In March of this year, just one month before the measures were due to come into force, the UK government announced a delay to the implementation of reforms to the off-payroll working rules ("IR35") in the private sector. Only a few weeks earlier the Chancellor had delivered a Budget in which he confirmed that the government remained committed to pressing ahead with the reforms, despite significant criticism of the measures from businesses, professional advisers and representative bodies.
Against the backdrop of rapidly shifting government priorities in response to the coronavirus pandemic it was perhaps seen as an opportune moment for the government to 'press pause' on the implementation date for the controversial measures.
However, the government is clear that this is a temporary deferral, and this is confirmed by the inclusion of the new rules in the Finance Bill 2020-21, as coming into force on 6 April 2021.
These reforms have been opposed by the oil and gas sector in the UK, but just how big a shift in 'doing business' in the sector will the rules generate?
What are the IR35 rules?
The IR35 rules apply where a 'worker' provides their services through their own personal service company ("PSC") or other intermediary to a client, but that 'worker' would have been classed as an employee of the client if they had contracted directly with the client. If the rules apply then the 'worker' is required to pay tax on the same basis as that of the equivalent employee, with the tax implications of this currently falling on the PSC or relevant intermediary.
From 6 April 2021, however, all medium and large-sized private sector clients and public sector authorities will be responsible for deciding if the IR35 rules apply. The initial burden will fall on the client to decide if contractors are genuinely self-employed, and the client will be treated as the 'deemed employer' and responsible for operating PAYE in respect of the arrangements until such time as the client issues a status determination statement.
In providing the worker with a status determination statement a client can shift the burden for operating PAYE to the entity closest in the contractual chain to the PSC or other intermediary. However, businesses should note the rather novel mechanisms in the legislation which may also allow liability for operating PAYE to shift between parties in the labour supply chain in certain other circumstances.
In short, the reforms mean that all parties within any contingent labour supply chain require to be aware of their obligations under the legislation, and take steps to protect their own position, or risk being responsible for the related payroll liabilities.
How will this affect businesses in the oil and gas sector?
Under IR35, businesses are not permitted to apply 'blanket' decisions in respect of worker status determinations for off-payroll arrangements. Instead they are required to assess each arrangement on its own specific facts and circumstances. Fearing the compliance burden and risk attached to this status determination process, many large businesses have taken a pre-emptive approach, confirming that, as a matter of policy, they will simply no longer engage with workers through intermediaries.
Such sweeping responses from client businesses were undoubtedly the underlying intention behind the reforms, effectively forcing businesses to regulate and discourage off-payroll working between themselves and increase the tax and NICs accounted for via payroll.
Arguably this is a very effective policy when it comes to targeting artificial arrangements where PSCs and intermediaries have been interposed into a relationship which would otherwise have been considered one of employment between worker and client simply to secure more a beneficial tax treatment. However, this sledge-hammer approach does not take account of the nuances of certain industries and sectors in which the traditional 'employment' labour model has never been the norm.
Contracting relationships in the oil and gas sector are complex and highly specialist. The human resource supply chain which underpins operations in the sector is often long, intricate and international or quasi international. By virtue of the nature of how projects are structured, the flexible labour which contractors can provide businesses operating in the sector is crucial to delivering projects on time and within budget. Specialist contractors can be brought in to work on specific tasks at key points in the life of a project, ensuring that businesses are able to plan and manage their labour costs. A wide range of skills are required for projects within the sector, many of them highly specialised or niche, and a number of which do not lend themselves as viable as a long term employment relationship between a worker and client. That said, regardless of the outcome of under the new off payroll working rules, the tax rules for continental shelf workers and mariners should not be ignored.
If, as a client, you are based wholly overseas (with no connection with the UK (e.g. no branch, subsidiary or permanent establishment or based on platform(s) outside UK waters) the off-payroll working reforms do not apply to you. The worker's PSC will be responsible for determining if the rules apply. It is worth noting that the residence of the PSC of the worker has no bearing on the application of the rules.
In some situations linked to the tax residence of the worker, UK NICs may not be relevant.
Depending on how businesses operating in the oil and gas sector react to the IR35 reforms, there may be a real impact on the availability of skilled workers, and labour costs may be driven up as a result. Despite what the draft legislation and guidance says, if businesses operating in the sector take a blanket approach, deeming all contractors to be within the scope of IR35, then we may inevitably see, as with public sector IR35 reform in 2017, a migration of skilled workers away from the sector. A proportion of contractors required in the sector offer highly transferable skills which will always remain in high demand elsewhere.
As a sector dominated by larger businesses, the small business exemption will be of limited application. The impact of these changes on a sector already feeling the very real effects of coronavirus pandemic and resultant drop in oil prices should not be underestimated.
Is there an opportunity?
There will be businesses who will choose to prioritise the elimination of potential liability under IR35 over the inherent risk of making bespoke status determination assessments, placing all contractors 'within IR35'. This approach is not in line with the legislation or guidance and risks driving skilled contractors into the open arms of other businesses operating in other sectors or overseas (and, crucially, to competitors within the sector) who are comfortable that their IR35 systems can protect both parties and ensure that liabilities rest where they are intended to.
Those businesses who meet the challenge of IR35 reform head-on, and who ensure that they have the tools to comply and engage with the rules confidently have an opportunity to stand out in the market place and to attract the very best contractor workers. From April 2021, contracting strategies of businesses in the energy sector (and elsewhere) may well diverge on account of IR35 reform being implemented. Whilst it is not likely to be a quick process to become "IR35-ready", keeping 'a foot on the gas' in anticipation of the changes could pay dividends, leaving businesses in the best position to take advantage of opportunities that are the likely silver-lining of an otherwise problematic piece of legislation.
Things for businesses operating in the oil and gas sector to think about:
• Employment status is a matter of fact, not choice. Preparing for IR35 will highlight the importance of taking professional advice when dealing with arrangements involving PSCs and other intermediaries to guard against inadvertent tax consequences.
• Engaging with workers via intermediaries can potentially pose a significant reputational as well as financial risk, but if managed correctly could represent a real opportunity.
• It is important to identify workers who are providing services through intermediaries and 'contract review' your labour supply chain to ensure that any amendments required are picked up (including obligations in relation to information sharing and protections against liability falling on your business as a result of a failing in the wider supply chain).
Authored by Caroline Colliston and Freya Gibb, DWF