IR35 is very important for the construction industry, so contractors and subcontractors need a guide to know exactly what it is and how it works. This is ours.
IR35 has gone through some radical changes in recent years. Those changes are now here to stay for the private sector.
And because the landing period has finished for the private sector, fines will be handed out for non-compliance. It’s therefore more important than ever to know what your new obligations are.
So, here’s everything you need to know about IR35 for the construction sector.
What is IR35?
IR35 is designed to make the self-employed pay a fair amount of tax where they contract out their work to someone else, but for all intents and purposes could be described as an employee to who they are working for.
The logic is that if you, as a contractor, enjoy something that looks like employment with someone (say, because all of your income comes from only them), then you should pay the same amount of income tax and National Contributions (NICs) as someone on the payroll.
IR35 actually originated in 2000, but the laws were tricky to implement back then, provoking widespread criticism from tax experts.
That led to the Government replacing IR35 legislation with new rules in 2017. Also known as the ‘off-payroll rules’, it is these new rules that apply nowadays.
Who does IR35 apply to?
In the past, it was up to contractors and subcontractors to determine their correct employment status for tax purposes according to criteria.
According to the changes, that obligation now rests in the hands of your client, who has to use more refined criteria to determine your employment status with them.
To be operating ‘inside IR35’ means that, under IR35 legislation, you must pay the same tax as an employee who works for the business you’re providing services to.
If you are ‘outside IR35’, you are entitled to pay tax the regular way under the construction industry scheme.
When is a contractor inside IR35?
HMRC judges IR35 cases on a number of criteria. A worker will be considered inside IR35 if:
- the contractor has to carry out the work themselves and cannot send a substitute in their place
- the contractee has control over how and when the job is done, as opposed to the contractor setting their own schedule
- there is a mutual obligation between the two parties – the client is expected to regularly provide work and the contractor is expected to complete it.
There are many other factors to consider, but this is a good starting point.
Be aware that IR35 is judged on a contract-by-contract basis. That means the same contractor can carry out multiple jobs for you, but only certain jobs might be inside IR35.
Need help navigating IR35?
Because the new rules put the decision making on your clients and they might get fined for making the wrong decision, they are likely to be far more cautious in the future.
Therefore, you need to account for IR35 in any relationship you have with a client so that you’re both confident in whether you are inside or outside IR35. That might mean rewriting your contracts, but it should be well worth it.
There are also some things you can do to persuade HMRC that you’re outside of the rules.
For instance, you could subcontract out some of your work to demonstrate that you don’t fulfil the first criteria for IR35 we detailed. That might mean you share out your contracts when you’re in a busy spot or so you can focus your work on the specialist jobs only you can do.
As accountants for the construction contractors and subcontractors, we can help you navigate IR35. Talk to us today.