In the Chancellor’s most recent Autumn Budget the UK government confirmed plans to reform the IR35 tax legislation for the private sector.
The proposed changes to current IR35 rules, which aims to bring the private sector in line with the public sector, will alter the way in which organisations engage with workers outside of the payroll and, in particular, those who contract with individuals through a Personal Service Company (PSC) arrangement.
Until relatively recently, the use of PSCs within the oil and gas industry was an exceptionally common and accepted structure. Many projects were being delivered with workforces that comprised of both staff and individuals contracting through PSCs.
The use of PSCs in the UK oil and gas industry suited both the individual contractor and the end user business, with the structure providing flexibility for both in terms of contract duration, which is particularly useful for project based work. In addition, businesses that engaged with PSCs were able to contract with certainty on costs – usually via an agreed fixed day rate – and the PSC bore the liability for determining and paying any PAYE (“Pay As You Earn”) or NIC (“National Insurance Contributions”) obligations under the IR35 legislation.
In 2017, the government announced changes to the existing IR35 legislation for the public sector, which moved the obligation for the PAYE and NIC obligation to the end user. Then in November 2018, it confirmed that the same changes were also to be rolled out to the private sector from April 2020. This would inevitably have an impact for businesses within the oil and gas industry – an industry that often engages with individual contractors through PSCs to upsize the workforce and bring in specialised skills for new projects.
It is fair to say that the use of PSCs has fallen significantly in recent years with many oil and gas businesses reviewing their overheads and taking action to reduce costs in response to the downturn. Measures included terminating or failing to renew PSC and agency contracts, requesting significant day rate reductions on existing contracts and offering employment contracts to individuals who had been operating as contractors.
With an uptick in activity and a continued confidence being observed across the industry, the many businesses that were forced to operate with a leaner workforce are now seeking experienced manpower to deliver new project wins. However, attracting the required skills and experience may prove challenging with the downturn resulting in many leaving the region to retrain and seek employment within other industries; taking up industry roles within other countries; or even taking early retirement.
With the sector beginning to become active again – coupled with the time critical nature of project delivery – PSC usage is likely to be on the rise again and with the coming changes to the tax treatment, there is a real need to take care prior to re-entering such arrangements.
The most significant impact of the proposed changes to IR35 will be the increased costs that these changes are anticipated to bring. From April 2020, when the rules are set to change, it will no longer be the responsibility of the PSC to determine the PAYE and NIC liability. The client (i.e. the end user) will instead become responsible for determining whether they have an underlying “employment” relationship with the contract workers. Furthermore, where an underlying employment relationship exists, the entity which pays the PSC will become responsible for operating PAYE and NIC on payments made to the PSC. At a minimum this will increase contracting costs by 14.3% of the payment (14.3% is the aggregate of employers NIC and the Apprenticeship Levy). However, it is likely that negotiated day rates may need to increase in order to attract / retain contractors, thus further increasing costs.
Given the likely cost implications, businesses should take appropriate steps to plan for the changes to IR35 rules, such as reviewing supply chains and identifying their contractor populations in both administrative and operational roles. Although April 2020 may seem like some time away, planning ahead will help to put the relevant processes and controls in place to ensure compliance with the new rules and ensure that contractual arrangements are appropriate. Businesses can then successfully and promptly deliver new projects and capitalise on industry opportunities that lie ahead.
Deborah May, Director, KPMG UK