IR35 and construction: Are you caught by off-payroll working rules as a builder or contractor?

IR35 and construction have become uncomfortable bedfellows in recent years, with many builders and contractors unsure whether they’re genuinely self-employed or should be treated as employees. Let’s cut through the confusion with an interview with founder Michelle Adams who explains what IR35 means for construction professionals working through limited companies.

What exactly is IR35 and why should construction workers care?

Michelle: IR35 is legislation designed to catch what HMRC calls “disguised employment” or “off-payroll working” – situations where someone works like an employee but operates through a limited company to pay less tax.

For construction workers, this matters because many contractors operate through limited companies when working for main contractors or developers. IR35 determines whether you can keep taking dividends and enjoying the tax benefits of your company structure, or whether you need to be paid through PAYE like an employee.

How do I know if IR35 applies to me?

Michelle: IR35 only affects you if you’re working through your own limited company. If you’re a sole trader, IR35 doesn’t apply – you’re clearly self-employed. But if you’ve incorporated and you’re doing work for medium or large construction firms, you need to understand these rules.

The key question is: if your limited company didn’t exist, would you be an employee of the client you’re working for? If the answer is yes, you’re likely caught by IR35.

What’s changed with IR35 in recent years?

Michelle: In most cases, the responsibility for determining IR35 status lies with the hiring client. Now, if you work for a medium or large company, they must assess your IR35 status and tell you their decision.

This particularly affects construction professionals working for house builders, property developers, and large construction firms. These businesses are now very cautious and often blanket-assess contractors as inside IR35 to avoid their own tax liabilities.

What are the three tests HMRC uses for IR35 and construction work?

Michelle: HMRC looks at three main factors, which I’ll explain in construction terms:

Control – Can the client tell you not just what work to do, but how and when to do it? A genuinely self-employed contractor decides their own working methods and hours. If the site manager directs your daily activities like they would an employee, that suggests IR35 applies.

Substitution – Could you send someone else to do the work in your place? True self-employment means you can provide a substitute if you’re ill or double-booked. If the contract requires you personally to turn up every day, that’s more like employment.

Mutuality of obligation – Is the client obliged to provide work, and are you obliged to accept it? Employees have this mutual obligation. Self-employed contractors can turn down work and the client isn’t obliged to keep offering it.

You can read more detail about these tests on HMRC’s employment status guidance.

Can you give practical examples of IR35 and construction scenarios?

Michelle: Absolutely. Let’s look at two bricklayers, both working through limited companies:

Bricklayer A works on a housing development for six months. He’s told what time to arrive, where to work each day, and follows the site manager’s instructions. He can’t send a substitute, and he’s expected to be there five days a week. The developer provides some tools and equipment. This looks very much like employment – IR35 would likely apply.

Bricklayer B takes on discrete projects – building a wall here, doing some pointing there. He quotes for each job, decides his own working hours, could send another qualified bricklayer if needed, and uses his own tools. He invoices on completion and moves between multiple clients. This looks genuinely self-employed – IR35 probably doesn’t apply.

The difference isn’t always clear-cut, which is why it causes so much confusion.

What happens if my work is caught by IR35?

Michelle: If your work is deemed inside IR35, the client must deduct income tax and National Insurance from your payments before paying your limited company. You’ll effectively be paid through PAYE, but you still have all the costs and admin of running a company.

You lose the ability to take tax-efficient dividends, you pay both employee and employer National Insurance, and your take-home drops significantly. Many contractors see their income fall by 20-25% when moved inside IR35.

Are there any benefits to being inside IR35?

Michelle: Very few, if I’m honest. You might gain some employment rights like holiday pay, but most clients structure contracts to avoid this. You’re in the worst of both worlds – taxed like an employee but without proper employment protections.

The only real benefit is that you’re compliant with tax law, which matters more than anything else. Operating outside IR35 when you should be inside can lead to substantial tax bills, penalties, and interest if HMRC investigates.

How can construction contractors protect themselves?

Michelle: First, understand your actual working arrangements. Don’t just accept a client’s IR35 determination without checking if it’s reasonable. If you believe you’re genuinely self-employed based on the three tests, you can challenge their assessment and you can check using the Government’s assessment tool CEST.

Second, maintain genuine self-employment characteristics where possible. Work for multiple clients, use contracts that allow substitution, set your own working methods, and provide your own equipment. The more you look like a business rather than an employee, the stronger your position.

Third, keep detailed records of how you work. If HMRC ever investigates, you’ll need evidence showing the reality of your working relationship, not just what the contract says.

Should construction workers still use limited companies?

Michelle: It depends on your circumstances. If you’re doing short-term projects for multiple clients and you have genuine business characteristics, a limited company still makes sense. The tax benefits remain substantial when you’re operating outside IR35.

However, if most of your work is long-term contracts with large firms who assess you inside IR35, you might be better off as a sole trader. You’d save on company running costs and accountancy fees whilst paying similar tax anyway. This is definitely something worth discussing with your accountant – we help construction professionals across Kent make these decisions based on their actual working patterns.

What about the Construction Industry Scheme – does that interact with IR35?

Michelle: CIS and IR35 are separate systems that can both apply simultaneously, which confuses many people. The Construction Industry Scheme applies to most construction work and involves tax deductions from payments. IR35 determines whether you’re genuinely self-employed for tax purposes.

You could have CIS deductions taken from your limited company payments and also be assessed inside IR35. They’re not alternatives – they can both apply to the same payment.

What’s the current situation with IR35 enforcement in construction?

Michelle: HMRC has been increasingly active in the construction sector. They’re particularly interested in long-term contracts where contractors work exclusively for one client over extended periods. This pattern looks very much like employment.

We’re seeing more construction firms playing it safe by assessing contractors inside IR35 by default. They’d rather be cautious than face potential tax liabilities themselves. This puts pressure on contractors to prove they’re genuinely self-employed if they want to work outside IR35.

What should I do if I’m worried about my IR35 status?

Michelle: Start by honestly assessing your working arrangements against the three tests: control, substitution, and mutuality of obligation. If you’re uncertain, get professional advice before you have a problem rather than after HMRC raises questions.

Look at your contracts, consider how you actually work day-to-day, and evaluate whether you’re operating as a genuine business or more like an employee. Understanding your position helps you make informed decisions about your business structure and working arrangements.

Talk to us about IR35, CIS compliance and construction taxation

At Adams Accountancy, we regularly help construction contractors understand their IR35 status and structure their affairs appropriately. The rules are complex but getting them right protects you from future tax problems whilst maximising your legitimate tax efficiency.

If you’re concerned about IR35 and construction work, or you’re unsure whether your current arrangements are compliant, contact us for a free consultation. We’ll review your specific situation and explain your options in plain English.

About the author

Michelle Adams is a qualified accountant and director at Adams Accountancy, with over 15 years of experience helping construction businesses navigate complex tax issues including IR35, CIS compliance, and business structure decisions. Her team specialises in providing practical, jargon-free advice to builders, contractors, and construction firms across Kent and the wider UK.