Get tooled up for the new off-payroll rules

Construction faces significant tax changes coming into effect on 6 April. These changes to the Off-Payroll Rules or IR35 legislation and will shift responsibility for deciding an independent freelancer’s tax status from the individual to the company using their services. In simple terms, this places greater legal risk on construction firms using freelancers.

IR35 is not being scrutinised as closely as it deserves, with all the current focus on big-ticket issues like covid-19 and the global recovery effort, Brexit and climate change. But the rule changes are significant, creating new exposure for businesses with a particular reliance on independent freelancers. ONS data shows that nearly half of construction contracting jobs are self-employed, making the sector one of those most affected. The pandemic has made access to a flexible workforce particularly important, as the cost of taking on permanent staff is often not feasible.

CEST – a tool that doesn’t work

The incoming system for IR35 fails in a number of its aims. It is important for construction business to understand both its shortcomings and what they can be doing prior to the April implementation date to protect themselves.

Perhaps chiefly, there are major concerns around the Check Employment Status for Tax tool (known as CEST). This is a tool created by HMRC in 2017. When a user inputs information about the freelancer in question, it is supposed to state whether they should be classified as employed or self-employed under the new legislation.

It sounds great in theory but the tool simply can fail to provide any answer whatsoever in certain circumstances. Our team recently undertook a structural and technological analysis of CEST, a process that has generated more than 17GB of data, and have been surprised by the number times that CEST gives “unable to make a determination” as a result. This can and does occur even where counsel has formulated answers that would typically place a contractor inside the off-payroll rules. Other critics have undertaken research that has returned similar results.

Another less discussed issue with CEST is that is does not allow the user to conduct structured and holistic assessments across the entire business. Status assessments must be undertaken on contractor-by-contractor basis. This is simply unworkable. A tool that can’t be scaled up and applied to multiple freelancers at once is the definition of “not fit for purpose” and is totally at odds with the needs of large businesses. It is arguably these very same large companies that are exposed to the most risk from IR35.

Steps construction businesses should be taking now

The good news is that there are constructive solutions to these hurdles and steps that businesses can take now to ensure they are compliant and avoid unnecessary risk:

• Get a picture of your company’s freelancer population – Given the dubious nature of the existing CEST tool, construction businesses of all sizes need to map out their use of freelancers in advance of the 6 April implementation date, as a first step.
  
  
• Explore tech solutions – Given the issues with CEST and the fact that HMRC may not step in to provide the support that is needed, businesses need to take the initiative and look at their own legal tech capabilities. Where possible, they should be building their own non-CEST tools and ensuring they are in a position to assess the tax statuses of freelancers under their own steam. Those that lack the capability for this should be assessing options on the market.

• Move fast – Don’t wait until after the deadline to seek support. Construction businesses need to be moving now to ensure they are ticking all the boxes and lining up the systems that they need. Businesses will not want to find themselves in a position where they are overly reliant on a broken tool, and under threat of fines.

Michael Paulin is a tax barrister and the founder of Wolf IR35 Legal Services.