Have you ever been told that IR35 means you can’t use subbies long-term? It’s bullshit, of course. Just another scare tactic to convince construction firms they have to use a payroll company.
IR35 has nothing to do with how long you work with subbies. It’s about the working relationship you have with them. And if your subbies are sole traders, it’s completely irrelevant anyway because IR35 doesn’t apply to them.
What is IR35?
IR35 (also known as off-payroll working rules) relates to intermediaries legislation. It is a set of tax rules designed to stop freelancers, consultants and contractors from avoiding tax.
Rather than becoming a company employee, a contracted worker can set themselves up as a limited company (also referred to as a personal service company) or work under an umbrella company in order to provide services to a client. Essentially, they are acting as an employee, but rather than paying tax and national insurance contributions on their salary, they pay corporation tax on their profits, which can work out at up to 25% less.
As you can imagine, HMRC doesn’t like people using an intermediary to avoid paying their taxes, which is why they introduced IR35. It is designed to stop people disguising themselves as limited companies in order to pay less tax.
IR35 applies to workers who provide services to a client through their own personal service company or another intermediary.
If someone falls within the IR35 rules, they have to pay income tax as if they were directly employed by the company, but they do not get the same employment rights. The contractor is responsible for collecting tax and NI contributions and passing these on to HMRC.
This applies to small, medium and large businesses in both the public sector and private sector, and impacts workers in all industries, not just the construction sector.
IR35 is separate from the construction industry scheme (CIS), which only applies to self-employed contractors in the construction industry.
How does IR35 impact the construction sector?
If you work in the construction industry, and you’ve been told you can’t work with subbies long-term because of IR35, it’s likely you have been misinformed.
IR35 does not apply to genuine freelancers, consultants, or contractors who are a business in their own right. And it doesn’t apply to sole traders.
So if your labour-only subbies are all sole traders, IR35 is irrelevant.
But that doesn’t mean HMRC won’t question their employment status.
Whether your subbies trade as sole traders, partnerships or limited companies, you could be at risk of an enquiry if HMRC has reason to believe you are disguising employees as self-employed workers.
Who is responsible for IR35 status determination?
Status determination isn’t as simple as just saying your subbies are self-employed because you don’t want to employ them. Disguising employees as subcontractors comes with serious risks. If HMRC decides to reclassify them, you could face huge costs.
It’s also not up to subbies to decide whether they want to operate as self-employed contractors. As the main contractor, it is your responsibility to determine whether your subbies are self-employed contractors or employees and whether they fall under IR35.
If your subbies are genuinely self-employed and operate as sole traders, IR35 is irrelevant. However, you will have to deduct CIS payments to remain compliant. This applies whether you are a small, medium or large business and regardless of whether your clients are public sector or private sector clients.
Are you at risk of an HMRC enquiry?
There’s very little chance HMRC will randomly launch an investigation into your business out of the blue. It’s more likely something will trigger an enquiry. This could be a tip-off from a competitor, ex-partner or disgruntled subcontractor. Or it could be a result of a query into a tax issue – for example, something on your CIS, VAT or corporation tax return that raises suspicion.
But although the chances of HMRC investigating you are slim, you shouldn’t rule it out. Businesses in the construction industry are often under more scrutiny as they are seen as high-risk. This is because there are still a lot of cash transactions within the construction industry, making it harder for HMRC to follow the paper trail.
If HMRC does come calling, the first thing they’ll be looking at is the contracts you have with your subbies. And while you can use contract templates or hash together a DIY contract, if it’s full of errors and inconsistencies, HMRC will have a field day. They can spot a sham contract a mile away, and plenty of construction companies have been caught out.
Defending an IR35 case or a reclassification of employment status can cost tens of thousands of pounds. Not really a risk you want to take. You need contracts that leave no confusion over the employment status of your subbies.
Proving your subbies are genuinely self-employed
It’s rarely one thing that determines whether a subcontractor is a business in their own right, just as it’s not one piece of evidence that proves they aren’t. Some of the things HMRC will look at to determine employment status include:
How much control do you have over your subcontractors? Do you dictate their hours, what time they start and finish, or when they take breaks? Do you control the way they work – what tasks they do, what order they do them and how they carry them out? While the main contractor will always have some level of control, if you treat your subbies like employees, HMRC could deem them to be employees.
This test is pretty black and white. Are your subbies allowed to send substitutes (with the same skills), or do you expect them to carry out the work personally?
Mutuality of Obligation (MOO)
Are you obliged to provide your subbies with ongoing work, and are they obliged to accept it? Once one project finishes, can you and your subbies part ways without further expectation? To learn more about MOO, check out our quick guide here.
One of the things HMRC looks at to determine whether a subcontractor is a business in their own right is whether there is any financial risk to them. For example, if they make a mistake, are they expected to rectify it at their own expense?
Are your subbies incurring business costs – training, fuel, accreditations, insurance, advertising and marketing? If you’re covering all their costs, you’ll need to have a good reason, or HMRC will question whether they really are a business in their own right.
Do your subbies wear your uniform, drive your vans and use your tools and equipment? These things alone are not evidence of employment, but they can be used by HMRC to strengthen a case against you unless you can demonstrate a legitimate business reason. And that legitimate business reason needs to be documented.
This is an area that catches lots of contractors out – it’s the way you refer to your subbies on paper. H&S policies RAMS, proposals etc. If you refer to them as employees, HMRC will be all over you.
This is what it all boils down to – the wording in your contracts. Is it absolutely explicit that the relationship between you and your subbies is one of contractor and self-employed contractor, not one of employer and employee? And have you covered your bases with all of the above points?
That doesn’t mean sticking a load of terms in just to cover your arse. HMRC don’t take contracts at face value – they compare them with what happens in reality. But as long as your contracts are clear and honest about substitution, control, MOO and so on, and you give legitimate reasons for why you work the way you do, you’re covered.
If you haven’t got those contracts in place…well… you better hope HMRC don’t suddenly take an interest in you.
Peace of mind with HardHats
What we do sounds pretty simple. We create contracts outlining your working relationship with your subbies so that HMRC can’t misinterpret them as employees.
But while it sounds simple, there’s a lot to it. Creating a watertight contract that reflects your true working relationship isn’t a ten-minute job.
We aren’t offering you some generic contract template that HMRC will laugh you out of court with. Our contracts are bespoke. We specialise in creating subcontractor contracts for the construction industry. And we’re the only company in the UK offering an insurance-backed guarantee for construction firms.
So if you are worried about whether your subbies could be misconstrued as employees, let’s talk. If you’re not at risk, we’ll tell you. But if you are, we’ll help you eliminate that risk. Book a call to get started.