Construction industry beware: Builders' IR35 is coming

The Revenue has announced that from the 9 August 2004 they will be issuing letters to 57,000 taxpayers working in the Construction Industry asking them to reconsider their own or their workforce's status as self employed.

The Revenue computer has reviewed the Construction Industry Scheme (CIS) records and where a contractor has paid particular sub-contractors regularly then they will be receiving a letter telling them that the Revenue believe they have got it wrong and these subcontractors should be employees.

The sub-contractors will also receive a similar letter. This is only the start and if a sub-contractor or contractor does not receive a letter it does not mean they are safe from attack from the Revenue, they also should review their procedures.

The Revenue is clearly setting up this exercise in preparation for the new CIS, which is to come into operation from April 2006.

Background

This area is extremely complex and the Revenue are continuing their initiative which started with their attack on contractors who use their own limited companies in such areas as IT and oil exploration. Now they are taking a similar approach to the construction industry and are currently recruiting more status inspectors, presumably to deal with this latest attack.

What does it mean to the contractor and sub contractor in the Construction Industry?

Simply the Revenue is seeking to re-classify some workers as employees. They will make the case that a worker should not have been operating through his CIS certificate and as he is an employee he should be taxed through the PAYE system and pay his tax at the basic and higher rates and most importantly there will be a liability to Class 1 National Insurance Contributions of 11 per cent for employees and 12.8 per cent for employers.

In addition the expenses claimable will have to be reviewed as the rules for the self-employed and employees are substantially different. There may also be interest and penalties charged where the Revenue believe the contractors and sub-contractors have got it wrong.

How does a worker know whether he should be within the Construction Industry Scheme or if he should be an employee?

This is a very grey area and he needs to examine his working practices and consider if he controls how and when he works, does he provide all his own equipment and could he send a substitute instead of himself? These are only some of the issues to be considered. There are many other questions the Revenue will want answers to should they review the status of a worker.

In the letters the Revenue will invite the recipients to contact them and they will ask them for their details and run them through a computer programme, which will make the decision. This software is by no means infallible and its findings should be checked in all cases. They will also invite those without letters who are concerned to contact them and again their computer will provide their answer.

What should contractors and sub-contractors do?

Firstly they should take professional advice and have their own status or the status of their workforce reviewed and a risk assessment carried out. This would determine how much additional tax and National Insurance may have to be paid by the contractors or sub-contractors if they have been operating within the Construction Industry Scheme incorrectly.

They should not rely on the Revenue checking their position. An independent review may take a completely different view and offer some hope that they may not be charged to additional duties.

Secondly they should consider what would happen if the Revenue was to review their status in detail. Who would pay the accountant's fee for this review? Some status reviews can last over 12 months with the Revenue calling for meetings with all the parties concerned.

Carl Whittaker

Qdos Consulting - for freelancers