IR35 rules and the impact on the construction industry

The construction industry had hoped that the new IR35 off-payroll rules would be delayed again, but those hopes were dashed by HMRC at the beginning of October 2020 when it issued letters to the industry confirming that the changes would go ahead as planned in April 2021.

We have written various articles on this subject, so we understand that the timing could not have been worse as many firms continue to fight for survival, while also living under the constant threat of lockdown restrictions and adjusting to the recent implementation of the domestic VAT reverse charge rules.

Our clients in the sector had already begun to address the new regime, with many already experiencing recruitment issues arising from the Budget restraints as a result of the new off-payroll rules. A recent survey of businesses showed that a large proportion were still not fully prepared for the new IR35 off-payroll rules for private companies. The changes came into effect on 6 April 2021 and, given the regular use of contractors, we expect that this will continue to affect the sector disproportionately and will need to be addressed sooner, rather than later.

The new rules mean private companies, other than those qualifying as ‘small’, will have to consider whether to deduct income tax and employee’s national insurance from payments they make to contractors operating through their own limited companies. This will also lead to increases in direct costs, such as employer’s national insurance and potentially the apprenticeship levy where applicable. There will also be the additional admin time and effort needed to process these deductions.

These rules apply even if the underlying services fall under the scope of the construction industry scheme (CIS) and will take precedence. The obligation to make the assessment on suppliers cannot be deferred to the contractor who may in turn use these service companies, though they may have to be ones that deduct the taxes.

While the rules came into effect just last week, HMRC has announced a ‘soft landing’, so there is still time to implement the necessary changes. The first step for construction companies is to assess the supply chain to identify the contractors who fall under these new rules and plan their communication strategy. For contractors themselves, they need to assess whether they can rely on the small companies’ exemption, though we do expect this to be withdrawn in the long term.

Moore Kingston Smith off-payroll worker tool

To prepare for the new off-payroll working regime, we have developed an off-payroll worker tool to help you understand the rules and whether they apply to your business. We have also listed the steps you can take to ensure that your business complies with the changes, but also what you can do to minimise risk.

Please also click here for the recording of our off-payroll webinar, along with the top five takeaway points from the webinar.

If you would like to discuss how we can help your organisation to prepare for the new off-payroll working regime or any other topics affecting real estate and construction, then please get in touch with our team, which includes tax, VAT and R&D specialists.