The proposed changes to the IR35 rule will take effect from 6 April 2021 and are likely to have a significant impact on medium and large companies operating in the construction industry. In recent years, the number of subcontractors has increased, largely due to those operating within the construction industry scheme and providing flexibility yon when and who they work for, normally through a personal service company (PSC).
The key changes for the sector will be how businesses engage with contractors, whether it be directly through a personal service company or an intermediary, for example, an agency, and whether they are deemed to be a contractor or an employee. The proposed changes are shifting the responsibility on determining the tax status away from contractors and placing the onus on the business engaging contract workers, and ultimately the decision on whether they should be paying tax and national insurance if deemed to be within the rules of IR35.
For all PSCs your business uses you will be required to:
- Make a ‘status determination statement’ (SDS) for each contractor.
- Pass on the SDS to the contractor in writing (and the party you are contracting with if different e.g. an agency), along with the reasons for the assessment.
- Respond to any employment status disputes within 45 days.
- Where PSCs are deemed to fall within the off payroll working rules, the entity that pays the PSC (which could be your business or an agency) will be responsible for deducting income tax and NICs from payments made to them.
Whilst the above is likely to create extra workload, there is some good news. The government has confirmed that this will not apply to small companies and are using the definition within the companies act 2006 to determine whether the business is a small company. The limits are as follows:
- Turnover of £10.2m of less
- Balance sheet total of £5.1m or less.
- 50 employees or less
One point to consider that, where the small company is a subsidiary or part of a group, the rules can be complex, so we recommend understanding your group structure and how this will impact individual entities within the group.
You should review your workforce and identify those contractors where you believe IR35 rules apply and begin to have conversations with those contractors at the earliest opportunity, to put in place processes ahead of the 6 April 2021 commencement date. It is likely you will need additional information from contractors to assess each one on its own merit. It might be the finance team is best placed to deal with the assessments but may need input from the commercial team to obtain copies of any existing agreements with subcontractors, where the contract runs past 6 April 2021.
The changes to IR35 will change working practices within the industry, and whilst change is welcome, putting the onus on the contractor only adds more risk to contractors who are already feeling the impact