70% of medium and large UK construction companies are not fully prepared for upcoming changes to the IR35 legislation, according to a survey by Randstad
Changes to the IR35 legislation govern the tax status of an individual working as a contractor (or freelancer) and whether, for taxation purposes, they ought to be deemed an employee on the payroll.
Businesses that fail to exercise reasonable care in determining the IR35 tax status of a contractor could face significant fines.
According to the survey of more than 200 construction businesses, 26% report to be totally unaware of the upcoming changes to the IR35 legislation and their consequences.
44% are aware that they need to prepare for these changes imminently or are currently part way through this process.
Only 30% reported having a plan already in place, placing them in the best possible position.
Unfortunately, the pressures of the pandemic have impacted the ability of businesses to prepare, with this additional business pressure hampering IR35 preparations for 60% of respondents.
The pandemic has also created greater pressures around cashflow, but 43% of construction employers do not know what the additional costs as a result of IR35 might amount to at this point.
The construction sector has a heavy reliance on contract workers, 98% of firms questioned in this survey reported using them, so the impact of the changes in April is set to be wide-ranging. In light of Randstad CPE’s findings, an education drive and urgent preparations are needed.
Owen Goodhead, managing director at Randstad Construction, Property and Engineering, said: “Worryingly, despite having an extra 12 months to prepare, our latest findings reveal that the majority of construction businesses aren’t ready for changes to IR35.
“Tax regime changes are likely to have fallen on the backburner given the upheaval generated by Covid-19, with survival mode kicking in for many.
“But these changes will have a deep impact on recruitment and HR processes and operations, with the need for in-depth stakeholder training and deployment of new management tools.”
How will changes to the IR35 legislation impact you?
Originally set to come into effect from April 2020, changes to the IR35 legislation were postponed until 6 April 2021, due to the Covid-19 pandemic.
The changes mean that medium and large businesses in the UK will be responsible for determining whether IR35 rules apply to those working for them as contractors, whereas previously the individual contractor was responsible for making this decision.
Owen Goodhead added: “It is still possible to prepare for IR35, but businesses need to act urgently, to start impact assessments and seek high quality advice.
“To put things into perspective, offers made to contractors now on the basis of a six-month contract will last beyond the 6 April 2021 and will therefore be in scope. This means the onus will be on the employer to determine the IR35 status of contractors and exercise reasonable care in doing so.”
Goodhead concludes: “Non-compliance with IR35 can bring with it potentially crippling financial penalties, which underscores the urgent need for employers in construction to understand and implement the government’s guidance.
“The next few months will present significant challenges for construction businesses, with Brexit on the radar and reverse charge VAT changes due to land, it’s critical that employers don’t lose sight of IR35 in order to avoid any unintended consequences of non-compliance from the 6 April 2021.”