Let’s be honest. Construction has faced some major challenges in recent years. The first lockdown halted projects for months, Brexit has reduced the size of the labour pool and now the changes to tax laws through IR35 legislation are on the horizon. These changes mean that medium and large construction firms will need to change their reliance on the traditional freelance and contract workforce. Is your business prepared?
What will be the implications of this? There will inevitably be negative financial implications for both organisations and contractors. The employment model used within construction is likely to change, with employers choosing differing routes in response to IR35. Some may look to avoid the issue altogether and cease to engage with the contract market by putting in place a blanket ban (as was the widespread approach in banking) and potentially look to increase permanent salaried staff numbers. There may be a growth in smaller firms who would be exempt from the new regulations and who could provide flexible support for outsourced work. However the industry reacts, it is inevitable that construction as an industry is in for more change.
What does the change to IR35 mean?
IR35 has been around for the past 21 years, but April 6th 2021 will see a change in who is responsible for determining an individual’s tax status. This now falls on the organisation employing the contractor rather than the contractor themselves. The aim of this reform is to differentiate between workers who are genuine contractors and those who are disguised as employees for tax benefits. The anticipated benefit to HMRC in tax and NIC receipts will be £420 million(1). You can find further detail on the IR35 legislation in our interview with TLT Solicitors here.
How will the construction sector be affected?
Of the 4.95 million self employed workers in the UK, 920 000 work in construction(2). This is just under one fifth, making construction the biggest industry for the self-employed. This means that these changes are likely to have a significant impact on the sector.
This will not just affect those involved in physical construction but throughout your business. Design contractors in the form of CAD technicians or even project managers will be affected by the regulation.
Firms may choose to take contractors in as permanent salaried staff to ensure their workforce pool remains strong. Adding employees to the books can be costly and the staff lose some of the take–home pay they would expect to receive as a contractor. How will organisations who take this approach make up for the increased cost? Perhaps prices will increase and be passed to the customer.
Smaller firms with fewer than 50 employees or an annual turnover of less than £10.2 million will be exempt from the new regulations. This could mean some firms may look to section off business units in order to come within this threshold.
Construction firms which choose to properly determine tax status will incur additional administration overhead costs. Depending on the size of your organisation this could take a long time and be complex.
Another option is for firms to use an Umbrella Company which is a business that employs contractors, but taxes them as employees (PAYE).
What to do next?
Don’t let your project slow or grind to a halt because you are not prepared for this deadline. There are considerable and real risks that your highly skilled, contracted resource may decide to move on and leave you with resource shortages.
You need to decide how your organisation will deal with the changes to a contractor-based workforce and act now. What will your strategy be and what are the risks? If you need help planning your resource pool for the future, we would be happy to help. Contact DavidD@NineFeetTall.com