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Oil sector to ‘feel the heat’ over changes to contractor pay rules, says tax expert

Derek Leith
Derek Leith

The oil and gas sector is bracing for the “extensive impact” of changes to off-payroll working rules announced in the chancellor’s budget, according to a tax expert.

On Monday, Philip Hammond said the rules, known as IR35, would change in the private sector from April 2020, meaning some contractors face higher taxes, while there could be potential penalties for firms hiring them.

It aims to stop employees from “disguising” themselves as freelance contractors in order to pay less tax, and the North Sea energy sector is thought to be among the industries which will be most drastically affected.

The IR35 rules are a major revenue booster for the Treasury, making sure that contractors deemed to be employees pay the right amount of taxes, as opposed to those who offer services via their own private companies.

From April 2020, the obligation will pass to large and medium-sized firms to assess whether the contractors are genuinely self-employed, rather than actually working for the company itself which is engaging the services.

Contractors who work through their own limited companies pay less in taxes but if someone is deemed to actually be an employee, the company using the contractor will need to make additional payments like national insurance contributions.

Factors such as overtime pay, hours worked and whether the firm provides equipment will need to be considered, and firms who don’t meet the rules will be subject to penalties.

The Treasury has estimated the measure will bring in an additional £2.9billion in taxes by 2024, and follows similar rules being brought into the public sector last year.

Derek Leith, EY’s global oil and tax leader, described it as a “profound change” for the sector.

He said: “I think we will see a lot of moves in the coming months to address this. Companies need to make sure they are not liable to penalties.

“I think you will see a number of people who have contractors feeling the heat.

“It places the obligation on the engager to assess whether or not the person is providing services to them is doing so through a private company, as opposed to really being an employee but disguising it.

“That’s a profound change for large and medium sized companies to make that assessment as to whether they should be making payroll taxes.”

In the budget, the chancellor said the changes will not apply to the smallest 1.5million businesses and will not affect anyone who is genuinely self-employed.

When similar changes were introduced last year in the public sector, it raised an extra £550m in tax and national insurance.

Mr Leith added: “If a company pays another company for the provision of services they don’t have to make payroll taxes or national insurance contributions, which is over 30% what they pay an employee.

“One of the biggest industries for this is oil and gas, it will have a very extensive impact.”

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