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Construction companies in the dark over IR35 tax regs: are your clients up to speed to keep your job intact, projects on track and on budget?

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An IR35 education drive is urgently needed as the majority of construction businesses are unprepared for significant changes to contractor tax legislation, according to a survey by Randstad Construction, Property & Engineering (CPE). The pandemic has also created greater pressures around cashflow, with 43% of construction employers not knowing what the additional costs as a result of IR35 might amount to at this point.

About 98% of construction companies or projects hire contract workers. The construction sector also accounts for 7 per cent of the economy and supports the wider economy via demand for building materials and housing goods. Any delay to talent acquisition will have a knock-on effect on project schedules and the supply chain, which has already had a tough year due to pandemic-linked lockdowns across the globe.


According to the survey of more than 200 construction businesses, over a quarter (26%) report to be totally unaware of the upcoming IR35 changes and their consequences.

Four in 10 (44%) are aware that they need to prepare for these changes imminently or are currently part way through this process. Only 30% report having a plan already in place, placing them in the best possible position.

The IR35 rules 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. 

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  • 70% of construction businesses surveyed in November still not fully prepared for IR35 rule changes from April 2021
  • Worryingly, more than a quarter of those questioned (26%) had no awareness of the rule changes or their potential business impact
  • 43% of businesses unsure of potential cost implications involved 
  • Just 24% report that they have understood the Government’s IR35 guidelines 
  • More than two thirds (70%) of medium and large UK construction businesses are still not fully prepared for upcoming changes to the IR35 legislation.

“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.”

Owen Goodhead, Managing Director at Randstad Construction, Property and Engineering

“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,” said Owen Goodhead, Managing Director at Randstad Construction, Property and Engineering.

Is your business prepared?

We aren’t aware of what the IR35 changes are or their impact26%
We haven’t started preparations for IR35 yet, but will be doing so18%
We have started preparations for IR35 changes, but we aren’t there yet26%
The business is prepared for the changes and has a plan in place30%
Most businesses aren’t prepared for imminent tax changes related to contract workers

Originally set to come into effect from April 2020, the implementation of IR35 legislation changes was postponed until 6th April 2021, due to the coronavirus 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. 

Unfortunately, according to the report, 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.  

IR 35 costs

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. These could include additional staffing costs in payroll teams, training and implementation of new systems and increased employer’s National Insurance Contributions, for example.  

Do you feel that your business can cope with the additional costs of IR35?

Unsure, as I don’t know what the additional costs might amount to43%
No, I don’t foresee any additional costs13%
No, in the current climate we will struggle19%
Yes, we have assessed the costs and have sufficient resource25%
Coping with costs – 43% of construction business don’t know what these might amount to

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. 

Goodhead said: “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 6th 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.”

Unintended consequences 

Whilst just under a quarter (24%) of UK construction businesses surveyed reported that they have understood the Government’s IR35 guidelines and find them clear and easy to implement, a further 76% reported not being up-to-speed with these or still having outstanding questions.

Failure to understand the impact of IR35 changes can have severe consequences if an individual has been incorrectly categorised as falling outside of IR35, which include fines and penalties issued by HMRC. These might include a discretionary penalty ranging from 0-100% of tax owed, and a more severe penalty is likely to be awarded if the employer has not exercised reasonable care in making their determination. Nearly one in four businesses (23%) were not aware of HMRC’s power in this regard.

“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,” Goodhead.

“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 6th April 2021,” he said.


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