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What is IR35 and how will that impact construction?

Changes to the way off-payroll works will be coming into force on 6 April 2021, and has the potential to significantly impact the UK construction industry. The off-payroll change, also known as IR35, will alter how contractors and consultants operate in the private sector and many clients are having to examine their policies to ensure they remain compliant. IR35 can be confusing and so this blog aims to shed some light on what it is, who exactly this will affect and how to ensure you are compliant. Some links to further reading are included at the end, should you wish to delve deeper.

Daisie Barnett

Policy Development Manager

Last updated: 19th February 2021

What is IR35?  

IR35 is designed to reduce tax avoidance by contractors who HMRC believe are working in a similar way to full-time employees but bill their services through their limited companies to make the businesses as tax efficient as possible. The new rules will ensure that individuals who are working as an employee, but billing their services through their own company, will pay the same tax and National Insurance as individuals employed directly.  

IR35 will be implemented from 6 April 2021 for private sector contractors, bringing it in line with the public sector which implemented these changes in 2017.  

Those who fall ‘inside’ IR35 will be contractors who are effectively an employee of the client, and those who fall ‘outside’ IR35 will be those operating as their own company providing services to the client on a project.  

 

Who will this affect? 

Both clients and contractors will need to understand the new IR35 rules, especially those who are classed as medium to large businesses and contractors who are working in the private sector.

How will it affect clients? 

For clients, the new rules will only apply to medium and large businesses who are the end user of the worker’s services. Businesses who must comply fall under two or more of the following features: 

  • More than 50 employees 
  • An annual turnover of more than £10.2 million 
  • A balance sheet total* of more than £5.1 million 

*A balance sheet total means the total amounts shown as assets in the company’s balance sheet before deducting any liabilities.  

Clients will need to decide the employment status of every worker who operates through their own intermediary, even if they are provided through an agency. Once they have decided, clients will have to communicate to the worker their decision and reasons for coming to the conclusion on their employment status through a ‘status determination statement’ (SDS).  

Failure to produce an SDS, or if the client fails to take ‘reasonable care’ in arriving at its decision, they will assume the position of ‘fee-payer’. As the fee-payer, the client will assume any liability for tax deemed unpaid as a result of the engagement and assume responsibility for reporting and deducting tax from payments made to contractors.  

Read the full guidance for clients here.  

If a worker falls ‘inside’ IR35, then you will need to calculate the ‘deemed payment’, which is fairly complex, and we recommend seeking professional help as the fee payer.   

Contractors 

If you are operating as a contractor or an intermediary who is providing a service to the client IR35 will affect you. 

The Government guidance states that if you are providing a service to a client in the public sector, you won’t have to worry  as they will decide your employment status. However, if you are working in the private sector this can become  more complex depending on the size of the client. 

If you are working in the private sector, you must decide your worker status. This means, as a contractor, you will have to understand if you fall ‘inside’ or ‘outside’ IR35. If you operate in the private sector for a medium to large-sized business, then you will need to also have an SDS from the client. If you work for a small business, they can confirm in writing that they are classified as a small business and the decision of whether you fall ‘inside’ or ‘outside’ IR35 will be dependent on you.  

Read the full guidance for intermediaries and contractors here.  

If you are operating ‘inside’ IR35, you will need to pay National Insurance contributions and income tax on your earnings, like that of an employee. This is completed at the end of the tax year by calculating the ‘deemed payment’. The ‘deemed payment’ will be deducted by the fee-paying party (e.g. the client or recruitment agency) in the supply chain before they pay your invoice. 

If you are operating ‘outside’ IR35 then, as a contractor you are responsible for paying your own taxes as the service you provide is considered to be a genuinely self-employed one.  

 

What do I need to consider? 

There are several factors that HMRC will take into consideration when assessing IR35 compliance.   

1. How the contractor is paid 

To stay ‘outside’ of IR35, self-employed contractors should be paid on a project-by-project basis.  

2. Is the contractor running their own business? 

Having a dedicated office space, employees and a website goes in favour of demonstrating that they are running a business of their own accord and reinforces them as a self-employed contractor.  

It is important that to be ‘outside of IR35’ the contractors have control over how they complete their work for a contract. Similarly, they must remain separate from the client’s business. If they become an integral part of the business structure, such as managing the client’s employees who directly report to them, this indicates they would fall ‘inside’ IR35.  

Equipment is another factor to indicate whether the individual is working as self-employed or as a ‘disguised employee’. If a client provides them with equipment, and they don’t use their own, this could result in them falling ‘inside’ IR35.  

 

How can you prepare for IR35? 

Clients should audit their current working practices to determine who in their supply chain falls ‘inside’ and ‘outside’ of IR35. We  suggest that clients implement new policies and procedures for dealing with the various features of IR35, including the SDS.  

Contractors should review how they currently operate in the supply chain. As a contractor, if you are unsure whether you are ‘inside’ or ‘outside’ IR35, the HMRC have a test which assesses your current work practices. Click here.  

If you fall ‘inside’ IR35, we recommend having a conversation with the client to ensure everything is in place for when the rule comes into effect.  

 

Further reading 

The HMRC have provided guidance for both clients and contractors on what they need to do to prepare, click here.  

The CIOB recently held a webinar discussing the VAT Reverse Charge and IR35 changes, click here to watch the recording. 

Construction Manager recently published a Q&A with Liam Tumulty from COINS, click here

Totaljobs explains IR35 in a jargon-free way, click here.