IR35: What construction needs to know

IR35 aims to ensure that those who work like employees pay broadly the same tax and National Insurance as employees, regardless of the structure they work through. Structures commonly include limited companies, often known as personal service companies (PSC), partnerships or managed service companies (MSC).

Up until April 6 2021, operatives who use intermediary structures are responsible for deciding their own employment status for each contract. After April 6 2021, the responsibility - and liability - shifts to clients if they are judged to be medium or large-sized companies. The criteria is at least two of three features: turnover of more than £10.2m, a balance sheet of more than £5.1m or an average of more than 50 employees. If the rules apply, tax and National Insurance contributions must be deducted from fees and paid to HMRC.

As the end user, the client is liable for paying tax and National Insurance contributions for their operatives, which could amount to vast sums of money. The taxman has said he expects the measure to raise up to £1.2bn per year.

In large companies, the issue of employment status is falling between different departments and leading to poor decision-making. It is difficult for companies to know if IR35 is an issue for HR, legal, accounts, procurement and purchasing or on-site. As a consequence, many companies are making blanket determinations and dictating that suppliers such as small subcontractors cannot use self-employed people on projects, which is totally wrong. They’re also asking for questionnaires to be completed and asking them to enter into new contracts.

Specialist subcontractors need to be careful about falling into the wrong hands with unscrupulous advisors who play fast and loose with the law. We have seen some bizarre solutions being offered in the market. In one case, a large utility firm in England ordered all subcontractors be brought onto a project via one umbrella agency. This was probably illegal, definitely anti-competitive and potentially an act of tort.

Poor decision-making is hitting sole traders too and the genuinely self-employed, vital for the delivery of new homes and infrastructure across the UK. Sole traders – typically the bricklayers, joiners, plasterers and plumbers without limited companies – are not the target of IR35, which was designed to attack intermediaries. But this does not mean all limited company contractors are within scope of the rules.

Specialist subcontractors could lose their best workers as a result of this pressure from above and below. Their competitors might be working for clients who are more clued-up on IR35 and not bothering them with arbitrary and unnecessary diktats. And their end client is not going to forego deadlines, quality standards or costs just because their supplier has to deal with a fully employed workforce.

An entire industry has sprung up charging for IR35 advice, selling off-payroll working reviews and promoting fee-paying firms which claim to be able to deal with the issue long-term. Anyone who says they have a magic wand that solves the problem one way or the other by classifying everyone as inside or outside scope is talking nonsense. The rules are far too nuanced to work like that.

Genuinely self-employed people can turn down projects, work for different clients, farm out assignments to associates, send a substitute in their place and decide how, when and where they work. If this hasn’t changed, why should they be reclassified as an employee but with none of the benefits? Because someone further up the chain doesn’t understand the rules.

A good example would be an operative who started working as a freelancer for a client who become integrated into the business and make executive decisions, hires and fires and can sign-off spending decisions. We are seeing many cases like this where companies are using IR35 as an opportunity to tie in highly valued people. Generally speaking, most companies do not have the in-house expertise to determine if IR35 applies to their contractors.

Hudson enables firms to engage self-employed consultants, professionals and technicians without the financial fear and administrative burdens of IR35 reforms. It is helping hundreds of specialist subcontractors to determine whether IR35 legitimately applies to their contracts with their clients and suppliers, labour providers and directly-engaged freelancers.

The Hudson guarantee, is watertight: If HMRC or an employment tribunal successfully challenges the status of the freelancers on a Hudson contract, the company will provide and pay for the legal team to argue the case. If it loses, it pays the fines or awards, not the client. Hudson has a 100% success rate in status cases. Our most recent landmark judgment featured in the UK’s paper of record, The Times.

If IR35 is dealt with properly it should not do any significant damage, unless companies make the wrong decisions.

We are offering no-obligation consultations for construction companies. Call Hudson on 0800 054 1127 and ensure you are compliant with the regime.

You may well find yourself in a situation where clients are insisting you should be taxed as an employee or that you have to use an umbrella company to process PAYE payments to you because of IR35 - even when there is compelling evidence that you are legitimately operating as a business outside the scope of IR35.

Hudson Freelance has been designed to meet the specific needs of freelance engineers, technicians and consultants supplying professional services to the construction sector, but fall outside the scope of HMRC’s Construction Industry Scheme (CIS).

If the circumstances under which you provide services are consistent with the contractual terms that we provide, and you are willing to take part in our auditing, there is absolutely no danger of your clients being hit with unexpected tax demands which they fear may be likely because of the April 2021 changes to IR35.

With the IR35 risk dealt with, a major barrier to your business is removed.

Call Hudson today on 0800 054 1127 for more information.

We also run a rewards scheme if you refer a construction company to us.