黑洞社区

Construction, a historically highly fragmented industry, has relied on subcontracting for decades. ONS figures show that nearly half of construction contracting jobs are self-employed, and that a fifth of the self-employed in the UK are in construction. Technical roles both on and off-site are drafted in on projects where the expertise is not an in鈥慼ouse resource. 

But now a tax reform 鈥� catchily named IR35 鈥� is set to come into force in April which could threaten the entire model of freelancing in the sector. Some had held out hope that a promised government review would delay implementation, but an announcement last week suggests there is no stopping the reforms to off-payroll working. 

鈥淐ome April, when the new rules take effect, a wholesale sweeping away of the contractor [freelance] model is inevitable鈥�

Michael McCartney, Fladgate

It is not as if companies have not been warned of the forthcoming changes. IR35 was originally introduced in 2000 鈥� designed to wipe out tax benefits for those working in 鈥渄isguised employment鈥�, whereby an individual could effectively provide similar services to a client within the rules of a limited company paying less tax than if that client employed the individual.

The original IR35 rules required the freelance contractor to determine their tax status. But non-compliance was rife. Michael McCartney, a partner in the employment department at law firm Fladgate, explains: 鈥淗MRC鈥檚 assessment that only around 10% of contractors comply with the current IR35 rules is a clear indication that reform is needed.鈥�

To tighten up, the government first focused on public sector clients, insisting from 2017 that they determine the status of their freelance contractors and whether they should be treated as an employee. From April this will now apply to large private sector firms as well, which it is estimated will raise 拢420尘 in tax and NIC receipts.

The private sector employers who have seen this change coming have already taken steps to renegotiate working arrangements with their freelance workers; others are simply not aware of their new tax responsibilities. Many predict that, initially at least, the costs of staffing construction projects could go up as a result of the reforms, but there is also a concern that in some sub-sectors it will be harder to hire certain specialists who do not want to go on the books. At a time when construction is already facing huge challenges in delivering for its clients, could this be one tax reform too far?

20%

The amount of take-home pay a freelancer might lose by moving onto the payroll 

37%

The additional amount of NIC contributions an employer would have to stump up to maintain the pay of a freelancer moving onto the payroll

拢420尘

The amount of additional tax and NIC the Treasury estimates it will receive once the IR35 reform kicks in

Impact on individuals

Last week the government launched a consultation into these reforms 鈥� but this is limited to how they will be implemented; the Treasury has made clear the roll-out will still go ahead in April as planned. McCartney feels that the review is merely a 鈥渢ick-box exercise鈥�, designed to satisfy an election commitment made by the chancellor Sajid Javid.

Many fear that by insisting on this implementation date there will be unintended consequences for the self-employed section of the labour market. Tom Hadley, director of policy and campaigns at the Recruitment and Employment Confederation (REC), which along with other employment bodies, has been calling on the government for a delay to conduct a full impact assessment of the IR35 public sector changes since 2017.

These looming reforms are causing widespread concern within the freelance community in the sector for fear of losing out through higher tax payments should they move to PAYE. 鈥淚 came through this industry in the 1980s and 1990s when subcontract labour has been commonly used by consultants and contractors and the industry worked well,鈥� says Mike Green, chair of the Central London Maintenance Association, representing property maintenance companies in the capital.

He adds: 鈥淗MRC cannot get their head around how to manage such a large and useful resource pool. It鈥檚 a crippling legislation on a massive contributor to GDP.鈥�

Rules could potentially apply to anyone involved in a project, from on-site labour to members of the project management team. For those freelancers that fall under IR35, the company using their services can then switch them onto employment contracts to reflect their genuine status, or redraft the service contract in place.

But for the freelancer, moving onto payroll on the same salary means as much as a 20% reduction in take-home pay 鈥� that is, if they are unable to agree new arrangements with their employer. In order to maintain the same take-home pay level, the hirer would be required to stump up an additional 37% in NIC contributions.

Specialist bid writers are one type of worker at risk. One told 黑洞社区 that they no longer accept longer-term contracts because of IR35, relying on short-term commitments which gives them much less financial certainty.

Impact on firms

Many are predicting a hike in costs for firms having seen the impact of the public sector roll-out. McCartney says that rates for public sector contractors which were adopted into IR35 increased on average 20% and projects were struggling to be completed by local authorities.

And according to REC member Harvey Nash, 42% of freelancers increased their day rates in 2018 to balance the cost of being caught within IR35 鈥� compared with just 16% in 2017.

