The “sheer scale of disruption” sparked by changes to IR35 rules have surpassed expectations, an employment expert has said.
Since April 6, it has been up to medium and large oil and gas companies to decide whether a contractor is self-employed or not.
As a result of the changes, many workers are now deemed to be agency employees rather than autonomous service providers, meaning they have to pay more tax.
The alterations have impacted thousands of people in the North Sea sector, who used to work via their own personal service companies (PSC).
A union boss previously said that many contractors and freelancers stood to lose around half of their previous pay packet due to the new rules.
Adding insult to injury, those who choose to continue operating as a PSC may not benefit from the rights and protections enjoyed by regular employees.
IR35 impact ‘no surprise’
Though some feel the new rules level the playing field, others have hit out at the changes for adding another level of uncertainty.
Brian Rudkin, director and head of employmer services at Johnston Carmichael, said: “It is no surprise that the April 2021 changes to IR35 have had a major impact across entire supply chains, particularly in the oil and gas sector where there has always been a heavy reliance on a contingent workforce across the industry.
“However, the sheer scale of disruption, administration and complexity involved has surprised many end clients, suppliers and labour providers, not helped by the added dimensions of Brexit and Covid which are both also having an impact on the supply of labour.”
Why were the changes made?
Announced in 2019, the new rules were initially meant to be implemented in 2020 before Covid-19 delayed them by a year.
Ultimately, they are designed to bring an end to contractors registering as self-employed and paying less tax than their on-payroll co-workers.
According to previous estimates from the UK Treasury, the reforms will add an extra £2.9 billion to Westminster’s coffers by 2024.
But there are fears that they will also incentivise many workers to abandon the oil and gas sector.
Further ‘fundamental’ changes unlikely
Mr Rudkin said it is “understood” that further “technical changes” are being considered to improve how the rules are being applied in practice.
Any further alterations are likely to be “around the edges” rather than “fundamental” though.
Moreover, having invested “significant resource” in rolling out the new regime, it’s likely Government is in it for the “long haul”.
He added: “I am even more convinced than ever that IR35 will have significant and long-lasting effects on the entire economy. There is no doubt that IR35 is contributing significantly to the shortage of skilled, flexible labour and there is unlikely to be an easy or quick fix to this problem.
“However, rather than creating a level playing-field on the taxation of contractors compared to regular employees, IR35 could potentially create more inconsistency for contractor pay and tax in the longer term because of the way that some end clients, suppliers and labour providers are tackling the legislative changes.
“The financial impact to end clients and fee-payers is the main unknown quantity at the moment. If HMRC is successful in increasing tax revenues through non-compliance with IR35, this could cause serious financial damage to those businesses affected. The impact of this may not be felt for some years yet.”
Business approach ‘frustrating’
Mr Rudkin isn’t alone in being left discouraged by how the IR35 rule changes have proven in practice.
That includes “quick fix” solutions like “contractor blanket bans” or “automated tools” for determining what category a worker falls in to.
Mr Fryer said: “Getting IR35 right now, as the country is opening up and organisations are starting to recover after the impacts of the pandemic, is crucial and is the first step towards benefitting from a truly flexible workforce.
“This will enable energy businesses to offer an attractive proposition for contractors in an increasingly competitive labour market where access to flexible talent is essential for growth while reducing the risk of unexpected tax bills further down the line.”
There is cause for hope though and Mr Fryer says he expects businesses to wise up to the impact of quick fix solutions.
But as UK Government moves into “enforcement mode”, he is encouraging firms to review their solutions to “ensure compliance” and continued access to contractors.
Mr Fryer added: “Since the government is yet to provide a clearer picture of the impact that IR35 has had on businesses this year, at Brookson Legal we have decided to commission our own independent research to shed light on the IR35 solutions businesses have implemented and the impact they have had. We will release the findings later this month.”