Structuring engagements via intermediaries has enabled individuals to reduce their overall tax bill (by way of paying corporation tax on fees paid and tax efficient cash-extraction via salary and dividend blends) when compared to individuals who are engaged directly as employees.
HMRC predicts the benefit to the Exchequer to be £1.2bn per year.
Whilst the new legislation is specifically targeted at anti-avoidance in the form of indirect "disguised employment" via intermediaries it is consistent with the wider political aim of levelling-up the overall tax position of direct and indirect employees.
Department for Business, Energy and Industrial Strategy deputy director of construction Fergus Harradence commented as follows:
"We are currently looking at how we can use some of the mechanisms that are under our control to encourage higher levels of direct employment in relation to the delivery of government projects. There is a correlation between direct employment and greater investment in skills and also in greater investment and more successful management of things like health, safety and wellbeing of the workforce, because firms tend to regard their people as an asset rather than just people that they have employed to do a job."
Trades unions are also providing backing. Unite assistant general secretary Gail Cartmail, also president of the Trades Union Congress, wrote in a foreword to a report released on Thursday that a “healthier, more sustainable balance” between self-employed and direct employment “needs to be restored”.
So what does this mean for the construction industry?
Clients will now become responsible for assessing the employment status of contractors for tax purposes and may be responsible for deduction and payment of tax and National Insurance contributions ("NICs") for the services of contractors from fees. Clients may be able to pass the responsibility for deducting tax and NICs on to other parties in the labour supply chain by complying with their statutory requirements in respect of "status determination statements". It is critical that wherever an entity sits in the labour supply chain that satisfactory due diligence is undertaken to understand the respective obligations under the IR35/off payroll working legislation.
However not all clients are within the scope of the new legislation which will only apply to medium or large-sized entities (in addition to the public sector bodies already within the ambit of the rules from 2017). The criteria to be medium or large for these purposes is at least two of three features:
- Turnover of more than £10.2m.
- A balance sheet of more than £5.1m.
- An average of more than 50 employees.
Clients are required to exercise reasonable care in undertaking a tax status determination (i.e. whether the engagement in question constitutes "deemed/disguised employment"). Clients are not able to issue blanket-decisions that arrangements are within the scope of the new legislation (and contractors are able to challenge any such blanket decisions). The introduction of the new legislation has resulted in changes in procurement policy by certain clients who wish to stay outside of IR35 and have elected not to enter into any new engagements with any individuals providing their services via intermediaries.
There is concern in several industries that the introduction of the legislation will reduce the available pool of talent and it will remain to be seen whether the introduction of the new legislation has a negative distortive effect on the labour market. However, the new legislation should not impact engagements which constitute genuine self-employment (whether such self-employment is pursued directly as independent contractors or via intermediaries). It may be possible for genuine self-employment to be substantiated on a case-by-case or project-by-project basis provided the relevant facts of the engagements support this position.
A substantial number of contractors have decided to operate via umbrella employment vehicles on large projects. Whilst the provision of umbrella vehicles is an unregulated sector such arrangements can be legitimate (and are viewed as legitimate by HMRC) where PAYE is correctly operated and tax accounted for, however, clients should verify and due diligence any umbrella vehicles that are proposed to be used in labour supply chains to ensure such vehicles are reputable and legitimate.
What are the consequences for construction?
- Clients and parties involved in hiring labour need to understand their new legal obligations and ensure that internal policies and practices facilitate compliance.
- Clients require to carry out due diligence on their labour supply chains and document this adequately.
- Construction is traditionally an industry which enjoys the flexibility of self-employment and so represents a significant resistance to the government desire for more employees. The introduction of the new legislation will naturally lead to increased scrutiny by clients and HMRC of engagements which purport to be genuine self-employment arrangements.
- The talents of self-employed specialists could be lost across the industry as they are either forced to become an employee of a particular company or cannot be employed by clients who will no longer use the self-employed. Genuine self-employment may continue but clients will be more likely to interrogate engagements more than before.
- The attitude of clients to IR35 could represent an un-levelling of the competitive playing field.
Medium / large size clients need to invest in determining their internal policy for compliance with the new legislation. If clients intend to continue using self-employed individuals (to ensure they use the whole industry for the benefit of their construction investments) it will be important to due diligence arrangements adequately and retain documentary evidence of decisions made in the event HMRC ever challenge the arrangements.
Public sector clients should also review and refresh their policies and arrangements in light of the revised legislation.
DWF currently acts for a wide range of clients in relation to the application of the new legislation to their labour supply chains. We can provide support and advice on the practical implementation of compliant procedures, policies, training and draft protection for inclusion in contracts.