Q&A: IR35 off-payroll working changes

The long-awaited changes to off-payroll working – known as IR35 – could have a huge impact on UK construction. Liam Tumulty explains
How will off-payroll (IR35) working rules change?

These changes will mean that personal service companies (PSCs) engaged by large entities will no longer be liable for IR35 taxes, but the entity paying the PSC will instead be liable. Small companies are exempt.

The policy can apply if a worker provides services through an intermediary, for instance with a contractor’s PSC. The rules ensure that individuals working like employees, but via  their own limited company, will pay broadly the same tax and National Insurance contributions (NICs) as individuals employed directly.

When will the new rules take effect?

The IR35 rules for off-payroll working are changing on 6 April 2021 for contractors and consultants who work in the private sector for large entities, such as construction companies. 

Are there any other off-payroll IR35 rule changes?

Yes. Under the changes from April 2021, responsibility for undertaking employment status assessments will pass to the fee-payer using the services of the worker, while the responsibility for operating PAYE withholding will be that of the entity paying the PSC.

The legislation also introduces the concept of a ‘status determination statement’ (SDS), which end users will be required to provide directly to the worker. The SDS must include not only the decision of the worker’s ‘deemed’ employment status, but also the rationale for reaching this conclusion. Deemed workers will need to be included in payroll returns and PAYE and NICs deducted as required. These rules apply to the UK.

What preparation should construction companies make in the UK?

Construction businesses are familiar with dealing with a contractor workforce within the Construction Industry Scheme (CIS). 

However, for IR35, construction businesses should review labour, contractors and consultant supply chains to determine where the rules apply. Firms should put in place policies and procedures for dealing with the various features of IR35. Clear communication channels will be essential and collaboration with their construction supply chains about the rule change is recommended.

What impact are these changes likely to have on UK construction?

In addition to CIS labour, construction businesses will need to consider payments made for consultants and other professional services, for example contract surveyors, architects, engineers, and determine whether or not IR35 applies. The HRMC Check Employment Status for Tax (CEST) tool can help with this.

Some construction workers can be classified as off-payroll even though they have been operating through CIS. HMRC guidance indicates that IR35 will take precedence over CIS (see HMRC Technical Note, point 47).

Will there be penalties if construction companies do not comply?

HMRC will initially take a ‘light touch’ to enforcing compliance with the new rules. Businesses should be aware of the risk of interest and penalties if not complying.  

Liam Tumulty is a consultant on compliance, finance and VAT at COINS.

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