Taxing Times for Construction
By Vijay Bange and Nic Hart
Sadly, the country has recently suffered from some of the worst floods and misery, multiple storms unprecedented for the time of year, and the potential risk to human life from COVID-19. Testing times for us all. Whilst the media have covered these issues, some pertinent economic issues have had less coverage. These issues affect the general economy and the construction industry.
Like any industry, there are pressures to strive to keep costs down and implement lean practices. Construction has, following the Egan Report and reforms, embraced these principles. Throughout the supply chain it is not unusual for employers, building contractors, and consultants to engage individuals on an ad-hoc and as-needed basis rather than having a permanently high baseline cost with direct employees. Those individual workers may have set up a Personal Service Company (PSC), to get a more advantageous tax efficient return.
In short, such workers describe their status as "self-employed contractors". In this instance, remuneration would be paid by the PSC to the worker/ self-employed contractor via dividends drawn at intervals from the PSC. If they (the worker/ Self-employed contractor) were employees engaged directly, the employer would be deducting tax and National Insurance Contributions (NIC). The quid pro quo is that self-employed contractors may not have the same benefits as direct employees, such as sick pay.
The practice is widespread and now HMRC, via IR35 legislation, has sought to ensure that selfemployed contractors pay broadly the same tax and NIC as an equivalent employee.
On 7 February 2020, HMRC announced significant changes concerning application of off pay-roll working rules, which were to apply to payments made by ‘medium and large’ companies for services provided by a PSC on or after 6 April 2020. However, it was announced on 17 March 2020 that as part of the Government’s measures to tackle the impact of the coronavirus crisis on the UK economy, the implementation of the new rules would be postponed until 6 April 2021.
When eventually brought in, the changes will see implementation of new rules for private sector self-employed contractors. The effect of these changes will be that the IR 35 rules, which place the obligation to assess employment status and operate payroll if appropriate with personal service companies rather than end user companies, would no longer apply to those entities regarded as ‘medium and large companies’. Consequently, these companies paying the PSC and ultimately benefitting from the services will be subject to an obligation to account for tax and national insurance for such workers through PAYE under the off-payroll working rules. (NB. This will bring private sector IR 35 in line with public sector - the former having already been implemented 2017).
Small business end users are not caught, only medium and large organisations (a Small Business will be as defined by the Companies Act 2006 definition). Overseas companies will not be caught.
In short the driver for this legislation is to ensure that individuals who are working like employees, but operate via an intermediary, usually a PCS, will pay broadly the same tax and NIC as an employee would. The individual may still be caught if they are providing services to more than one end company, and perhaps working on multiple different projects.
The onus will now be on the end organisation. where such is regarded as a medium or large company, who are receiving the services to account for tax and NIC. However, interpretation of employment status for tax purposes and for the purposes of concluding status under the Employment Rights Act 1996 are not mutually exclusive. The fact that an end user company deducts tax and NIC before paying a contractor is merely one of the many factors a court or tribunal will consider when making a determination of employment status for the purposes of determining the rights of an individual under employment law legislation. Certainly, the attribution of the obligation on end user companies to deduct tax has been a factor which has influenced that determination, but it should be emphasised that this alone is unlikely to be conclusive, and this is likely to remain the case after 6 April 2021.
Back to the construction industry, it is noteworthy that Employers, Developers, building contractors/ sub-contractors, consultants providing services (architects, engineers, surveyors etc) have a practice of only keeping on their books as direct employees those that they can afford or require, with others being engaged as required. This works for all; helping to keep costs competitive and overheads down. The self-employed contractor has a favourable remuneration package by working through a PSC arrangement. Those employing the services of the self-employed contractor have flexibility in that they get their services as required and will avoid paying for people when there is no work for them. This will all change.
Organisations getting the services have to decide whether to take those self-employed consultants on directly where they are caught by the legislation, deciding which ones they want to take on as permanent employees, and which to no longer use. They may have had under the PSC arrangement a larger talent pool to select services, but the selection process will now be more limited and perhaps restricted to those that have been taken on as employees.
Self-employed consultants may have to accept lower packages now than they would have gained by the PSC arrangement or employers may have to accept they will have to pay more to get the talent. This is taking up a considerable amount of resources, time, and cost, and is having an effect throughout the industry. Behind the scenes in the industry, this culling process may well be taking place in organisations now with decisions being made as to who they take on their books as direct employees. Some employers may also seek to keep workers on a contingent basis via an IR 35 compliant umbrella company.
It remains to be seen whether this will drive up costs as inevitably, keeping the best talent may entail matching remuneration for former selfemployed contractors so they are not out of pocket with the less favourable tax and NIC regime. This may result in a clash between salary structures within businesses and some employers might not be able to make a sufficient return on outlay.
Of course, there is a lifestyle issue here too. Namely, those working as self-employed contractors for a variety of clients may have chosen to do so to get out of the shackles of being employees and therefore having the ability to work as little or as much that suited their circumstances.
A variety of those we act for in the industry who are aware of the changes have raised this as anissue that is significant for the industry. Equally, those who are less sophisticated in this arena and are yet to appreciate the significance will be hit hard later, upon becoming aware.
* Please note that this article is not to be relied upon as tax advice. This is a complex and new issue, and specialist advice ought to be taken on a case by case basis.
Republished by permission.