IR35 Education Drive Urgently Needed

More than 70% of medium to large businesses in the UK construction industry are still not fully prepared for the upcoming changes to the IR35 legislation, according to new research from Randstad Construction, Property & Engineering (CPE).

The IR35 rules govern the tax status of an individual working as a contractor or freelancer, and whether they are to be deemed as an employee on the payroll. Business which fail to exercise reasonable care in determining the IR35 tax status of a contractor could face fines.

According to the research, just over a quarter (26%) of participants said they were totally unaware of the upcoming changes and their consequences. More than four in ten (44%) said they were aware they needed to prepare for the changes imminently or were currently part way through this process. Just 30% of participants said they already had a plan in place.

Owen Goodhead, Managing Director at Randstad Construction, Property & Engineering, said: “Worryingly, despite having an extra 12 months to prepare, our latest findings reveal that the majority of construction businesses aren’t ready for changes to IR35. Tax regime changes are likely to have fallen on the backburner given the upheaval generated by Covid-19, with survival mode kicking in for many. But these changes will have a deep impact on recruitment and HR processes and operations, with the need for in-depth stakeholder training and deployment of new management tools.”

Originally set to come into effect from April 2020, the implementation of IR35 legislation changes was postponed until 6 April 2021, due to the coronavirus pandemic. The changes mean that medium and large businesses in the UK will be responsible for determining whether IR35 rules apply to those working for them as contractors, whereas previously the individual contractor was responsible for making this decision.

Unfortunately, the pressures of the pandemic have impacted the ability of businesses to prepare, with this additional business pressure hampering IR35 preparations for 60% of respondents.

The pandemic has also created greater pressures around cashflow, but 43% of construction employers do not know what the additional costs as a result of IR35 might amount to at this point. These could include additional staffing costs in payroll teams, training and implementation of new systems and increased employer’s National Insurance Contributions, for example.

Mr Goodhead continued: “It is still possible to prepare for IR35, but businesses need to act urgently, start impact assessments and seek high-quality advice.

“To put things into perspective, offers made to contractors now on the basis of a six-month contract will last beyond 6 April 2021 and will therefore be in scope. This means the onus will be on the employer to determine the IR35 status of contractors and exercise reasonable care in doing so.”

While 24% of UK construction businesses surveyed reported that they understood the Government’s IR35 guidelines and found them clear and easy to implement, 76% reported either not being up-to-speed or still having outstanding questions.

Failure to understand the impact of IR35 changes can have severe consequences if an individual has been incorrectly categorised as falling outside of IR35, including fines and penalties issued by HMRC. These might include a discretionary penalty ranging from 0-100% of tax owed, and a more severe penalty is likely to be awarded if the employer has not exercised reasonable care in making their determination. Nearly one in four businesses (23%) were not aware of HMRC’s power in this regard.

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