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​With only a couple of months to go until the IR35 reforms hit the private sector, self-employed contractors and end-clients alike are working hard to ensure that their procedures are in line with HMRC guidance before the IR35 reforms in the private sector come into effect in April. .

Self-employed contractors could face higher tax and National Insurance deductions, without any significant change to their day-to-day role. Businesses too have found the tax liability shifted onto their shoulders, with severe consequences for non-compliance.

We talk to Paul Kynaston, Managing Director of Search Construction & Property, about the impact of IR35 reform on the construction industry.

A shake up for construction professionals

According to research by Kingston University commissioned by the Association of Independent Professionals and the Self Employed (IPSE), the number of UK contractors and freelancers has grown 35.1% since 2008, up to around 1.88 million.

IR35 reform is set to shake up multiple markets, such as transport and healthcare, but several construction professionals are warning it will also have an impact on their industry.

Self-employed contractors currently operating in the sector are being warned that many of them could soon find themselves ‘inside IR35’. From April, the end-client determines whether they are operating inside (employed for tax purposes) or outside (self-employed) IR35.

“A large percentage of construction management professionals currently operate through their own personal services company (PSC) or limited company. This is a somewhat smaller percentage in construction trades, but still could be an issue,” says Paul.

Currently, the rules allow self-employed contractors to determine their own tax status, whereas from April 2021, the responsibility will shift to the end-client to determine their tax status, which will determine the subsequent income tax and National Insurance deductions.

“The concern we have is that some major building companies in the sector are going down the route of a low risk blanket ban on PSCs,” says Paul.

“There are worries that not having a flexible approach to PSC’s could restrict access to particular unique skill sets, and that workers are being panic pigeonholed into PAYE when they might legitimately continue to operate through a PSC. “

“IR35 needs to be managed with balance against other risks, such as losing top talent in the industry, or finding that a company’s approach to IR35 sends PSC contractors in the direction of the competition.”

What’s next for construction companies?

Construction companies are likely to be affected in multiple ways by the changes to IR35. Currently, using temporary contract staff operating through a PSC is common, particularly in London, but hiring staff in this way is likely to become much more of a risk after April 2021. End clients will also face the administrative burden of having to assess roles, and issue the necessary “Status Determination Statements” along with necessary supporting evidence.

Some companies are taking the steps to ban self-employed contractors entirely, but this can be short-sighted. Whilst this might avoid the burden of carrying out IR35 determinations, and avoid the potential tax risks, it may present other risks such as a shortage of workers to fulfil resource demands, or potentially the loss of a limited company contractor providing a highly specialised and critical role.

Rather than apply a blanket ban to all, Paul recommends trying to review them on a case-by-case basis. Although time consuming, it could save a recruitment headache for businesses at a later date.

Businesses must also consider that if they ban limited company contractors, a “blanket ban” approach could make them a less attractive option for top talent and see them lose out to their competitors.

Having a robust but commercial IR35 strategy in place, and operating best practice procedures to comply with the new legislation should enable you to continue to engage contractors “outside IR35” if the circumstances of the role allow.

“Talk to your freelancers to establish what their future tax status should be,” says Paul. “Evaluate all your major contracts. Remember that the ultimate responsibility to determine IR35 status lies with the end-client, which is the business itself, and any promise of ‘work arounds’ should be viewed with suspicion.”

It’s also likely that IR35 will have an inflationary effect on rates of pay. The increased tax and NI demands on previously self-employed contractors is expected to feed through to increased costs for end-clients. Workers could start to demand higher pay rates, as they aim to recoup the shortfall to their net salary.

Hirers may have to take a commercial view of how far they are prepared to go to soften the blow for the contractor, and retain the necessary resource to mitigate the risk of skills shortages and resource gaps, which become even more expensive to fill those gaps in resource-scarce sectors where urgent staffing requirements will command premium prices.

Paul also recommends handling the issue of IR35 directly, rather than relying on an insurance company or tax lawyer to try and smooth things out once a business has been caught out by HMRC.

“IR35 insurance products seem to be flooding onto the market at the moment, but I’d recommend that businesses proceed carefully,” says Paul. “Some of these seem almost too good to be true; they should be thoroughly investigated with appropriate legal advice and treated with caution. A breach of IR35, particularly if you are seen to have acted without using reasonable care, can be a very high price to pay, and would likely invalidate any insurance cover. There really aren’t any workarounds.”

So, what’s next?

Luckily, those who find themselves impacted by IR35 do have a few options.

“If you find your role is inside IR35 then there are options available other than PAYE, including umbrella and CIS. I’d advise anybody considering the CIS route to seek advice from HMRC as you will have to evidence your self-employed status,” says Paul

“Umbrella companies are not necessarily the attractive option that they once were, now that they are subject to extremely tight controls from HMRC, especially around the concept of “supervision direction and control”, and the payment of expenses,” says Paul.

“I’d recommend anybody considering this route to take advice and ensure they register with a reputable company. Search Construction & Property has relationships with a number of established and reputable umbrella companies, which we can put you in touch with.”

Search Construction can help

Search Construction & Property has help available for both clients and candidates that are affected by IR35 reform

“Compliance is at the heart of our business,” says Paul. “We’ve been doing this for a long time, and have seen this IR35 change affect the public sector in 2017, so we’re prepared for what this means. We have the contacts and the expertise to truly help.”

Why take a risk with your business or career? Get in touch with the Search Construction & Property team today. Whether you are an end-client looking to manage your contractors, or perhaps find permanent staff, or a contractor worried about being forced into an unsuitable tax arrangement, get in touch with the team today.

​Looking for more guidance on IR35?

Check out our IR35 hub for all the latest content and resources to help you navigate through the new legislation and prepare for the upcoming changes.

IR35 Hub

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