Specialist subcontractors, the businesses leading the recovery in the construction industry, are coming under pressure from above and below as tier one contractors and skilled tradespeople grapple with IR35.
In this long read, Hudson Contract managing director Ian Anfield, a foremost authority on employment and tax matters in the construction industry, explains the new off-payroll working rules and how they will impact companies in our sector.
What is IR35?
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).
Who does IR35 impact?
Up until April 6, operatives who use intermediary structures are responsible for deciding their own employment status for each contract. After April 6, 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.
If you don’t act, what could happen?
As the end user, the client becomes 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.
What is the industry response?
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.
How is this affecting specialist subcontractors?
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.
Is there a magic wand for IR35?
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 new rules are far too nuanced to work like that.
Who is genuinely self-employed?
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.
Who is not self-employed?
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.
The role of Hudson?
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, backed up by the Advertising Standards Authority, 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 per cent track record and has never lost an HMRC status case or an employment tribunal hearing. Our most recent landmark judgment featured in the UK’s paper of record, The Times.
The moral of the story?
If IR35 is dealt with properly it should not do any significant damage, unless companies make the wrong decisions.
We are ensuring all clients of Hudson are prepared before the new rules come into effect on April 6.
Hudson Contract regularly provides advice and commentary on IR35 to press, our most recent piece with construction index received more than 23,000 unique views in one week. For commentary contact email@example.com