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North Sea contractors risk ‘random’ HMRC tax audit after IR35, top accountant warns

Michael Reid, Meston Reid. Picture by Jim Irvine.
Michael Reid, Meston Reid. Picture by Jim Irvine.

Tighter tax rules after the introduction of IR35 could see North Sea contractors face “random audits”, according to a north-east accountant.

Michael Reid, partner and co-founder of Aberdeen accountancy firm Meston Reid, said that there is a “risk to a contractors” that Her Majesty’s Revenue and Customs (HMRC) may take the view that many personal service companies are not “genuine self-employed entities”.

He also claimed that he would “not be surprised” if HMRC adopted a targeted approach and could “look back” to earlier periods and raise assessments.

North Sea oil and gas firms – alongside the IT sector – are predicted to be most impacted by new IR35 legislation due to the number of one-man personal service companies (PSC) in the locality.

The new rules seek to halt individuals registering themselves as companies to pay less tax.

Mr Reid commented that the risk to a main contractor is that HMRC will take the view that a PSC is not a genuine self-employed entity.

He said: “In such case, HMRC could approach the contractor and say that the sum paid to the PSC is deemed to be net of the pay as you earn (PAYE) and National Insurance contributions that would have arisen if that PSC had been operating as an employee and ask the contractor to pay such sum.

“It is perhaps to avoid this risk that the contractor will either add the person to the payroll rather than pay them through a PSC, or seek someone else to shoulder the tax risk such as an umbrella company.”

The UK Treasury has estimated the measure will bring in an additional £2.9billion in taxes by 2024, and follows similar rules brought into the public sector in 2017.

The new rules for the private sector are due to come into effect on April 6 2020.

All North Sea operators are obligated to ensure that PSC contractors engaged by them are compliant with IR35 rules by the deadline or risk being caught under the new provisions.

Mr Reid also warned that some PSC’s may be targeted by HMRC due to the expected “smaller population” of PSCs in operation.

But he added that it was currently “impossible to determine” until it is known how many companies cease operating after the April deadline.

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