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The construction industry is bracing for the impact of the IR35 tax reform as it comes into effect today.

The off-payroll tax reforms mean that medium and large sized firms in the private sector will be required to take on freelance construction professionals that they regularly hire as PAYE staff.

Previously, these workers could be employed off-payroll with intermediaries determining their employment status and whether IR35 tax rules should apply.

Those who are caught out by the changes could face penalties, although the government has said that HMRC will take a 鈥渓ight-touch鈥� approach to mistakes for the first 12 months unless there is evidence of deliberate non-compliance.

The reforms were originally due to be introduced in April last year but were delayed for 12 months to relieve pressure on firms during the early stages of the covid-19 pandemic.

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The changes, which were introduced in the public sector in 2017, have caused widespread concern in the sector as self-employed workers, described by the new rules as contractors, fear the new rules will lead to a greater cost burden and a reduction in work.

Dave Chaplin, chief executive of ContractorCalculator, urged contractors to 鈥渉old their nerve鈥� but warned that hirers who are not prepared should consider terminating or pausing existing contracts with workers immediately and start assessing them before they continue any work.

He added that employers and contractors can continue to work together to ensure their working relationship remains 鈥榦utside IR35鈥� by agreeing and signing a Status Determination Statement, making sure the work is the same as what was originally intended in the contract and monitoring supporting evidence throughout the run of the contract.

Seb Maley, chief executive of IR35 specialist Qdos, said the was confident that contracting will be able to handle the reforms.

Maley added: 鈥淭he introduction of IR35 reform is a historic moment. It marks the culmination of years of the government chipping away at contractors, who have shown tremendous resilience and a determination to continue working this way. 

鈥淏ut while reform poses challenges to contractors and the businesses who rely on them, I am confident that contracting will survive.鈥�

He said firms that have prioritised compliant IR35 status decisions and that continue hiring freelancers are set to 鈥済ain a huge advantage鈥� over those who have introduced blanket bans because of the changes.

He called bans on freelancers ahead of the changes a 鈥渟hort sighted and totally needless decision鈥� and added: 鈥淒espite IR35 reform and the problems the changes create, I am optimistic about the future of contracting. 

鈥淭he economic climate, the changing make-up of the workforce and the growing demand for flexible, skilled and cost efficient workers suggest contracting is here to stay in spite of these changes.鈥�

Matt Fryer, head of legal services at tax consultant Brookson Group, said firms would need to take a 鈥渃ompletely new approach鈥� to workforce management following the changes.

He said: 鈥淧rocesses need to be embedded throughout the company to ensure continuity, including undertaking a fair and accurate employment status test, managing the process of any challenges to status determinations, contract migration and recruitment.鈥