At the heart of the IR35 tax reform is £700 million each year in tax avoidance by personal service companies (PSCs), according to HMRC.
Despite the recently announced Treasury review and calls for a delay from MPs, there’s nearly a billion reasons why delay will not happen.
To work out whether the off-payroll working rules apply, the person or organisation receiving an individual’s services (the client) will be responsible for making a decision about whether the worker is employed or self-employed for tax purposes.
The reform does not affect clients who are classified as “small”, ie those who satisfy two or more of the following requirements – an annual turnover of not more than £10.2m, a balance sheet total of not more than £5.1m or employing not more than 50 employees.
Unless exempt, clients should continue with their preparations and educate their PSC and contracting population on their plans and the future tax status. It is a high-risk strategy to wait until the latest Treasury review reports.
This tax reform does not create a new tax, nor will it be harder to show whether IR35 legislation applies or not. This reform is a new way of collecting tax that would always have been due.
What the legislation does is change who polices the system. The onus will shift from a PSC to the end user/client.
The client’s new duties include: (a) determining the tax status, (b) communicating that determination and (c) responding to challenges. If IR35 legislation applies, a client contracting with a PSC will be obliged to remit tax and national insurance contributions (NICs) to HMRC from April 6.
This creates significant new administrative burdens on clients and if IR35 legislation applies, the deemed employer must bear an additional cost of NICs which transfer from the PSC. PSCs will also lose a 5% tax break, which will not be passed on to clients.
With the onus on clients to enforce compliance with IR35 legislation and new corporate offences of facilitating tax evasion, which could kick in, as well as the fiscal consequences of getting it wrong, clients should update their risk registers and review their exposure.
These reforms have been well publicised in the oil and gas industry for the past few years. However, until clients assess the future tax status for each PSC, PSCs (and their contractors) can only wait to see how it impacts them.
There is an increasing sense that PSCs and contractors will have to react swiftly, which will create a sense of urgency. This could lead to disruption and resourcing issues for the sector.
Because of the perception of non-compliance, HMRC expects substantially more income tax and NICs to be collected as a result.
Critics voice concerns that limited company contractors in oil and gas have been “at it” for years. There may be some cases where scepticism is justified. But our recommendation is to watch out for conscious (or unconscious) bias affecting decisions.
While HMRC may not complain if genuinely self-employed contractors are taxed as employees, contractors probably will and the client risks giving a commercial advantage to those competitors who apply the rules with greater precision.
The oil and gas industry is resourced by professionals and specialists who extract natural resources in hard-to-reach places, making them available as a valuable commodity on the open market. An industry consisting of project-based, problem-solving work is suited to the self-employed and the employed alike.
In the countdown to implementation, clients should already have a clear policy commitment on IR35 tax compliance and written procedures.
Clients should be telling their contractor population about their plans. There are important legal changes required to the contractual relationships between clients, agencies and their PSCs to reflect the new obligations. If you have not yet got to grips with this reform and your obligations as a result, seek help.
Robert Phillips, legal director, Addleshaw Goddard LLP