IR35 has become a major compliance concern for construction companies, especially those engaging subcontractors through limited companies or personal service companies (PSCs).
Getting IR35 wrong can lead to serious consequences: unpaid tax liabilities, penalties, and even HMRC investigations.
In this blog, we’ll break down what IR35 is, how it applies in construction, and what you need to do to stay compliant.
🔍 What Is IR35? (Quick Refresher)
IR35 (also known as the off-payroll working rules) is designed to stop workers from avoiding PAYE tax and National Insurance by operating through a limited company, when in reality they should be classed as an employee.
If HMRC deems a subcontractor to be a “disguised employee,” you could be responsible for:
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PAYE tax
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Employer National Insurance
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Interest and penalties
🏗️ Why IR35 Matters for Construction Companies
Construction firms often engage specialist subcontractors or freelancers on long-term or repeat contracts. Some of these workers operate through limited companies, which puts them in IR35’s scope.
If you’re a medium or large private business (as defined by HMRC), you are responsible for assessing IR35 status—not the contractor.
✅ IR35 applies to private sector firms with two or more of the following:
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£10.2m+ annual turnover
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£5.1m+ balance sheet total
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50+ employees
If you’re a small business, IR35 compliance still matters—but the responsibility remains with the subcontractor (for now).
✅ How to Stay IR35 Compliant in Construction
1. Understand the Employment Status Rules
HMRC looks at the working relationship, not the contract wording.
Here’s what you need to consider:
| Factor | Employee (Inside IR35) | Self-Employed (Outside IR35) |
|---|---|---|
| Control | You control how/when work is done | Contractor controls their work |
| Substitution | Worker must do the job themselves | They can send a substitute |
| Mutual Obligation | You’re expected to offer work, they’re expected to accept | No ongoing obligation to offer or accept work |
| Equipment | You provide tools, PPE, etc. | Contractor uses their own kit |
| Integration | Worker is part of your team | Separate from the business |
| Financial Risk | Little risk—paid hourly or daily | Bears the cost of mistakes, delays, materials |
2. Use HMRC’s CEST Tool (But Don’t Rely On It Alone)
The Check Employment Status for Tax (CEST) tool helps assess IR35 status. You answer questions about the engagement, and HMRC gives an inside/outside IR35 decision.
⚠️ But be careful: CEST isn’t always accurate or detailed enough for construction projects with grey areas.
3. Issue Status Determination Statements (SDS)
If you’re a medium or large contractor:
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You must provide a Status Determination Statement (SDS) for each contractor
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You must share it with the contractor and their agency (if applicable)
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You must take reasonable care in your assessment
4. Keep Documentation and Audit Trails
HMRC may request evidence that:
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You assessed IR35 status properly
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You issued an SDS
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You’ve taken care in your approach
Keep records of:
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CEST results
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Contracts and working practices
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Communications with subcontractors
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IR35 assessments reviewed by advisors (if used)
5. Review Subcontractor Engagements Regularly
Contracts and working relationships evolve. A contractor who started outside IR35 may gradually become integrated into your business.
Set calendar reminders to:
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Reassess long-term contractors every 6–12 months
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Reissue SDS statements if terms change
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Monitor working practices on-site (not just what’s written in contracts)
🚫 Common IR35 Mistakes Construction Firms Make
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Treating long-term subcontractors like employees
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Using standard contracts without checking working reality
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Assuming IR35 doesn’t apply to them
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Not keeping evidence of assessments or SDS statements
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Relying only on agencies to manage compliance
👷♂️ How to Reduce Your IR35 Risk
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Engage subcontractors through genuine business-to-business arrangements
- Speak to a professional such as ourselves or Hard Hats
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Offer fixed-price project work instead of day rates where possible
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Allow substitution clauses, and be willing to accept substitutes
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Avoid treating contractors like internal staff (e.g. company email addresses, holiday entitlements)
✅ Need Help Managing IR35 in Your Construction Business?
At Thomas Emlyn Ltd, we help construction firms:
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Assess subcontractor status
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Draft compliant contracts
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Use correct processes and documentation
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Reduce risk of HMRC investigations or penalties
📞 Book a free discovery call here — we’ll help you stay compliant and confident.
📌 Final Thoughts
This isn’t just for tech firms or consultants, it’s highly relevant to construction companies using off-payroll workers. With increasing HMRC scrutiny, now’s the time to tighten your processes and reduce your risk.
Stay compliant. Stay protected.
