IR35 or CIS – choose the right one
5th September 2020
David Maslen See profile
The rules governing ‘off payroll’ contracts (commonly known as IR35) are changing. These changes are significant and were due to come in from 6 April 2020. However, one positive side effect of COVID-19 was that the government deferred the introduction of the new regime for 12 months. This has given businesses time to breathe and time to think. But with under six months to go, businesses now need to ensure they are fully prepared.
In particular, construction companies need to understand which of the IR35 and CIS rules apply to them and whether they will have to adjust their working practices.
IR35 continues to cause consternation generally. There is particular confusion in the construction industry, which has historically relied on contractor workforces, stemming from the interaction between IR35 and the Construction Industry Scheme (CIS) for tax deduction.
Many construction businesses and workers have assumed CIS is a way to avoid IR35, however HMRC has said that IR35 will take precedence over CIS.
In this article, we will cover the difference between the two sets of rules and offer guidance on how construction companies can prepare for IR35.
On 6 April 2020, responsibility for compliance with IR35 in the private sector is shifting from contractors operating through intermediaries (such as personal service companies, or PSCs) to end users of the contractor’s services. Many of these end users are in the construction sector.
The end user must determine the status of the worker i.e. determine whether they’re a deemed employee or not. Anyone following recent high-profile cases will see that this is not a straightforward exercise. Clients must take ‘reasonable care’ when doing this. HMRC have an online tool – Check Employment Status for Tax or CEST – to assist with this, which can be a useful starting point in this process. HMRC will stand by the result of using the tool but only where information has been completed accurately.
A status determination statement must be produced and passed down the supply chain to both the worker and the fee payer. The worker has the right to appeal the decision and so procedures will need to be in place to cater for this.
If the worker is deemed to be an employee, then they will need to be included in the payroll and PAYE and NIC deducted as required.
HMRC have confirmed that they will initially take a ‘light touch’ to enforcing compliance with the new rules. As ever, though, taxpayers should be aware of the risk of interest and penalties if not complying.
Any private sector organisation engaging with subcontractors via a PSC will need to be aware of the new rules.
Similarly, anyone providing their services through a PSC should be aware of the changes.
The new rules don’t apply to end client organisations which are ‘small’. In that case, the existing rules continue unchanged, which means that responsibility for IR35 decisions remains with the sub-contractor’s company.
Whilst this exemption is useful, one can quickly see some of the challenges it presents. End users which are growing could be small one year and not small the next. End users will need to revisit their status annually. Similarly, a PSC may have contracts with different end users, some of these being small and some not small. This means the PSC has to operate two different systems.
Under CIS, contractors deduct money from a subcontractor’s payments at source and pass it to HMRC. These deductions count as advance payments towards the subcontractor’s PAYE and NIC contributions.
While contractors must register for the scheme, subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they don’t.
The following need to register as contractors:
- A party who pays subcontractors for construction work; and
- A party whose business doesn’t perform construction work, but spends an average of more than £1 million a year on construction in any three-year period.
A subcontractor is essentially a party who performs construction work for a contractor (you must register as both if you fall under both categories).
It’s important to remember that IR35 rules take precedence over CIS and will need to be factored into current processes when dealing with construction contracts.
CIS covers contractor services on most construction work to permanent or temporary buildings/structures and civil engineering works (such as roads and bridges).
For the purpose of CIS, construction work includes:
- Preparing the site (e.g. laying foundations and providing access works);
- Demolition and dismantling;
- Building work;
- Alterations, repairs and decorating;
- Installing systems for heating, lighting, power, water and ventilation; and
- Cleaning the inside of buildings after construction work.
There are some exceptions, including architecture and surveying, scaffolding hire (with no labour), carpet fitting, manufacture of materials used in construction including plant and machinery (and their delivery) and work on construction sites that clearly doesn’t count as construction (such as site facilities).
If not done so already, an initial step for construction companies will be to audit their labour supply chains and establish where they sit in those chains. This will help determine what, if any, obligations they have under IR35.
Construction companies should talk to their contractors, to make sure all parties know the change is coming and set up clear communication channels for passing information up and down the labour supply chain.
They should also put policies and procedures in place for dealing with the various aspects of IR35 – including how to make status assessments and manage any subsequent challenges by workers to those assessments.
Companies should consider using HMRC’s CEST online tool although it’s worth noting that the response to CEST from both the private and public sector business sectors has been on the whole negative, with many disagreeing with the determinations given by it.
Construction companies thinking about setting up their own assessment procedures might want to start by looking at the questions asked by HMRC’s CEST tool and using them as a starting point for discussions with contractors.
This approach gives companies and workers a chance to smooth out any differences in opinion about the worker’s status, before involving HMRC.
Construction companies should also be prepared for challenges by workers who disagree with their status determinations and, where contractors accept employment status, be ready to deal with claims to backdated holiday and sick pay, among other benefits.
Clearly this new framework is a potential minefield and if you require guidance on any aspect of the new off-payroll rules then please contact your Old Mill adviser or alternatively click here…