The flexibility, skills and savings offered by contractors mean energy companies must learn to cope with IR35 reform
While many commentators expected the issue of IR35 to fall into the background upon the introduction of reform on 6th April 2021, it’s safe to say this hasn’t been the case.
HMRC’s recent – and quite aggressive – policing of this tax legislation designed to prevent disguised employment among contractors has made sure that this controversial tax legislation remains firmly in the spotlight.
IR35 reform has been in force in the private sector for five months now. These changes saw medium and large businesses become responsible and in many cases also liable for assessing the IR35 status of contractors they engage. In other words, energy companies must now decide if the service delivered by a contractor is carried out in a way that reflects self-employment or employment.
So how has this industry coped so far? What approach have companies taken? The challenges they have faced? The opportunities seized?
In this article, I’ll draw on my experience as director at Qdos, which is supporting a number of high profile energy companies with their IR35 processes.
The lay of the land
Cast your mind back to pre IR35 reform and you’ll recall that many people were expecting the worst when these changes arrived. Reflecting on reform, has it led to the end of contracting? Absolutely not.
Granted, while too many energy firms have needlessly – and in some cases non-compliantly – transferred their entire contractor workforce onto the payroll, this is not the case across the board.
Thousands of private sector firms – many of whom operate in this industry – have successfully implemented these changes and have chosen to continue engaging genuine contractors outside the scope of IR35. This is the sensible, logical decision and one that will serve them well.
Our most recent study, put to contractors in April immediately after IR35 reform was rolled out suggests 35% have been placed outside IR35 by their client – the remaining 65% were determined inside IR35.
Not the best ratio, I’ll give you that, but also not the worst – and I imagine this split will have balanced out somewhat and will continue to do so.
Ongoing IR35 compliance is key
Many firms have completed ‘phase 1’, which was the introduction of IR35 reform, but ‘phase 2’ also needs careful attention. By ‘phase 2’, I’m referring to the ongoing measures that must be taken to ensure IR35 compliance going forward.
Getting ready for IR35 reform in April was just the beginning. Businesses need to continue to uphold the standards set upon the arrival of the changes – whether that’s carrying out expert IR35 status reviews or regular audits of the processes and procedures in place.
The £87.9m IR35 bill paid by the Department of Workplace and Pensions (DWP) tells you everything you need to know about how seriously HMRC are taking compliance – or at least how much of a message they wanted to send by holding this government body accountable.
With this in mind, it’s crucial that firms see IR35 as an ongoing project, not a one-off tick box exercise.
Contractors vitally important to an evolving industry
There is, of course, still a lot of work to do to convince risk averse companies that they can safely engage genuine contractors outside IR35 going forward. This is an outcome that can be achieved through the combination of rigorous IR35 status reviews, with outside IR35 engagements protected with insurance.
The change happening in the energy industry currently means it’s perhaps more important than ever that companies – whether oil and gas or those investing in renewables – are able to manage IR35 reform. It holds the key to retaining a highly skilled, flexible and cost-efficient workforce. With contractors in play, businesses can reap the benefits of an agile, lean and specialist headcount – one that is able to help them meet the demands of a rapidly evolving industry.
As a result, the decision that some firms have had made in response to IR35 reform – which is to insist that all contractors become employees or work via umbrella companies – is short-sighted and could see them fall behind their competitors.
To put this into context, 87% of more than 32,000 IR35 status reviews carried out by Qdos on behalf of businesses are deemed to sit outside IR35. Absorbing employers’ NI by forcing these genuine contractors to work on the payroll simply doesn’t make sense and is more expensive than engaging them compliantly outside IR35.
So where do we go from here?
Casting an eye on the road ahead, the fact of the matter is that IR35 is here to stay. This means the sooner energy companies get to grips with these changes the better.
In an industry facing great change, contractors could prove to be the difference in being able to navigate change, overcome challenges and seize opportunities that emerge.