Self Employed Construction Contractors and IR35
If you’re a self-employed contractor in the construction industry, you need to be aware that Her Majesty’s Revenue and Customs (HMRC) recently announced a new crackdown which focuses mainly on the 15% of the UK workforce who identify as self-employed, whether as a sole trader, contractor or freelancer. This means that all self-employed workers need to ensure that their taxes are in good order to prevent HMRC investigation and subsequent action.
HMRC is also currently pushing forward its plan to roll out IR35 legislation to private sector contractors. IR35 is a piece of legislation designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary were not used. It’s a practice known as Off-payroll Working and you can check on the government website to see if you fall into this category. If this does apply to you, then we would advise that you get your tax affairs in order before the HMRC comes knocking on your door.
IR35 was originally introduced as far back as 1999 and is officially known as the Intermediaries Legislation – it came into force in April 2000 as part of the Finance Act. The Income Tax element of the Intermediaries Legislation has subsequently been integrated into the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) and the National Insurance Contribution’s (NIC’s) element was integrated into the Social Security Contributions (Intermediaries) Regulation 2000.
IR35 was introduced to tackle the problem of “disguised employment” which is when organisations engage workers on a self-employed basis, usually through an intermediary, rather than on an employment contract – making these people disguised employees. It’s an attractive option for organisations as they are able to save a significant amount of money as they do not have to pay employer’s NICs or offer any employment rights or benefits.
A common example of disguised employment is known as the “Friday to Monday” phenomenon – this means an employee leaves employment with their employer on a Friday, only to return to the same role in the same place the following Monday, but engaged as a contractor or consultant who trades through a personal services company and paying much less tax.
While IR35 should play a genuine role in defending both workers’ rights from unscrupulous employers, and the Exchequer from lost tax payments, the current form of the legislation fails on that front.
If IR35 does apply to you, the legislation makes provision for paying the extra income tax and NICs. However, the HNRC can go back at least six years and evaluate past contracts to see if the legislation applies retrospectively. This means that HMRC can demand income tax and NICs, plus penalties and interest, going back several years!
If you own a legitimate small business, then IR35 should not apply. However, that won’t prevent HMRC from launching an investigation into whether it does, which can be both stressful and time-consuming for the contractor.