The scale of the impact on construction is largely dependent on how firms within the sector prepare themselves. Industry awareness that it is even happening appears to be the first hurdle. Research from Hays found that a third of large construction organisations are not even aware of the reforms, and of those that are, a third are concerned about the impact it will have.

Ken Reid, a senior partner at Gleeds, says his firm has been looking at changes for the last few years and is taking the legislation very seriously.

鈥淭here鈥檚 a vested interest in maintaining the current status 鈥� people get that tax advantage,鈥� says Reid. 鈥淲e just don鈥檛 want to get caught out, so we鈥檙e going through determination for all personal service companies [we work with].鈥�

Mandy Willis, group director of strategy at Mace, says shockwaves will be felt particularly in sectors which require technical expertise. 鈥淭his is an industry that engages a lot of [off payroll] consultants 鈥� particularly in sectors like nuclear new build 鈥� and so there will undoubtedly be a period of flux in the short term as some contractors move in order to try and circumvent greater scrutiny.鈥�

Gleeds鈥� Reid says his firm is only having to deal with a handful of individuals but says this will affect a 鈥渉uge number of workers within construction, particularly within the infrastructure sector鈥�.

鈥淧roblems arise if people currently employed through personal service companies who are deemed to be within scope choose not to accept an alternative arrangement. If that is the case there will be skills gaps across the board, from designers to project controls and cost engineering.

鈥淭here is less of an impact for design and build contractors who rely less on outside help,鈥� says McCartney. 鈥淒esign teams tend to be employees.鈥�

Blanket bans 

Fladgate鈥檚 McCartney believes the impact extends beyond particular sub-sectors, and represents a total shift in the use of freelancers. He says: 鈥淓nd users [the company that will bear the risk] will be encouraged towards a cautious approach in these circumstances and come April when the new rules take effect a wholesale sweeping away of the contractor [freelance] model is inevitable.鈥�

In the rush to meet the April deadline, firms may decide to impose a blanket ban on the use of contractors, or to categorise all contractors to fall within IR35 to avoid liability. Hays Construction & Property鈥檚 director Richard Gelder says: 鈥淲ithout proper guidance and understanding of IR35, we have seen some organisations take the approach to make blanket determinations for all their freelancers, without context.鈥�

This approach is problematic because of a lack of an independent review process into a how a company has categorised a freelancers working arrangement, says McCartney.

鈥淚f the hirer stands firm with their decision on a contractor, there鈥檚 not a lot they can do. With the 2017 reforms, self-employed workers were unable to challenge their IR35 categorisation without leaving the public sector and going elsewhere. But now there鈥檚 nowhere to go.鈥�

Alternatives

The alternatives to a blanket assessment of all freelance contractors is for hirers to set up an umbrella company to act as employment intermediaries, or to re-negotiate terms with contractors, factoring in the additional costs.

Reid says: 鈥淲e have been in discussions with our consultants to either bring them on the books or to make alternative arrangements. Some have already agreed to come on the payroll.鈥�

For some freelance contractors within the industry however, these arrangements are frustrating. 

One freelancer says: 鈥淔or me it sucks, because I pay an accountant to handle my tax affairs, which is not cheap, yet to go through an umbrella company I鈥檒l be treated like a PAYE employee without the benefits.鈥�

鈥淚R35 is totally unworkable for large swathes of the freelance workforce,鈥� says another. The short notice roll-out, potentially resulting in fewer contractors being drafted into projects may exacerbate problems in a labour market already hit hard by a skills crisis.

REC鈥檚 Hadley says: 鈥淏usinesses may have just weeks to make sweeping reforms to their payroll at what is already an extraordinarily difficult time as Brexit uncertainty and skills shortages take their toll on employer confidence.鈥�

Simon Winfield, managing director at Hays UK & Ireland, says: 鈥淎 number of industries are suffering from niche skills shortages and these reforms could worsen these gaps, just at a time when we have a real opportunity to make the UK a more attractive place to work and do business.鈥�

But despite the widespread condemnation of how the legislation is being rushed through while under review, Mace鈥檚 Willis believes the long鈥憈erm impact on project delivery should be minimal.

鈥淐osts may temporarily rise until all parties become familiar with their obligations, but the reality is that IR35 is simply the existing regime being enforced more strictly with clear accountability. However, from engaging with our peers, it is clear that they too are taking a firm line to ensure that risks are mitigated and the rules are enforced.鈥�

Those who are genuinely self-employed will not be affected. But freelancers working with firms that are leaving it late to comply, could yet be in for an expensive surprise.