In just a few months from now, new employment tax legislation is due to come into effect for medium and large businesses that engage contractors who operate through an intermediary such as a personal service company (PSC). Needless to say, these proposed changes will have a huge impact on thousands of oil and gas workers and other contractors.
So just as the industry begins to recover following the challenges of the low oil price, another hurdle approaches: the extension to the IR35 rules from April 2020.
The change, which brings the private sector into line with the public sector, will impact individuals who provide services through a PSC. The IR35 rules are designed to assess whether a contractor is a ‘disguised employee’, to use HMRC’s (Her Majesty’s Revenue & Customs) terminology.
Arrangements which are not caught by IR35 allow the services to be provided to the client without the need for the client to operate PAYE, pay National Insurance Contributions (NICs) or give contractors employee benefits. The current set-up, some argue, suits an industry where ad hoc project-based work is the norm and can scale quickly over a short period.
That said, the new legislation does not apply to clients or engagers who are small companies, where this is the case there is no change and the PSC must decide if IR35 applies.
It’s important to note the new legislation doesn’t change the IR35 criteria – the key development is that the decision about whether the rules apply passes from the intermediary to the ‘engager’, or client with limited scope for the contractor to influence the decision if they are not prepared.
If the IR35 rules apply there will be significant tax consequences for the intermediary and the contractor.
One thing is for sure – a one-size-fits-all contract will not be sufficient to ensure that the IR35 rules do not apply and the potential for the renegotiation of rates to make up for the additional tax burdens and the likelihood of multiple individual contracts looks set to impose a significant financial and administrative burden. Only time will tell if this will be borne by the client, at the top, or further down the chain.
There is a need for the contractor to be IR35 ready. A good first step would be to seek specialist advice on whether IR35 is likely to apply. There are a number of factors at play here, but the key elements are the contract details and the reality of the working relationship. Sometimes the two can differ considerably.
Doing nothing is not an option, otherwise, you will be leaving the outcome solely to the engager.
A full contract review is something Meston Reid & Co can manage by tapping into the expertise of those at the frontline of IR35 case law.
While there is a cost for the service, a review of working arrangements – are you a genuine contractor, or effectively a member of staff? - and the right guidance is an essentially pragmatic approach to what will be a game-changer for the North Sea oil and gas industry.
A review can identify shortfalls and uncertainties that could be raised with the client/engager and expert opinion which concludes that IR35 does not apply can be used to influence the client/engager when they make their decision.
While there is still a degree of uncertainty with the inner workings of IR35, the bottom line is that the new rules will go live in April 2020. The clock is ticking and a proactive approach is required.
Dave Smith is a tax manager at Meston Reid & Co, an Aberdeen-based chartered accountancy practice with strong expertise in tax, audit, insolvency, corporate finance, business advisory, payroll and landed estates. The firm, based at Carden Place, has a broad range of clients, from contractors in the oil and gas sector to large businesses with international operations.