Freelancers make up the majority of offshore workers in the UK’s oil and gas industry, with 38,130 employed by contractors compared to the 10,949 employed by operators, according to the OGUK Workforce Report 2019. To say that this sector is going to be majorly impacted by the upcoming changes to IR35 would be an understatement.
The COVID-19 pandemic has pushed back the date for when the new IR35 rules take effect from 6 April 2020 to 6 April 2021. This should give companies that will be affected more time to adjust, but it’s never too early to start making preparations, such as taking HMRC’s Employment Status for Tax test.
With another year to prepare then, let’s take the opportunity to take a deep dive into IR35 and what it means for employees and contractors.
IR35 Defined
IR35 is legislation to determine a contractor’s tax status. It was enacted in 2000 to reduce the number of contractors considered by companies as “disguised employees” to avoid paying certain taxes.
“Disguised employees” are contractors who work for clients much in the same way as full-time employees but without the benefits and the legal obligation to pay taxes like National Insurance contributions. Such contractors set up an informal type of limited company called “Personal Service Company” or PSC. A PSC is functionally the same as a limited company—personal finances are separate from business finances, and there is less tax to be paid. What is different is that it is specifically created for one person. There is no actual legal recognition of the term, as a PSC is set up exactly like a limited company. It’s different from being a sole trader, as sole traders have unlimited liability and their legal structure is not as tax-efficient as limited companies.
Also known as the Intermediaries Legislation, IR35 lays out criteria that sort out the professional relationship between a contractor and their client. The legislation overrides whatever professional arrangements there might be with a contractor and a hiring agency, directly looking at the working practices between the contractor and who benefits from the contractor’s services, or the “end-client”.
Working relationships that fall within IR35 must then observe the taxation rules that govern employers and full-time employees. This means contractors within IR35 will have their earnings automatically deducted for tax and NICs. For contractors that fall outside IR35, they maintain the responsibility of paying their own taxes without changing the way they earn income.
IR35 Criteria
The guiding principle to IR35 is that if a contractor only provides their services to an end-client and not their own skills, then they are outside IR35. In the offshore industry, “specialism” of service provided may also be a factor in helping someone fall outside of IR35 and it’s important to note that this is still a very grey area, so it’s important to seek the advice of a good accountant if you’re even slightly unsure.
All the other criteria follow this principle, as outlined in full detail in the government’s Employment Status Manual and its Intermediaries Legislation section.
1. Mutuality of Obligation
Contractors are not obligated to continue working for an end-client once they have accomplished all the tasks outlined in a contract. The same is true the other way around: end-clients are not obligated to continue providing work for contractors once a contract is done. Another defining aspect of freelancing is contractors are not bound to one client.
2. Supervision, Direction, and Control
Contractors must have control over how they accomplish their work in a contract, with as little supervision and direction from their clients. Any additional work for a client outside a contract may be deemed as a working relationship within IR35.
3. Substitution
Contractors should be able to offer substitute workers to their clients to complete the tasks in a contract.
4. Corporate Involvement
Contractors should not be part of their client’s corporate structure in any way, including receiving benefits, being in a list of employees or having a company business card.
5. Provision of Equipment
Contractors should not be reliant on their clients for equipment to fulfil a contract except for cases where safety, security or practicality is an issue.
6. Payment Basis
Contractors have their own rates, and they must send an invoice to get paid. They do not have regular wages.
7. Financial Risk
Contractors pay their own expenses to keep operating as self-employed workers.
8. Right of Dismissal
Contractors may only be dismissed from work if they breach their contract. They are not entitled to a statutory notice of termination.
9. Intention
Contractors are “suppliers” of services to their “customers” (or the end-clients). Nothing more, nothing less.
Changes in IR35
Originally, it was up to the contractor to determine whether they fall under IR35 or not. This was changed for the public sector in 2017. Organisations were given the responsibility of determining the tax status of any contractor working for them. Agencies were also assigned the legal duty to pay the Income Tax and National Insurance contributions of contractors within IR35.
Come 6 April 2021, such changes will apply to the private sector via the Finance Bill 2019-20.
Businesses that tap into contracting will become responsible for assessing whether or not the contractors whose services they retain are within IR35. Contractors found to be within IR35 must then have their Income Tax and NICs managed and paid for by their end-clients. Agencies are also advised to work closely with companies that retain contractors to ensure IR35 assessments are correct.
Employers directly benefiting from contractor work, or end-clients, must submit a Status Determination Statement (SDS) to their contractors and, if applicable, to the recruitment agencies from where the employers sourced the labour. Prior to the submission of the SDS, end-clients have the legal duty to manage their contractors’ Income Tax and NICs.
End-clients also handle SDS disputes and have 45 days to resolve them. IR35 liabilities will fall on end-clients if disputes are not resolved within the timetable.
Only small companies will be exempt from this change. Companies have to meet at least two of the three following requirements to be considered as a “small company”:
- Average number of employees should not be over 50
- Annual turnover should not be over £10.2 million
- Balance sheet total should not be over £5.1 million
Limited companies will no longer have the 5% expenses allowance to help meet IR35 rules, except for those in business with small companies.
Contractors who will be paying employment taxes for the first time will not be subject to an investigation of their tax history by HMRC. Companies who will be assessing the IR35 status of their contractors will not be subject to HMRC enquiries either.
Preparing for IR35
With the offshore energy industry’s heavy reliance on contractors to complete projects, the official implementation of the new IR35 rules are set to have a major impact on UK-based contractors and companies.
The anti-avoidance section of the March 2019 off-payroll working rules consultation document tackles the issue of contractors who are UK residents working with end-clients who are non-UK residents. Basically, end-clients that are non-UK residents are responsible for determining the employment status of contractors they work with who are UK residents. If it is determined that the working relationship falls under IR35, the end-client must deduct tax and National Insurance contributions from retaining the services of a UK-resident contractor.
Such complications make it absolutely necessary that you prepare yourself for the oncoming changes with the following action steps:
1. Take HMRC’s Employment Status for Tax Test
HMRC has set up a tool that workers and businesses can use to see if their contract falls under IR35. Take the test to see where you currently stand. It asks a series of questions to determine the nature of a specific working relationship, which makes it useful for contractors, recruitment agencies, and end-clients. Be extra careful with your answers, reviewing each one to make sure they are all accurate.
2. Review Your Contracts
If the results from the test show that IR35 will apply to you with your current contracts, it’s advisable to review their answers to make sure that they have answered in the most accurate way possible. Then it’s time you take another look at how you negotiate contracts.
Following the aforementioned criteria, be clear about the terms you are willing to work under. Write in detail the exact services you will provide, your working hours, your place of work and that you will use your own equipmen
3. Show You Run Your Limited Company
As a contractor with a limited company, it pays to present your company as such. Set up your own website with your company name on it. You can do it yourself or hire a web developer to make one for you. Get dedicated office space if possible, as this can help your case to be considered as self-employed and not an employee.
4. Reassess Your Recruiters
Offshore recruitment agencies will play an important role in connecting companies concerned about contractors and IR35. Take the time to talk to recruiters about how they will address the issue and know if they can help you.
Once you’re ready for IR35 changes, why not browse our jobs page to start looking for offshore work in your field.
