UK social care levy could hit infrastructure project profitability

The levy, which will temporarily raise the main rate and additional rates of class 1, class 1A, class 1B and class 4 of national insurance contributions by 1.25% for the 2022-23 tax year, will raise money to support the NHS and social care across the UK.

Nigel Blundell and David Greenwood, construction contract experts at Pinsent Masons, said the measure was the most recent example of changes in general legislation that are likely to have an impact on the profitability of infrastructure contracts as construction becomes increasingly complex and incorporates off-site manufacture and use of data.

Blundell said: “The contractor’s entitlement to a variation or compensation event will depend on the precise wording of each clause. Because construction contracts tend to deal with the impact of statutory change on the provision of the design and construction of the works, this type of wider change in law is often not covered by the clause. The contractor is left to fund the change itself.”

For contractors using the New Engineering Contract (NEC) standard forms, Blundell said the change in law provision is wide enough to include the imposition of the health and social care levy, though how that entitlement is calculated will depend on which option is being used. Under NEC option C, tax is an element of the schedule of cost components and will be payable, leading to an increase in the target price.

“Under the NEC option A, however, a general entitlement will be difficult to establish - although for compensation events instructed once the levy is in force, it can be included in their build up,” Blundell added.

Other contracts are more restrictive, including Joint Contracts Tribunal (JCT) contracts, which limit change in law to changes that affect the work or performance of the works and are generally around changes in building regulations and discharge of planning consents.

Greenwood said drafting bespoke provisions could often “limit the definition of a change in law as necessitating a change to, or affecting, the works”.

“There are two key considerations for contractors. Firstly, if there is a potential entitlement - irrespective of whether the change will create an entitlement - the rules on notifying relief events need to be observed strictly. Under the NEC contracts and other contracts notification of possible entitlements to additional cost need to be made as a condition precedent to recovery,” he added.

“Failing to observe the time limits and other notice requirement will, in all but the rarest of cases, lead to loss of any chance of obtaining additional entitlement. It is best to notify and preserve the ability to debate the merit of the claim at a later date,” Greenwood said.

He added: “Secondly, considering what legislative changes may have an impact on projects once they commence should form part of the negotiation to allow for an allocation of future risks - potentially broadening the ambit of the clause.”