If you are an employer in the private sector in construction and engineering, you are probably aware of the IR35 changes that the Government is implementing from 6th April this year. There are lots of rumours and information flying around the industry and we know it may be confusing to understand all of it. Because of that, we’ve decided to put together this article to explain the main changes and what they may mean for you.
What is IR35?
IR35 is a legislation that was first introduced in 2000. It aimed to address concerns regarding individuals who work through an intermediary, such as their own limited company or an agency. Thanks to this intermediary, the contract is set out as business to business. This way, the amount of tax and National Insurance contributions that contractors pay to HMRC is less than what a payroll employee would pay. Initially IR35 only applied to the public sector.
From 6th April 2020, however, changes to the IR35 regulations will also make it applicable to large and medium sized private companies. The regulations place the responsibility to assess and determine an individual’s employment status on the employer. Before the changes, it was up to the contractor or intermediary to determine it.
Do the IR35 changes apply to you?
If you are a client who receives services from a worker through their intermediary, the changes to IR35 may affect you. According to HMRC, your business is classified as large or medium size if it meets 2 or more of the following criteria:
- Annual turnover of more than £10.2 million
- Balance sheet total of more than £5.1 million
- More than 50 employees
If you are considered to be a small company because you don’t meet 2 or more of the criteria, then the responsibility to determine a worker’s employment status remains with the intermediary. However, if you meet 2 or more of these criteria, you will have to ensure that you comply with the IR35 changes from 6th April 2020. Failing to comply with the deadline may expose you to increased risk in the following areas:
- Financial: you may have to pay fines and interest
- Operational: your projects may be delayed
- Legal: you may have to go to court with HMRC or your workers
- Reputational: you may find it difficult to attract contractors
To avoid these risks, you should prepare yourself to be compliant with the IR35 changes.
What the IR35 changes in April mean for you
Assessing and determining a worker’s employment status is not an easy task. To fulfil your responsibilities, you will have to assess whether each individual contractor should be an employee or not. Some of the key questions that can help you in your assessment are:
- Can the worker send a substitute for the work he or she is carrying out?
- Can the worker reject the work you give him or her?
- Does the worker have control over when, how and where he or she carries out the work?
If the answer to any of the questions above is ‘no’, then such worker is likely to fall within IR35. Having said that, there are more factors that you’ll need to assess on a case-by-case basis. And because the assessment can be a complicated task, HMRC has developed a check tool that can help you. The tool is called CEST, which stands for Check Employment Status for Tax. It is available for both public and private companies, so feel free to use it in your assessments.
What to do after the employment status assessment for each worker
Once you’ve finished your assessment and have determined the employment status of the worker, you have the following responsibilities:
- Send your determination and the reasons for it to the worker and the intermediary.
- Keep records of your employment status determinations, including the reasons and any fees paid.
- Ensure you have processes in place to deal with any disagreements that arise from your determination.
Because you are liable for your worker’s tax and National Insurance contribution until you tell them your determination, it is advisable to carry out the assessment as soon as practically possible.
Think IR35 doesn’t apply to you? Read on…
So what if you don’t meet the criteria mentioned above to be classified as a large or medium-sized company, you may well think that IR35 doesn’t apply to you. Technically, you would be correct. That said, if you haven’t already connected the dots yet, you should understand that the main rationale for the new IR35 rules is the closing of a long overdue loophole to avoid payroll taxes. The onus to determine if a contractor or worker you hire is an employee or not may not be on you this time, it would still be wise to plan a few steps ahead.
What if you could get the best of both worlds… be free from any concerns, potential liabilities and responsibilities for payroll taxes compliance as far as hiring contractors goes AND get high quality work done by experienced professionals at a competitive rate? Outsourcing to a UK based CAD & BIM company may well be a better solution for you going forwards.
So, how do you think that the IR35 changes in April would affect the construction industry? Share your thoughts in the comments below!