IR35 or CIS? Choosing the correct regime for construction contractors
With changes to IR35 tax legislation due to come into force on 6 April 2020, construction companies need to understand which rules apply to them and whether they will have to adjust their working practices.
At a sector level, anecdotal evidence suggests 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 (see HMRC's Technical Note, point 47).
Here, we briefly examine the difference between the two sets of rules and offer guidance on how construction companies can prepare for IR35.
What is IR35?
On 6 April 2021, responsibility for compliance with IR35 is shifting from contractors operating through intermediaries (such as personal service companies, or PSCs) to private sector end users of the contractor's services – many of which are in the construction sector.
Once the end user has assessed the worker's status, they are obliged to pass this information back to the worker, via any intermediaries.
If the worker is assessed as being employed for tax purposes, the entity nearest the PSC/intermediary in the labour supply chain will need to make deductions for tax – i.e., PAYE and National Insurance contributions (NICs), and withhold these from the contractor’s fees.
In some cases, that entity will be an employment agency or another contractor, but very often it will be the construction company who benefits from the contractor's services.
If they fail to operate the IR35 system, HMRC may pursue the construction company for taxes owed and they could also face fines or other penalties.
When does IR35 apply?
For the new IR35 tax rules to apply, there are certain key components that need to exist.
The individual worker must personally perform a service for an end user/client through an intermediary. The intermediary can be a PSC, limited company, agency, or partnership.
There is a small company exemption from IR35 for end user companies with a turnover of less than £10.2 million, a balance sheet of less than £5.1 million or 50 employees or less.
What is CIS?
Under CIS, contractors deduct money from a subcontractor’s payments and pass it to HMRC.
The deductions count as advance payments towards the subcontractor’s PAYE and NIC contributions.
While contractors must register for the scheme, subcontractors do not 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:
When does CIS apply?
It is important to remember that IR35 rules take precedence over CIS and will need to be factored into current process 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 does not count as construction (such as site facilities).
What can construction companies do to prepare?
An initial step is for construction companies 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.
HMRC has produced its own online test, called "Check employment status for tax" (CEST), which gives an automated determination. HMRC will stand by that decision, provided it agrees with how the person taking the test has answered the questions.
It is safe to say the response to CEST from the both the private and public sector business communities has been on the whole negative, with many disagreeing with the determinations given by the tool.
Construction companies thinking about setting up their own assessment procedures can start by looking at the questions asked by HMRC's CEST tool and using them as a starting point for discussions with contractors.
This 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.
The sector is also due for a further tax change, when measures aimed at combating VAT fraud relating to supplies of labour within the construction industry take effect on 1 October 2020 (postponed from October 2019) – see our blog on this topic here.
For more information on how IR35 may affect your business, please visit the IR35 page on the Fieldfisher website or get in touch with your usual Fieldfisher contact.
The latest reform of UK tax rules to cause consternation for businesses is IR35 (also known as the off-payroll tax rules), which is being extended to the private sector from 6 April 2021.
At a sector level, anecdotal evidence suggests 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 (see HMRC's Technical Note, point 47).
Here, we briefly examine the difference between the two sets of rules and offer guidance on how construction companies can prepare for IR35.
What is IR35?
On 6 April 2021, responsibility for compliance with IR35 is shifting from contractors operating through intermediaries (such as personal service companies, or PSCs) to private sector end users of the contractor's services – many of which are in the construction sector.
Once the end user has assessed the worker's status, they are obliged to pass this information back to the worker, via any intermediaries.
If the worker is assessed as being employed for tax purposes, the entity nearest the PSC/intermediary in the labour supply chain will need to make deductions for tax – i.e., PAYE and National Insurance contributions (NICs), and withhold these from the contractor’s fees.
In some cases, that entity will be an employment agency or another contractor, but very often it will be the construction company who benefits from the contractor's services.
If they fail to operate the IR35 system, HMRC may pursue the construction company for taxes owed and they could also face fines or other penalties.
When does IR35 apply?
For the new IR35 tax rules to apply, there are certain key components that need to exist.
The individual worker must personally perform a service for an end user/client through an intermediary. The intermediary can be a PSC, limited company, agency, or partnership.
There is a small company exemption from IR35 for end user companies with a turnover of less than £10.2 million, a balance sheet of less than £5.1 million or 50 employees or less.
What is CIS?
Under CIS, contractors deduct money from a subcontractor’s payments and pass it to HMRC.
The deductions count as advance payments towards the subcontractor’s PAYE and NIC contributions.
While contractors must register for the scheme, subcontractors do not 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 does not perform construction work, but spends an average of more than £1 million a year on construction in any three-year period
When does CIS apply?
It is important to remember that IR35 rules take precedence over CIS and will need to be factored into current process 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 does not count as construction (such as site facilities).
What can construction companies do to prepare?
An initial step is for construction companies 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.
HMRC has produced its own online test, called "Check employment status for tax" (CEST), which gives an automated determination. HMRC will stand by that decision, provided it agrees with how the person taking the test has answered the questions.
It is safe to say the response to CEST from the both the private and public sector business communities has been on the whole negative, with many disagreeing with the determinations given by the tool.
Construction companies thinking about setting up their own assessment procedures can start by looking at the questions asked by HMRC's CEST tool and using them as a starting point for discussions with contractors.
This 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.
The sector is also due for a further tax change, when measures aimed at combating VAT fraud relating to supplies of labour within the construction industry take effect on 1 October 2020 (postponed from October 2019) – see our blog on this topic here.
For more information on how IR35 may affect your business, please visit the IR35 page on the Fieldfisher website or get in touch with your usual Fieldfisher contact.
