Construction is one of the UK’s biggest employers, with some 3.1 million people working in the sector. It’s also got an unusually high proportion of contractors – 36% compared to an average of 13%.
That means the construction sector has 177% more contractors than the average workforce. The sector is disproportionately vulnerable to constitutional changes and trends that impact how you work with contractors.
Which brings us to IR35.
Many construction companies have assumed IR35 isn’t relevant to them because they’re registered for the Construction Industry Scheme (CIS) but HMRC say IR35 takes precedence over CIS.
In other words, there’s no getting off the IR35 hook. Let’s look at exactly what the IR35 reforms mean for construction companies. And, more important, what you should be doing now to manage ongoing IR35 compliance.
What is IR35 (a quick summary)
IR35 isn’t new. This ‘off-payroll worker’ rule has been around since 2000 to stop workers who essentially worked full-time for one employer – ‘disguised employees’ – claiming tax breaks designed for true non-employees.
Read more: Everything you need to know about contractors vs. employees
The reason it’s only entered onto the corporate agenda now is responsibility for ensuring correct tax liability under IR35 sat with workers, not employers. And workers were liable for penalties for getting it wrong, not employers.
That’s what’s changed under these reforms – largely because the rules simply weren’t working, and the government coffers were losing billions in non-compliance revenue.
Now, the responsibility to ensure IR35 compliance has shifted from worker to employer, and so have the penalties. Let’s dig into the numbers for a moment.
A costly threat for construction
Let’s imagine your workforce has 10,000 people. Following that stat above – that 36% of the construction workforce are contractors – roughly 3600 of them are non-employees who potentially fall within IR35 scope.
Of course, they’ll cover all sorts of different job titles on different rates. Perhaps you’re paying your site managers £350/day and your plasterers £180. But let’s take a loose average of £250.
(And that’s before agency costs. Through 2020, average construction industry recruitment agency margins were 29%. So £250/day becomes £322.50/day, with £72.50 lining an agency’s pocket…)
According to IR35 reforms, workers who fall within the scope of IR35 should pay broadly the same higher rate of tax as employees. If HMRC determines that your ‘contractors’ are really ‘disguised employees’, you’ll have to pay all back taxes and NI contributions plus any accumulated interest.
Then you’ll also potentially be liable for additional penalties of 30% to 200% of the revenue HMRC has lost.
Let’s say a contractor works at £250/day for 250 working days in a 12-month period. That’s a taxable ‘salary’ of £62,500. Roughly £12,500 tax is due on that, plus around £5000 NI and £7500 employers’ NI – that’s around £25,000 you now owe, ignoring any interest.
Depending on the scope of your error, you might pay fines of an additional £7500 to £50,000 on this £25,000 lost revenue – leaving your total risk profile at £75,000 for this one contractor.
Scale that up to your 3600 contractors and your risk profile isn’t looking good, at £270M. Let’s talk about how you mitigate the risk and ensure IR35 compliance.
What’s needed for IR35 compliance in construction
IR35 demands new scrutiny over your talent mix, to ensure you have transparent visibility over who you’re working with and when. In essence, you need to be confident your contractors are really contractors.
(That’s true even if you outsource to an MSP or agencies. “The client is the organisation who is or will be receiving the services of a contractor. The client will be responsible for determining if the off-payroll working rules apply”.)
Right now, amid IR35 panic, these reforms might seem like a bureaucratic nightmare – but there’s a major opportunity here too. IR35 offers the chance to re-evaluate who you work with, why, and how – to make sure your working arrangements make most sense for your business. (That’s how come 47% of the Fortune500 consider IR35 a catalyst for positive change).
As HRMC put it, “we would expect a higher degree of care to be taken by a large multi-national company with its own internal finance function than of a much smaller entity. A client with a small, straightforward workforce may only need a simple regime, provided it follows it accurately. Whereas a client with a larger and more diverse workforce may need to put in place more sophisticated systems.”
That means there’s no hard-and-fast rules to ensure ongoing compliance – this list isn’t exhaustive but can guide your hand.
Many of the steps you’ll take to ensure ongoing IR35 compliance are to show HMRC you’ve taken ‘reasonable care’ when deciding the status of your workers. HMRC say you must “act in a way that would be expected of a prudent and reasonable person”.
That’s as wishy-washy as it sounds, but it’s designed to accommodate nuance in how different businesses handle IR35.
Step 1: Make a determination of your workers
Or, in non-HMRC jargon, audit your workforce. This involves cataloguing everyone who works for you and reviewing their employment contracts, then submitting a formal Status Determination Statement (SDS).
You’ll need to consider every worker as an individual. You must “give consideration to the specific facts of each individual case” and “give proper consideration for the different working arrangements for each worker”. Indiscriminately applying conclusions across your workforce is a big no-no.
Step 2: Keep auditable records
This is the ‘show your working’ part. As well as submitting an SDS, you’ll need to show why you’ve reached the conclusions you have about who’s an employee and who’s not.
You’ll also need to keep an audit trail of any communications with contractors, including any IR35 disagreements.
Step 3: Review contracts regularly
HMRC suggest that if the “terms and conditions or working practices of an engagement change” you should re-evaluate contracts, to consider “whether there is a new contract or a continuance of an existing contract”.
In other words, don’t set and forget your contracts. As new projects come up or circumstances change, evaluate the status of your workers.
Step 4: Continually review risk factors
HMRC say employers must “take account of all relevant evidence”. In other words, you’ll need to understand the factors that make a worker an employee or non-employee and monitor when you’re approaching a boundary that might change their status.
- Is work on-site?
- Do workers use their own equipment or company equipment?
- Can workers set their own hours and rates?
- How long are contracts?
- Are contracts intermittent or ongoing?
- Do workers work for other clients?
- Are workers paid on a project basis or on salary?
If any of these factors change – for example, you originally hired a contracting plumber for one project but then decided to roll them straight onto another project – you’ll need to re-evaluate that worker’s classification.
Consistency, visibility, accountability
IR35 isn’t especially complicated, but it hinges on having consistent processes, good visibility, and clear accountability. Which you probably don’t, given Deloitte’s finding that only 17% of businesses have specific policies that guide how they work with non-employees.
IR35 means that needs to change.
In practice, that’s dramatically easier with purpose-built software designed for end-to-end contractor management. Such software provides a central auditable hub to source, hire, onboard, manage contracts, review, mobilise, and ensure compliance across your contractor workforce.
It brings effortless consistency, visibility, and accountability into your processes, making reasonable care much easier. And safeguarding against disguised employees slipping through the net and costing you a fortune. (And saves you a fortune on agencies too, powering total in-house talent management).