IR35 in the Construction and Real Estate sector
IR35 and ‘Off-payroll working’ – are you ready for the changes in the Construction sector?
Changes to the employment tax intermediaries legislation – usually referred to as ‘IR35’ – will have ramifications across all sectors. This includes the Construction sector wherever a business uses personal services provided through intermediaries. Businesses need to act now to ensure they are fully compliant with the new rules from 6 April 2021.
How will this affect our sector?
We anticipate that the new rules will have a significant impact on construction businesses who engage individuals whose services are provided through intermediaries. Note: the new rules will apply even if an arrangement currently falls within the scope of the HMRC Construction Industry Scheme (CIS).
The use of Personal Service Company (PSC) intermediaries has long been a focus for HMRC, who consider there is a significant ‘tax gap’ as a result of these arrangements.
Existing IR35 rules require anyone providing services through a PSC to consider whether the arrangement with the end client would be an employment if the services were provided direct to the end client, and to operate PAYE where that is the case. However, from April 2021 these obligations will shift from PSCs to end clients – meaning new admin and tax reporting burdens for many businesses.
Will this affect me as an end client?
This will depend on the size of your business. If you are a ‘small company’ (as defined by the Companies Act) the new rules won’t apply to you. However, if you are medium or large-sized and you engage PSCs you will likely have new IR35 obligations from April 2021, subject to some other limited exemptions.
What are the new obligations for end clients?
- Review the employment status of everyone who supplies services to you through a PSC. You need to ask yourself “would that individual be my employee if there were no PSC involved?” If the answer to this is “yes” it’s inside IR35.
- Advise the PSC individual (and potentially other parties in the supply chain) of your decision, preferably giving the reasoning behind it. This must be in writing and is referred to as a ‘Status Determination Statement’ (SDS).
- If the individual would otherwise be your employee and you also pay their PSC you will be required to operate PAYE on all payments made after 6 April 2021.
Can I just issue one blanket SDS that covers everyone?
This is not advisable. The legislation states that “reasonable care” must be taken by end clients in conducting the reviews with each case being reviewed on its own merits. When similar rules were introduced in 2017 for end clients in the public sector the use of blanket determinations resulted in action by HMRC – who will likely take a similar view in the private sector.
What practical steps should I be aware of?
The IR35 rules are complex, so please do get in touch if there are specific issues we can help you with. There are key factors to consider – some of which could ease the burden:
- Have you identified all workers providing services to you through PSCs? Remember this may not be immediately obvious if the PSC supplies its services to you through another intermediary such as an agency.
- Do you qualify for the exemptions for end clients who are “wholly overseas” or who receive a “fully contracted out” service?
- Is it possible to make genuine changes to ways of working to take PSC arrangements outside IR35? Consider written contracts but also the reality of working practices
- Potential alternatives to the use of PSCs – such as employing the contractor individuals directly or using umbrella companies – must be fit for purpose for your business
Could the changes be delayed again
Although the introduction of the IR35 private sector rules was postponed from April 2020 due to Covid-19, we consider a further delay is unlikely. It is therefore vital that end clients are ready to implement the new rules from day one to address the potential labour supply, business continuity and compliance challenges that could arise.
Do get in touch if we can help support you on these challenges.
If you have any queries, please contact a member of our specialist IR35 team for advice by completing our online enquiry form here