Oil & Gas firms must prepare for fast-approaching tax reform

Oil & Gas companies, that rely on the skills and flexibility of contract workers, are bracing themselves for the 6th April 2020 - the date on which they become responsible (and in many cases liable) for determining the tax status of the limited company contractors they engage for projects.

Reform to the IR35 legislation, which exists to prevent contractors working as ‘disguised employees’, will mean medium and large private sector businesses must decide if these workers provide a service that reflects employment or self-employment.

As part of these changes, the liability will transfer from the contractor to the party responsible for paying the worker, which will be the hiring business or when involved, the recruitment agency. You might already be aware that similar measures were rolled out in the public sector two years ago.

Given contract workers make up many thousands of the reported 300,000 jobs the UK Oil & Gas sector supports, it goes without saying that to continue benefiting from engaging these workers, Oil & Gas companies must get to grips with the changes sooner rather than later.

When April 2020 arrives, it’s important Oil & Gas companies are able to accurately determine the tax status of contractors - a move which will not only help them attract independent professionals going forward but one that will also ensure their IR35 compliance and protect their own financial interests.

The draft legislation for private sector reform was published earlier this year and, barring potentially minor tweaks, is expected to reflect the changes that are enforced next April. So, with the blueprint for incoming changes in place, Oil & Gas companies and recruitment agencies servicing the industry are under pressure to prepare for the arrival of changes.

While helping more than 100 companies and recruitment agencies get ready for IR35 reform - a number of whom operate in the Oil & Gas sector -  we’re often asked similar questions by our clients, who are understandably concerned about rapidly approaching reform and wondering how to make well-informed IR35 decisions that safeguard any liability.

I’ll answer a few of these frequently asked questions now...

Where do we start?

Working off the assumption that you haven’t started preparations, the sooner you begin, the better. Regardless of whether you’re an Oil & Gas firm engaging these workers or an agency placing contractors, you must first assess the impact IR35 has on your own business.

So, for example, how many contractors do you currently engage or place? What risk does IR35 pose to your business specifically? If you handle the payments to contractors, do you have the processes in place to make relevant tax and NI deductions before paying a contractor who is deemed inside IR35? With a clearer view of the job in hand, you’ll be better positioned to start putting your IR35 strategy into action.

How should we assess IR35 status?

We get asked this a lot. HMRC encourages the use of CEST - the taxman’s own IR35 tool - however, given the technology has a number of obvious flaws, we advise our clients not to rely solely on an answer it provides.

CEST ignores key aspects of the IR35 legislation, relies very heavily on the right a contractor has to provide a substitute when delivering an answer and, compared to an IR35 contract review, asks very few questions before making its decision.

When you add into the equation that CEST has been dismissed in numerous IR35 court cases and that 86% of contractors do not trust the tool, an IR35 status review conducted by an independent specialist is a safer, more accurate way of determining a contractor’s status.

What are our responsibilities?

Businesses have a responsibility to take ‘reasonable care’ when making IR35 decisions. While ‘reasonable care’ is open to interpretation, in our opinion, it should effectively stop companies from prioritising protecting their liability over making accurate determinations. In other words, don’t place contractors inside IR35 simply to safeguard the liability you might carry - this will drive contractors away.

There are also other tax responsibilities Oil & Gas firms need to take into consideration. If and when you deem a contractor inside IR35, you (or the fee-payer) will need to deduct the appropriate amount of income tax and employee National Insurance contributions from their invoice and pay this to HMRC on their behalf.

You’ll also need to pay employers NI to HMRC on any inside IR35 engagements. Given this is a direct cost to you, the client, it’s worth bearing in mind that it’s much more economical to compliantly engage contractors outside IR35 - an arrangement which the vast majority of contractors prefer too.

What shouldn’t we do?

Do not place all contractors inside IR35 just to protect the liability of the fee-payer or because it’s the most convenient thing to do. ‘Blanket determinations’ as they’re known, are not compliant and will result in the business becoming liable for IR35, assuming they don’t already carry it as the fee-payer.

HMRC says ‘role-based decisions’ are compliant, but only when the workers have identical contractual terms and conditions. However, in our experience, and having handled over 1,600 IR35 investigations, it’s very rare that two contractors’ working practices are exactly the same. Therefore, we advise companies to conduct IR35 assessments on a case-by-case basis.

Can you insure yourself against IR35?

Absolutely. Amid the concern surrounding IR35, this is something that is often overlooked. As a result of IR35 reform, the liability - in other words, the risk - will shift from the contractor to the fee-paying party in the supply chain. Throw an aggressive HMRC into the mix and IR35 insurance is a valuable policy to take out.

With under six months to go until the arrival of reform, Oil & Gas companies and recruitment agencies mustn’t ignore the changes and hope for the best. Nor should they react when reform is enforced - do this and you’re left playing catch up.

Put simply, for the Oil & Gas sector to continue attracting contract workers in years to come, businesses engaging these workers and agencies placing them are advised to take IR35 reform seriously and equip themselves with the knowledge and tools needed to make well-informed status decisions - something that through the Qdos Status Review, we’re able to help with.