IR35 and the construction industry

IR35 is coming into play for medium- and large-sized private companies from April 2020, following its roll out in the public sector in April 2017, writes Phil Beardwood, Compliance and Assurance Director at the Morson Group.

Phil Beardwood

is Compliance and Assurance Director at the Morson Group

Within construction, this will create a seismic shift in attracting and retaining talent, as well as changes to supply chain relationships and business operations.

What is IR35?

IR35 is tax legislation applying to contractors who don’t work in a way that meets a ‘self-employed’ criterion set by HMRC. These varying criteria include the amount of control a client has over where, when and how a worker completes their role; whether, if the worker suddenly became unable to work, they could supply a substitute, and whether the worker is obliged to accept work offered to them by the client.

Currently, contractors in the private sector determine their own IR35 status, but from April 2020, medium and large businesses will become responsible for such status determinations. For the construction industry – from specifiers through to on-the-ground labourers – IR35 will pose serious disruption.

Operational change

IR35 doesn’t just pose a risk to your business operationally, but also financially. HR and finance teams are debating the best ways to deliver risk-averse strategies that wouldn’t result in a huge shake-up of existing operations and processes or risk hefty fines from HMRC. IR35 isn’t a one-size-fits-all approach. Any business found not to have taken ‘reasonable care’ to determine IR35 status for every individual engaged via a PSC (Personal Service Company) are only increasing their chances of a penalty.

The 2014 Agency Workers Intermediaries Legislation also changed the construction industry, seeing many sole traders move to Personal Service Company models so that a CIS deduction would mitigate against any tax risk. But IR35 will still apply, even when CIS has been deducted.

Availability of talent

Any contractor deemed in scope and moved to PAYE will see a huge impact on their income. As such, many will migrate to projects that see them fall outside of IR35, so they can maintain similar ways of working and living. This will leave organisations already struggling to source a high-quality workforce, at an even greater risk.

And the power is still in contractors’ hands. Once IR35 comes into play, contractors need only compare two potential clients and what they will do to ensure they can work outside of IR35, and choose the best option as their next role. Meanwhile, those willing to move to PAYE will demand greater benefits and increased rates to compensate against any losses.

Impact on your supply chain

A lot of businesses within construction engage directly with contractors meaning they’re doubling their risk as both the end client and the fee payer. In those instances, it’s better to engage with an agency supply chain, like those operating within the Morson Group, so that some of the risk is mitigated.

Following lessons learnt from the public sector rollout, HMRC has also insisted that every private sector organisation produce a status determination summary (SDS) that outlines the reasons to deem an individual inside or outside of IR35. However, this will also have to be supplied for every party within the contractual chain. Few organisations in construction have full transparency of their supply chain, which poses a substantial risk of being caught out.

Act now

There are just weeks left to get your house in order. Aside from the threat of fines from HMRC, those who don’t take the necessary steps to deliver IR35 properly, and deem those inside or outside correctly, will ultimately lose talent to their competitors who do.

The future success of any construction company will come down to its ability to attract and retain this talent, so while IR35 may seem like challenging Everest, prioritising it now to ensure your business is future-proofed and able to meet the demands of candidates, will reap the long-term benefits.

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