More than two thirds (70%) of medium and large UK construction businesses are still not fully prepared for upcoming changes to the IR35 legislation, according to a survey by Randstad Construction, Property & Engineering (CPE). The IR35 rules govern the tax status of an individual working as a contractor (or freelancer) and whether, for taxation purposes, they ought to be deemed an employee on the payroll. Businesses that fail to exercise reasonable care in determining the IR35 tax status of a contractor could face significant fines.
According to the survey of more than 200 construction businesses, over a quarter (26%) report to be totally unaware of the upcoming IR35 changes and their consequences. Four in 10 (44%) are aware that they need to prepare for these changes imminently or are currently part way through this process. Only 30% report having a plan already in place, placing them in the best possible position.
TABLE 1: Most businesses aren’t prepared for imminent tax changes related to contract workers
Is your business prepared for upcoming changes to IR35 in April 2021? (%)
We aren’t aware of what the IR35 changes are or their impact 26%
We haven’t started our preparations for IR35 yet, but will be doing so 18%
We have started preparations for IR35 changes, but we aren’t there yet 26%
The business is prepared for the changes and has a plan in place 30%
Owen Goodhead, Managing Director at Randstad Construction, Property and 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 6th 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.
TABLE 2: Coping with costs – 43% of construction business don’t know what these might amount to
The construction sector has a heavy reliance on contract workers, 98% of firms questioned in this survey reported using them, so the impact of the changes in April is set to be wide-ranging. In light of Randstad CPE’s findings, an education drive and urgent preparations are needed.
Owen Goodhead continues: “It is still possible to prepare for IR35, but businesses need to act urgently, to 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 the 6th 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.”
Do you feel that your business can cope with additional costs as a result of IR35? (%)
Unsure, as I don’t know what the additional costs might amount to 43%
No, I don’t foresee any additional costs 13%
No, in the current climate we will struggle 19%
Yes, we have assessed the costs and have sufficient resource 25%
Whilst just under a quarter (24%) of UK construction businesses surveyed reported that they have understood the Government’s IR35 guidelines and find them clear and easy to implement, a further 76% reported not being up-to-speed with these 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, which include 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.
Owen Goodhead comments: “Non-compliance with IR35 can bring with it potentially crippling financial penalties, which underscores the urgent need for employers in construction to understand and implement the Government’s guidance. The next few months will present significant challenges for construction businesses, with Brexit on the radar and reverse charge VAT changes due to land, it’s critical that employers don’t lose sight of IR35 in order to avoid any unintended consequences of non-compliance from the 6th April 2021.”