Engineering Construction Contractors to be Slashed After IR35 Reforms

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Engineering Construction Contractors
Engineering Construction Contractors

Engineering Construction Contractors

The numbers of Engineering Construction contractors will be severely cut after the IR35 reforms are implemented in April2020. That’s according to a recent survey of companies plans after the IR35 reforms in the private sector come in. If this is correct, this will be a disaster for contractors in the Engineering and Construction sectors.

Questions Engineering Construction Contractors May Ask

  1. What are the Private Sector IR35 reforms?
  2. How do companies determine a contractor’s IR35 status?
  3. Why have the IR35 reforms been brought in?
  4. How will the IR35 Reforms impact Engineering Construction Contractors?
  5. Will companies take fewer contractors after the IR35 reforms?
  6. What can the contractors do about it?
  7. How long have contractors got to do something about it?

What Are the Private Sector IR35 Reforms

In April 2017, the Government changed the rules for determining the IR35 status of a contractor. Before that all contractors decided their own statuses. If they got it wrong HMRC may chase them for back tax, penalties and interest. In the public sector the Government changed all that. Since 2017 it is the hiring organization that is now responsible for determining a public sector contractor’s IR35 status.

If they get it wrong then they may be liable for the missing tax, interest and penalties. If they have a lot of contractors this could mean a lot of money.

From April 2020 these IR35 reforms will be implemented in the private sector too. When it is implemented it will be companies who will be responsible for determining their contractors’ IR35 statuses. They could be potentially hit by back tax, penalties and interest.

How Do Companies Determine a Contractor’s IR35 Status

HMRC have devised a test to help companies determine a contractor’s IR35 status. It’s called the Check Employment Status for Tax test.

HMRC have said that if a contractor passes the CEST test then they will not come after the company for money if it is subsequently shown that the contractor was really inside IR35.That’s as long as the information entered is not false.

One would say two things here. Firstly, this is a very unlikely scenario. HMRC created the test themselves and it is highly skewed in their favour. Some of the answers to the questions would be a matter of opinion. And you would expect HMRC to argue that the information input was false.

Companies who do not use the CEST test are running a bit of a risk. That is why in a recent survey by Brookson Legal 59% of engineering and construction companies are considering taking a blanket approach to their engineering construction contractors. by this they mean no longer taking on limited company contractors.

Why Have the IR35 Reforms Been Brought In

The Government consider all limited company contractors to be tax avoiders. Both Theresa May and Philip Hammond said that “It is an unfair anomaly that a self employed person earning £100,000 a year pays less tax and National Insurance than a permanent employee earning the same amount”.

This, as we all know is nonsense. It is comparing apples with pears. Engineering Construction Contractors don’t get holiday pay, sick pay, maternity leave, pension contributions an they have to pay their own expenses if hey are traveling from the office to some other office. They don’t get share options or promotions. It is much easier to get rid of them without any redundancy pay.

However, this idea that there is an unfair anomaly has most likely been implanted in them by the big consultancies who have the ear of he Government. The big consultancies have always seen contractors as rivals. They would like them all gone so that they can supply companies with recent graduates for fees double or treble what companies would pay for a highly experienced contractors.

How Will the IR35 Reforms Impact Engineering Construction Contractors

It will mean that Engineering Construction freelancers will no longer determine their own IR35 status. The hiring company, or engager as HMRC call them will now determine this. They are likely to use HMRC’s online IR35 test the Check Employment Status for Tax tool.

This is highly weighted in HMRCs favour but has no basis in law. However, as HMRC are telling companies that they will not chase them for back tax if their contractors sat the test and passed it. That’s even if they are shown to be inside afterwards.

Currently, 54% of contractors pass the test, 31% fail it and 15% are indeterminable.

Those engineering construction contractors who fail the test will have to pay tax and national insurance as if they are an employee.

This will push down their take home income considerably.

Will Companies Take Fewer Contractors After the IR35 Reforms?

There’s another big problem. 59% of companies who engage construction, Engineering and Architect contractors say they are considering taking a blanket approach to their contractors. When they say that they mean they are going to say that all their contracts are inside IR35. All their contractors would either have to pay the IR35 tax or dump their limited companies.

Also, 75% of companies say that the new IR35 tax reforms will impact on the number of contractors they hire. I don’t think they mean that they will take more contractors on.

This will mean that not only will there be fewer contracts available for engineering, construction and architect freelancers but rates will plummet as there will be the same number of engineering construction contractors chasing fewer jobs.

That’s at a time when they will be earning less anyway through paying more tax.

What Can the Contractors Do About it

First of all you must take the CEST test yourself before your engaging company does it. Its crucial that you are brutally honest with yourself. That’s because the company are likely to be that when they test you. Also, if HMRC look at the results, on appeal, they will be too. E rr on the side of caution.

If you pass the test that’s great. However, still do more work to get you further outside IR36.

If the results are indeterminable you must take action.Companies wont take a risk with those assessed as indeterminable.

If you fail the test then you have a lot of work to be done. However, you still have time to change before you are tested for real.

What the wise contractors must do is:-

  1. Change their contract with the agency and get the agency to change their contracts with the engaging company to help take them outside IR35
  2. Change their working practices, with the agreement of the company, to help take them outside IR35

This must all be done before the company asks the engineering construction contractors to take the CEST test. It will be too late by then. The company would have to log that the contractor failed the test.

Talk to your agency and company right away.

Here is some help  How Companies Can Help Contractors Stay Outside IR35

How long have Contractors Got to Do About it

Its crucial that the contractors do something about it as soon as possible. There is no time to lose. Those contractors who leave it till the last minute are likely to be asked to sit the CEST test before they have had a chance to do anything about it.

There are three types of people in life:-

  1. Those who make things happen
  2. Those who things happen to
  3. And those who say “What happened?”

If you cant be in category one make sure that you are not in category three.

Be like the 5 wise virgins in the Bible and not the 5 foolish virgins and be ready. Take the Check Employment Status for Tax test.

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