IR35 still lacks clarity one year on, but construction is adapting

Ryan Dawson is IR35 programme manager at insurance broker Kingsbridge

 When IR35 tax reforms came into force in April 2021, several construction firms introduced blanket bans on the use of contractors classed as ‘people with significant control’ (PSCs).

Given that the industry has a long and well-established history of engaging successfully with PSCs, it is not surprising that many construction contractors have felt hard done by due to these bans. Our research has found that 39 per cent feel they have not been treated fairly since the IR35 reforms were introduced. And 47 per cent of construction contractors have even considered closing their company as a result.

This suggests there is room for improvement when it comes to engaging with those who might fall into the PSC bracket.

CEST under fire

HMRC provides a Check Employment Status for Tax (CEST) tool to help employers assess their IR35 status. While it is free to use, it has been widely criticised by inter-governmental departments and industry stakeholders.

For example, an April 2020 report from the House of Lords Economic Affairs Finance Bill Sub-Committee, called Off-Payroll Working: Treating People Fairly, argued that CEST was not fit for purpose and fell well short of requirements.

One key criticism is that CEST does not fully reflect case law. Certainly, it fails to address mutuality of obligation (MOO), one of the key tests of IR35 status. This is because HMRC refuses to accept that MOO goes beyond the creation of the “irreducible minimum” – when one party agrees to provide services to another in exchange for payment.

“According to usage data from HMRC between November 2019 and August 2021, CEST was unable to deliver a verdict more than 233,000 times”

HMRC’s view is that MOO is met the moment someone signs a contract. But this very narrow interpretation is present in employment and self-employment contracts alike, so MOO has to be explored beyond this.

Another concern is the weighting given to the questions that CEST asks, such as: “Do you have the right to reject a substitute? Yes or no?” This fails to take account of the fact that a reasonable right of veto – such as insufficient skills, qualifications or experience of the proposed substitute – does not diminish the right of substitution.

More widely, CEST is failing to deliver verdicts. According to usage data from HMRC, between November 2019 and August 2021, CEST was unable to deliver a verdict more than 233,000 times – that’s 21 per cent of all outcomes. This does not provide much-needed certainty for employers in the industry, who require a clear outcome every time they determine the status of a contractor.

Alternatives to CEST

Clearly, CEST is not fit for purpose, and alternative tools are vital for the long-term success of industries such as construction, which rely heavily on specialist contractor labour.

Alternatives are available. What’s more, many private-sector suppliers provide specialist support for employers, who can then be proactive in their approach to assessing IR35 status. These suppliers help ensure the staff and key individuals responsible for assessing IR35 status are suitably skilled and educated in dealing with complex employment status matters.

It is important to remember that status is not a one-and-done exercise. It needs to be considered on an ongoing basis and reassessed when required, such as when there is a material change in an engagement.

Employers might also consider taking out IR35 insurance to protect against the tax liabilities, interest and penalties that can be incurred as a result of an incorrect status determination.

Room for optimism

Despite the ongoing challenges, there is room to be optimistic. Slowly, blanket bans are being reversed and the construction industry is beginning to engage with PSCs again. In the latest Kingsbridge research, 48 per cent of construction contractors said they felt confident about business prospects in 2022.

We can expect the industry to continue to adapt to the IR35 reforms and become more comfortable with the legislation over time. Progress is already being made, and we are beginning to see new and returning contractors working in construction as a result of more outside IR35 roles, and as end-clients become more familiar with the reforms.

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