In the recent Autumn Budget the Chancellor announced changes to the legislation for off-payroll workers, known as IR35. The new regulations have the potential to make a significant impact on companies within industries that rely on contractors such as oil and gas.
IR35 was introduced in 2000 in a bid to tackle alleged tax avoidance by individuals using Personal Service Companies (PSCs) to work in a similar way to a typical employee while enjoying the tax benefits available to them via a corporate structure. These rules ensure that people working via a PSC, who would have been employees if they had been engaged directly, pay broadly the same Income Tax and National Insurance Contributions (NICs) as if they were employed.
With the Government estimating in their latest report that only 10% of Contractors working in this way correctly followed the rules, a consultation was launched into how non-compliance of IR35 in the private sector might be tackled – in conclusion and as per the Chancellor’s announcement new regulations will be brought into effect for the private sector from April 2020. This follows their introduction in the public sector in 2017.
While final operational aspects of the new regulations are subject to further consultation, it has been confirmed that the changes will apply to medium and large sized businesses.
As a result of the proposed IR35 reform there is a wide range of implications to the companies (the Engager or end user) paying for contractors via PSCs. At present, it is immaterial to the Engager whether IR35 applies to the person whose services they pay for. However, in less than two years’ time it will be the responsibility of the Engager to review their relationship with every contractor and determine whether the IR35 rules apply. It is important the Engager correctly categorises their Contractors because they will be liable for the PAYE and National Insurance Contributions on the amounts payable for those deemed to be within IR35.
There are extensive challenges facing companies in preparation for the changes to IR35 with the only certainty being that this will require a significant commitment of time and cost. It will also be far-reaching across departments with operations determining the value an individual brings to the delivery of work, legal teams having to review or re-write contracts and finance preparing cost analysis. HR teams, who might have been unaware of the Contractors as a result of them not being an employee, are likely to be critical to the discussions and process going forward.
The relationship between a Contractor and the Engager can often be sensitive. Many PSC Contractors are highly skilled or valuable to the business, and the Engager may consider reducing the impact of the new rules on the Contractor. There are various options that can be considered around how the additional cost can be distributed, and who will bear it – the Contractor and/or the Engager.
Even if a PSC is outside of IR35, changes may have to be made to the existing contracting arrangements.
Other areas that have caused issues in the public sector since the IR35 reform in 2017 include: accounting/VAT systems struggling to process the nuances that the new regulations bring, resulting in manual overrides; processes and procedures have had to be adapted; increased lead times for getting resource into the business; increased costs; attrition of skilled Contractors; wider employment law implications; impact on existing resource as legal, commercial, HR and finance teams are all key stakeholders in managing this significant change.
IR35 reform should be a priority for those working in the oil and gas industry. Although the numbers of Contractors engaged by oil and gas companies in this manner is understood to have significantly reduced following the fall in the oil price in 2014, the industry continues to rely on the expertise of off-payroll workers.
For the oil and gas industry early action will be essential to understand their current contractor base and to do cost analysis, engage with stakeholders and plan for the change so that Engagers can adopt any changes made by HMRC when the updated guidance/regulations is issued - with the end aim of being prepared for the IR35 reform to be implemented from April 2020.