With high levels of talent engaged through off payroll structures in the energy sector, the North Sea operators will feel an acute impact when new IR35 reforms are extended to the private sector in April 2020 – impacting flexibility, skills availability and adding complexity and cost to end users.
The original off-payroll working rules (known as IR35) were introduced in 2000 to ensure that those who choose to work through an intermediary such as a personal service company (PSC) who would have been employees if they were directly engaged, should pay broadly the same in employment taxes as if they were employed.
However, HMRC contends that non-compliance with the IR35 rules is widespread and estimates that only 10 per cent of PSCs that should apply the legislation actually do so. The cost of this non-compliance in the private sector is estimated to increase to £1.3bn by 2023/24 – highlighting the significance of this to the Government.
In the Budget 2018, the Government announced intentions to reform the off-payroll working rules for medium and large organisations in the private sector from 6 April 2020 to broadly mirror the public sector rules which were rolled out in April 2017. However, where the end user of the worker’s services is a small business the responsibility for assessing the arrangements, and applying IR35, will remain with the PSC.
This change will impact businesses that engage off payroll workers who operate via intermediaries, such as personal service companies. The impact of this change should not be underestimated, and sufficient preparation will be crucial. The reform will present private sector end users with additional, and often substantial, one-off and ongoing challenges and costs.
Initially, it will be necessary to identify existing arrangements that will be caught from April 2020, which can be challenging, and to determine the additional cost that may arise as a consequence.
For example, for businesses which decide that their off-payroll workers fall within the IR35 rules, there will be increases to direct costs such as employer’s NIC (13.8 per cent) and potentially the Apprenticeship Levy where applicable (0.5 per cent).
Due to the typical make-up of the workforce, IR35 reform from April 2020 is likely to have a significant impact on the North Sea energy sector; and with green shoots of recovery being seen across the industry operators will need to carefully consider how to balance the requirements for a flexible workforce with the potential administrative and financial implications of the proposed new legislation.
HMRC has previously focused elements of their IR35 activity on workers in the oil & gas sector and the proposed changes, which will put the onus on the end user of the services to assess the arrangements, will put more pressure on the operators and will likely lead to increased scrutiny going forward. The work required to prepare for this change should not be under estimated and the sector needs to start looking at this now.
by Campbell Reith, Tax Partner, RSM
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