In a piece for LexisLibrary and LexisPSL, John Dunlop, Head of Tax at DAC Beachcroft, considers the potential impact on the construction industry of the changes to off-payroll working due to come into force on 6 April 2020 (the off-payroll IR35 regime).
What is IR35?
IR35 is all about who pays the tax and NIC (and through which medium are these paid to HM Revenue & Customs) as a result of the engagement of individuals supplying their services. IR35 applies to engagements via an individual's personal service company. It is sector agnostic but the construction industry is one of the main sectors which are on HMRC's radar.
The following central question must be addressed; if you imagine a contract between the ultimate engager and the individual doing the actual work would this deemed contract be one of self-employment or would he or she be an employee? If, in answering this question, you conclude that the individual is a (deemed) employee then tax and NIC must be paid through PAYE; whereas if you conclude that the individual is not such a deemed employee, you are outside the scope of PAYE.
IR35 is not a change in the underlying test as to whether someone is a (deemed) employee or not which is all driven by the case law which focuses on the whole factual matrix but it can be easier to consider this as being broke down into four cornerstones of Mutuality of Obligations, Control, Substitution and being in business on your own account with all the financial costs and risks which are associated with being in business on your own account. After a very long lull with no tax cases in this area, the last 18 months have seen a flurry of cases at the tax tribunals which addressed this key question. As with any factual question there will always be a difficult balancing exercise at the margins with the tribunals trying to come to what they believe is the fair decision.
Who is currently responsible for compliance? Please use examples from the construction industry to illustrate
At present in the private sector if an engager such as a house builder enters into a contract with an individual's personal service company for that individual to provide, say, landscaping services it is up to that landscaper to decide if he or she is a (deemed) employee of the house builder. If they are such a (deemed) employee their personal service company must operate PAYE on the money received from the house builder. If not the normal rules apply and the landscaping company pays corporation tax on the profit it makes and can then, for example, pay small salaries to its employees and dividends to the individual and other shareholders, banking any surplus.
What is changing? Please also mention when the changes come into effect
With effect from 6 April 2020, the burden of making the decision and operating PAYE shifts from the landscaper and his / her company to the house builder. HMRC has recently announced a further review to ensure the rules operate as envisaged but it is highly unlikely that any material change will be made to the headline message. If there are more parties in the contractual chain (than just the house builder, landscaper and his / her personal service company in this example) it is the ultimate engager who makes the decisions with the PAYE being paid by the body immediately above the personal service company in the contractual chain.
Why are the changes being made?
The same change was made in the public sector in 2017 and the stated aim is to align the public and private sector to ensure a level playing field. However the better answer is that compliance in this area across all sectors, not just the construction industry, and HMRC's policing of this (by their own admission to the House of Lords Select committee) has been sub-optimal and something needed to be done.
How does the construction industry scheme (CIS) interact with IR35?
IR35 takes precedent over CIS.
What should those in the construction industry be doing now to prepare?
They should operate a four stage process as follows:
- Assess – How many people are potentially affected; what is their (deemed) status; how do they provide their services; and what do the contracts say;
- Action Plan – Who is critical; keep the board and stakeholders informed; communicate to the actual individuals concerned; and accept that some people should move to the payroll;
- Systems review – Are your systems able to adequately record and review what is happening on the ground and keep this up to date?
- Budget for the cost – This covers the time costs of the above as well as the tax and related cost / risk of moving status.
Life is a lot easier if the above assessment is done sooner rather than later. HMRC have given various indications that they won't look back to the landscaper and his / her personal service company in the above example for periods earlier than 6 April 2020 but any announcements they give are merely statements of intent and don't look like being a statutory exemption / safe harbour.
Dealing with international engagers can get a lot trickier. The general rule (subject to complex rules) is that in terms of compliance you look to the first entity with a UK presence above the personal service company. However in the construction industry it would be very difficult to have a contractual relationship dealing with construction in the UK where the engager and all parties in its contractual chain above the personal service company do not have a presence in the UK for these purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.