While COVID-19 and Brexit have dominated the agenda for oil and gas businesses in recent times – and rightly so I should add – there is a third issue that this industry is taking just as seriously. I am, of course, referring to IR35 reform in the private sector.
On 6th April, all medium and large businesses will become responsible for assessing the IR35 status of contractors – in effect determining if the working relationship reflects self-employment or employment.
As part of the reform – which is also referred to as the ‘off payroll reform’ – the fee-payer (whether the business engaging the worker or the recruitment agency placing them) will start to carry the IR35 liability, assuming all obligations have been fulfilled in the supply chain.
Explained differently, IR35 changes will see oil and gas firms tasked with deciding if a contractor is self-employed or employed for tax purposes, with the party handling payments to the worker to shoulder the risk.
After IR35 reform was delayed by 12 months because of the pandemic, the clock is now ticking towards what is a hugely significant moment – not only for contractors, but for the businesses that rely on the skills and flexibility of these workers.
So what must oil and gas companies do to ensure the successful and compliant handling of IR35 reform by 6th April?
Avoid knee-jerk reactions
Before I get into the granular details, businesses need to be made aware that IR35 reform is manageable. Banning contractors or forcing them to work on the payroll is unnecessary, and these knee jerk reactions to the changes – ones that we have unfortunately seen all too often – must be avoided at all costs.
My advice to businesses is to adopt a pragmatic approach to IR35 reform – a strategy that prioritises IR35 compliance over needless workarounds to the changes.
Assess contractors with ‘reasonable care’
Businesses must determine the IR35 status of all contractors with ‘reasonable care’ or be held liable for IR35 irrespective of whether they are the fee-payer or not.
The term ‘reasonable care’ is loosely defined at best, but the cut and thrust of it means firms need to carefully consider a contractor’s IR35 status and not simply place everyone inside the legislation regardless of status.
Do not enforce PAYE-only working
This means blanket IR35 decisions – where all contractors are forced inside IR35 irrespective of their true status – must be avoided. They are non-compliant, given they do not constitute ‘reasonable care’.
Having assessed over 15,000 contractors on behalf of businesses, Qdos has found that the vast majority belong outside IR35 in our expert view. So if most contractors belong outside IR35, why force them to work PAYE?
While most end clients are aware that all contractors – existing and newly engaged – need to have been assessed by arrival of reform, recruiters would be wise to carry out their own due diligence too. After all, in many cases the agency will be the party that carries the can for incorrect IR35 status determinations.
Remain wary of CEST
Companies should think carefully about how they assess IR35 status and, in an ideal world, steer well clear of HMRC’s IR35 tool, Check Employment Status for Tax (CEST). The use of CEST isn’t mandatory and, frankly, the tool is fundamentally flawed.
This isn’t just my opinion or only the view of Qdos either – it’s how most IR35 specialists feel about HMRC’s tool, which incidentally has been dismissed in court, ignores key aspects of the IR35 legislation and cannot deliver an answer 19% of the time.
If, for whatever reason, a business decides to use CEST to assess IR35 status, answers should be checked by a specialist. IR35 status reviews carried out by third party specialists qualify as ‘reasonable care’ and, in contrast to CEST, offer a far more reliable and thorough assessment of a contractor’s actual status.
Issue ‘Status Determination Statements’
With a contractor’s IR35 status decided, end clients must inform the worker of this, along with the second party in the supply chain. These Status Determination Statements (SDS) need to be sent out before 6th April, containing the deemed IR35 position and the specific factors that contributed towards this decision. An SDS can be sent via email, whether as an attachment or within the copy itself.
Implement compliant payroll processes
If and when a contractor is deemed inside IR35, the fee payer is required to deduct the appropriate employment tax from the contractor’s invoice and pay this directly to HMRC. These processes need to be set up compliantly and in place by the time reform arrives to ensure that both the contractor is paid correctly and HMRC receives tax it is owed.
Review supply chain contracts
In addition to reviewing the contracts and working practices of contractors, IR35 reform is an opportunity for oil and gas companies to examine the contracts they hold with other parties in the supply chain – from agencies to payroll providers.
It’s vital that businesses are confident that all contracts they hold are compliant. Naturally, HMRC consider both the ‘upper tier’ and ‘lower tier’ contracts as part of an IR35 enquiry, which is why it’s so important that firms leave no stone unturned in ensuring compliance across the board.
With many often parties involved in the supply chain – from end-clients to agencies and consultancies – it’s certainly worth businesses carrying out due diligence to make absolutely sure of their responsibilities under the incoming reform, irrespective of whether a firm is responsible for determining IR35 status or is the one set to carry the IR35 liability.
There are several other considerations for businesses – whether that’s taking out IR35 insurance to mitigate the risk of engaging contractors outside IR35 or the need for a clear and traceable audit trail that demonstrates compliance.
As we close in on 6th April, I urge oil and gas companies – who perhaps need contractors more than ever in times of uncertainty – to implement a measured approach to IR35 reform and one that will allow for the continued use of contractors in years to come.