Contractors are at the core of the oil and gas industry. But a new tax reform directly affecting these small businesses and self-employed professionals is causing unease within the sector. Oil and gas companies will now be the bodies responsible for reviewing work contracts and setting the appropriate status for contractors.
The change is expected to affect a significant number of existing contracts across all industries. According to the UK Treasury, it’s expected to bring in an additional £2.9 billion in taxes by 2024.
In this blog post, we’ll look into what the legislation entails. Plus, how offshore operators and contractors can work together for proper tax assessment.
What is IR35?
The IR35 is a set of laws that regulate taxes for contractors. Also known as “off-payroll rules”, it aims to prevent self-employed individuals from working as an employee for companies while hiding behind a business-to-business contract to apply for higher tax efficiency.
In the industry, this is called “disguised employment”, and can carry hefty penalties should it be proven that contractors are not paying income tax on a Pay As You Earn (PAYE) basis and National Contributions as should regular employees.
How Has It Changed?
Under the new tax reforms to IR35, companies hiring contractors will now be the ones responsible for setting the tax status of contractual workers. Firms will be the ones to evaluate whether the working relationship qualifies the contractor as an “employee”, or as a business owner.
That means that companies will ultimately be the liable parties should HRMC find any errors. The penalty involves contractors paying back the taxes with interest. Should the contractor default payment, firms will have to shoulder the burden.
The change has only been affected in the private sector last April 2020, which has had many contractors and firms scrabbling to stay compliant. Some have taken a more proactive approach than others. Ithaca Energy, an operator in the North Sea, met with relevant authorities such as HRMC before the rollout began to create a framework for the new reform.
Industry Effects
The changes have generally been met with concern by affected contractors, many of which will be taking a significant pay cut over the changes. Some firms, like China National Offshore Oil Corporation, have offered to transition contractors to PAYE, with limited success. Many have chosen to pull out of the North Sea altogether. Around 27 percent contractors in oil and gas intend to leave because of IR35, according to accounting firm Inniaccounts.
Workers leaving for better, competitive pay overseas is exacerbating the industry’s already pressing talent shortage. As employers of a large pool of gig workers, oil and gas operators are also put at a higher risk of making inaccurate assessments and violating regulations, incurring heavy fines.
Some companies in risk-averse industries like banking are cutting ties with contractors completely. However, doing so can only damage the offshore sector. The project-based nature of the industry means that companies will need the expertise of contractors on a flexible basis.
Staying Compliant
Yet the situation isn’t quite as bleak for contractors and firms. Some organisations are already creating work guidelines to help contractors legally stay outside of IR35. Firms are committing to learning how to set tax status properly.
Contractors can take further steps to protect themselves and ensure the companies they work for are conducting correct assessments of their tax responsibilities. An online tool by HRMC helps firms and workers check their status.
Does IR35 Apply to Me?
Three checks will determine whether a contractor falls within IR35: Control, Substitution, and Mutuality of Obligation.
Control looks at how much oversight a company has over how a worker executes their responsibilities. Because of the specialised nature of offshore work, firms often have little control over how contractors provide their services, and many can use this to support staying outside of IR35.
Substitution examines whether the service you’re providing can be done by another business. However, the inverse can also put you under IR35. If your work cannot be substituted for, then that points to you being an employee, not a business.
A Mutuality of Obligation is when a worker needs to provide a service when asked by a client. This is a typical hallmark of an employee-company relationship, where individuals are expected to accept the work. Contractors should be engaged based on a project basis, with all their responsibilities terminating once the agreed upon service is completed.
Because of the diversity of the scope of services provided by contractors, workers and firms alike will have to closely review existing contracts. For instance, the nuances of control will vary based on existing agreements between contractor and company. “It is possible to demonstrate that there are degrees of control that may not be sufficient to put a contractor inside IR35. However, an understanding of the components of control – how, what, where and when – can underpin a contractor’s IR35 defence,” says IR35 advising consultant Andy Vassey.
There’s work to be done on the client and contractor side. Firms need to learn how to evaluate each contract, instead of applying blanket assessments that will only put off independent contractors. On the other hand, self-employed offshore workers will need to strictly define the terms of engagement for each contract to ensure they legally keep away from the scope of IR35.
