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IR35 – Impact on Oil & Gas?

How could IR35 reform impact the oil and gas sector?

While statistics tell us that Britain’s oil and gas sector accounts for around just 1% of the oil produced globally, this industry is still hugely important to the UK and provides more than 75% of our total primary energy, with a staggering 1.6m barrels of oil every day. Below we take a look at the potential IR35 impact on the oil and gas sector.

Not only is this sector vital in powering the nation and a huge economic contributor, but the UK’s oil and gas sector also supports over 300,000 jobs, 40% of which are based in Scotland. Many thousands of these roles are filled by contractors – independent professionals who offer unrivalled flexibility and a wide range of specialist skills, from offshore engineering and data science, through to IT support and project management.

A great number of these contractors provide their services to oil and gas companies through their own limited companies, and so must consider whether they fall inside or outside IR35 – the tax legislation designed to stop limited company contractors from paying less in tax as a self-employed individual when the service they provide reflects employment.

From April 2020, changes to the IR35 legislation will be introduced – a reform which will see the responsibility for deciding IR35 status shift from the contractor to the end-client. In a nutshell, this means that thousands of oil and gas contractors will soon have their tax status set by the companies they work with.

The IR35 liability, for which contractors currently carry for any mistakes when operating in the private sector, will transfer from the worker to fee-paying party – which is either the end-client or the recruitment agency.

What might IR35 reform mean for oil and gas contractors?

When working inside IR35, contractors are taxed at a similar rate to employees. After similar changes were introduced in the public sector in 2017, many contractors found themselves wrongly placed inside the rules by clients, who seemed to prioritise protecting their liability over making accurate IR35 assessments.

Therefore, contractors fear a repeat performance in the private sector. They are understandably worried that oil and gas companies will not be prepared and do not possess the skills and IR35 expertise to make well-informed status decisions.

Should contractors be unfairly placed inside IR35 next April, there’s a strong chance these workers will look to work elsewhere and with businesses capable of setting IR35 status accurately.

What do IR35 changes mean for oil and gas companies?

There could be huge consequences for the oil and gas companies that fail to prepare for IR35 reform. Firstly, any medium and large company that isn’t in a position to make accurate IR35 decisions from next April will struggle to attract contractors, who understandably want their tax status set correctly.

There’s also the issue of IR35 liability and the fact that oil and gas firms – when responsible for paying contractors – could be fined by HMRC for inaccurate IR35 assessments and made to pay the taxman any missing tax, plus interest and any other penalties.

However, the threat of this doesn’t mean oil and gas companies should make blanket IR35 determinations, which usually result in all contractors being placed inside the rules. HMRC has said this approach is non-compliant, signalling the importance of accurate, not risk-averse, decisions.

Where do oil and gas recruiters fit into all of this?

Recruitment agencies need to take IR35 reform seriously, and not only for the fact that when playing the role of the fee-payer they will carry the liability.

Much like oil and gas companies, recruitment agencies placing contractors in this sector will also lose out if the end-clients they work with offer only inside IR35 opportunities. While agencies will not be the party responsible for setting IR35 status, they are advised to work with end-clients to help them get it right.

IR35 reform presents a number of challenges to agencies, but it’s fair to say the ones that assist end-clients with accurate decisions will find themselves better placed to attract contractors after April 2020 and protect their liability, when operating as the fee-payer in the supply chain.

Given contractors play such an important role in the success of the UK’s oil and gas industry, it’s crucial that the companies engaging these workers prepare for IR35 reform. In doing so, they will be well-placed to attract independent professionals and minimise risk.

Learn more about QAccounting’s range of IR35 services here.