16 January 2020

IR35: How will the off-payroll tax changes impact property businesses?

The property/real estate sector is one of the three areas specifically mentioned by HMRC regarding the tax April 2020 changes to IR35 and the impact on the use of labour.  Employment Partner, Jim Wright, has considered the use of contractors and other workers who are not employees and the potential impact to businesses.

Most property and construction companies use contractors and other workers who are not employees, but provide their own services, ingenuity and expertise.  Tax law changes due to come into force in April 2020 mean that the end users of such contractors might be liable for the taxes of those contractors. Now is a good time to consider these changes, not least because together with IT and employment agencies, property/construction is one of the sectors of “interest” for HMRC.

Changes to what is called IR35 (or sometimes referred to as “off-payroll working”) mean that from April 2020 those who use contractors will have to decide whether tax should be deducted from payments made to those contractors, rather than the contractors accounting for tax themselves. Ultimately, therefore, end users become liable to HMRC for taxes in respect of such contractors and could incur interest, penalties and liabilities for back taxes.  This could go back as far as seven years.

As the end user, companies will potentially take on liabilities for taxes for contractors that were not previously considered part of the workforce, the changes to IR35 could prove an expensive trap for the unwary.  Those in the real estate sector, therefore, need to educate themselves about the changes, formulate an action plan, assess their likely risk and put in place mitigation strategies.  As the stated aim of the changes is to raise £550m in taxes from the three named sectors, it may be prudent for some of the risk assessment to be carried out under legal privilege.

The changes happen in April 2020, but organisations will need to plan out their strategy and consider their commercial terms with contractors, payroll companies and any employment agencies in the months beforehand.  As this is a board level issue that cuts across finance, human resources and operations, it is likely to need to range of individuals within an organisation to work on the compliance project.

The changes potentially impact not just those contractors who provide labour directly through their own personal service companies, but where third party consortia, temporary work providers or gangs of workers operate together but PAYE is not usually operated in full.  The overlap between IR35 and the Construction Industry Scheme (CIS) for employment taxes also puts the property sector in the sights of HMRC.

To find out more about how IR35 could affect your business, or to discuss any of these issues in more detail, please contact Jim Wright.