The oil and gas downturn of approximately five years ago where the price of a barrel of oil dropped to less than $30 led to thousands of employees in the sector being made redundant. Those who wished to remain in the sector had to be patient before ultimately securing further employment.
The oil price began to rise albeit it was a slow progression. Just when businesses were starting to get on their feet again, we were hit by the coronavirus pandemic and subsequent global lockdown. Once again this has resulted in significant redundancies being made in the sector around the globe with the North Sea oil and gas sector in particular taking the brunt.
Most oil and gas companies have stated that there will be a recruitment freeze for some considerable time. In such a volatile sector, it has been muted that it could be at least two years before the recruitment of employees is considered. Individuals who have spent most of their working life in the oil and gas sector and have previously been made redundant, are faced with the dilemma of looking for employment opportunities in a different field or setting up as their own Personal Service Company and offering their services to companies in the sector, including former employers.
Setting up as a Personal Service Company potentially brings IR35 into the equation. IR35 is legislation aimed at identifying individuals who work ‘off payroll’ through intermediaries such as Personal Service Companies who are in fact disguised employees.
Under the existing IR35 rules, if deemed to be inside the scope, PAYE/National Insurance Contributions would need to be withheld from payments made by the Personal Service Company to the individual.
However, oil and gas companies need to be mindful that the IR35 Off Payroll Working Rules in the private sector has recently received Royal Assent and will be introduced from April 2021. Businesses who have taken significant cost cutting measures including reducing their payroll bill will have to be mindful that if they do not take the appropriate measures, they could be faced with an unexpected Employer National Insurance bill from April 2021.
Careful consideration needs to be taken when engaging with a Personal Service Company with the updated rules IR35 coming into force next year and existing contracts in place will need to be changed from April 2021. It has been acknowledged by HMRC that many businesses over the years have engaged with a Personal Service Company (eg. contractor) who has only provided their services to that particular business, and therefore the Personal Service Company would be caught under the IR35 rules. Lack of resources had been a frustration for HMRC, but steps have now been taken to significantly increase the resource in this area. Transferring the responsibility to the “end user” of the services also makes it easier for HMRC to police.
We know that HMRC IR35 enquiries are burdensome and the cost for businesses in getting it wrong could be considerable. Unless the business is exempt under the small companies’ rules (turnover of £10.2m or less, balance sheet total of £5.1m or less, 50 employees or less), companies need to understand the impact of these changes and what it could mean for their tax bills.