The government’s decision to no longer proceed with the IR35 reversal is a huge blow to the construction sector, and industry generally, argues Brendan Sharkey of chartered accountants, tax and business advisers MHA
IR35, or more accurately “the intermediaries legislation” relating to “off payroll workers”, is a legal, financial and administrative burden on businesses. Introduced in 2017 and through the 2021 reforms, it was thought to have contributed to a 10% fall in the number of self-employed workers in the construction sector, according to the Association of Independent Professionals & the Self-Employed – (IPSE). IR35 reforms have also created a barrier for the self-employed and a risk for companies using self-employed workers, with many deciding to avoid the risk altogether by engaging workers through payroll companies.
The problem with IR35 arose again in April 2021, where medium and large private sector firms joined public sector organisations in becoming responsible for reviewing arrangements with individuals working through intermediary businesses. Before then, the contractors themselves were responsible for such reviews and operating PAYE on the payments they received. This was usually without any of the benefits associated with employment.
The IR35 reversal was welcomed by the industry
The proposed reversal of IR35 reforms that Kwasi Kwarteng announced in his mini budget on 23 September was well received by the construction industry, with many in the contracting sector seeing it to as an opportunity to reduce costs and red tape. It also opened the door to potentially re-engage with workers who had moved away from the sector and ease concerns over engagement of labour on a flexible basis, especially when it is in short supply. Overall, industry thought the government was listening to their needs, generally, not just construction.
Businesses believed that from April 2023, those that used contractors would no longer have to perform employment status determinations or, based on the results, operate PAYE. This would have resulted in an immediate saving of employers’ National Insurance and end possible exposure to liability arising from errors in the review process, such as risks being transferred back to the contractors themselves.
Employment status has always been a controversial area, largely as a result of there being no statutory definition of what constitutes employment for tax purposes. This has led to numerous cases ending up in the courts. Even HMRC’s Check Employment Status for Tax (CEST) tool has been subject to ongoing concerns regarding the accuracy of its results, and the fact it still fails to consider the concept of “mutuality of obligation”, which is considered a key test in assessing employment status. It is also thought that around a fifth of all CEST assessments continue to produce an “unable to determine” result.
However, while many of the other U-turn announcements on Monday were not unexpected following the chaos and market turmoil from the so-called mini budget, it is disappointing to see the scrapping of the IR35 reforms being abandoned, particularly with Kwasi Kwarteng stating that IR35 reforms imposed are an “unnecessary complexity and cost for many businesses”.
Scrapping the IR35 reversal has caused concern for the future
With the cost of living rising and pension funds falling, there is now a real incentive to return to work. Scrapping the IR35 changes would have helped to drive recruitment at exactly the right time, especially within construction. Given the government appears to acknowledge IR35 is an inhibiter to growth, it is hard to understand why the reversal was necessary given the rationale for the change.
Confusion is now prevalent as to whether there is a possibility of relaxing the IR35 changes in the months ahead. As a priority, the government should provide businesses with clarity as to their future intentions for any further changes.
However, as the current IR35 reforms are still in place, businesses will need to continue with their compliance procedures; at least until another U-turn.
Brendan Sharkey
Head of construction and real estate
MHA
Tel: +44 (0)20 7429 4100
