasonable care’ when making the decision, and to issue a ‘Status Determination Statement’ (“SDS”) confirming your decision. If you engage contractors (drivers) directly, this SDS must be issued to the driver. For those that engage contractors via an agency, the SDS must be issued to both the worker, and the party in the contractual chain directly below the client. 

So, who is liable for the tax and NIC? This is a little tricky, as there are provisions for the liability to move up and down the contractual chain depending on the parties involved and their behaviour.

Simplest of all is where the operator engages the contractor directly, where the driver is responsible for the tax and NIC. Where there are other parties in the chain between the client and worker’s company, the ‘fee-payer’ – that is the party making the payment to the contractor – is treated as making the deemed direct payment, and therefore responsible for the tax and NIC. 

However, even where there is a fee-payer involved, there are circumstances in which the operator will be liable which you should be aware of. The operator could be liable for the tax and NIC:

– until and unless it issues the SDS to the worker and, if applicable, the party below it in the contractual chain. 

So, If you are an main contractor or an engager of sub-contractors, you need to confirm whether the legislation applies to your operation and identify where workers’ services are provided via intermediaries. You need to put procedures in place for reviewing engagements and issuing SDSs, as well as investing time in ensuring they have an adequate appeals procedure in place – either internally, or via a suitable external advisor. 

A warning. During the consultation process, HMRC has made it clear that it is aware of avoidance strategies and will not be fooled by contrived arrangements intended to circumvent the new rules. Such arrangements should not be entered into in haste, and without review by a suitably expert third party. We will be producing more advice so look out for Blogs on https://eazitax.co.uk/eazipedia/

Still Confused? Come talk to us at Eaziserv.co.uk. 

A report by Gary Jacobs of Eaziserv.co.uk and Rebecca Walker of HQ35