Larson Howie: - How will IR35 affect energy sector contractors?

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IR35 has already affected many contractors in the public sector and is set to affect a whole lot more when it hits the private sector in April 2020. HSBC has already announced that it plans to stop engaging limited company contractors from September 2019 and with blanket determinations rife across the BBC, NHS and Network Rail, it looks like the concerns of the contracting community have – temporarily, at least – been validated.

However, IR35 may affect certain industries within the self-employment sphere more than others. We’ve already looked at how accountancy firms may be impacted. How will the energy sector, another industry that heavily relies on a contractor workforce, fair in the face of the off-payroll rules?

How will IR35 change energy sector contracting?

Earlier this week, Deborah May of Energy Voice reflected on the legislative changes, as confirmed in the Autumn Budget last year, would bring to the energy sector.

She writes:

‘Until relatively recently, the use of PSCs within the oil and gas industry was an exceptionally common and accepted structure. Many projects were being delivered with workforces that comprised of both staff and individuals contracting through PSCs.’

‘The use of PSCs in the UK oil and gas industry suited both the individual contractor and the end user business, with the structure providing flexibility for both in terms of contract duration, which is particularly useful for project-based work. In addition, businesses that engaged with PSCs were able to contract with certainty on costs – usually via an agreed fixed day rate – and the PSC bore the liability for determining and paying any PAYE (“Pay As You Earn”) or NIC (“National Insurance Contributions”) obligations under the IR35 legislation.’

This arrangement will soon come to an end because of IR35. The off-payroll rules will certainly change the way business is done within the oil and gas industry in particular, and could have an impact on flexibility, skills availability and cost to end users.

What can energy sector contractors do to avoid being caught by IR35?

While the energy industry has undeniably seen many a PSC and agency contract ended over recent years thanks to IR35 – either through straight up termination or an offer of permanent employment – there seems to be a rise in hiring activity again. This directly equates to a rise in the use of PSCs too.

Avoiding these arrangements is crucial to not being caught by the off-payroll rules, but what else can energy sector contractors do to protect themselves?

Don’t wait for HMRC to come to you

While the public sector may have been subject to blanket determinations in part due to being given just three months to prepare for IR35 (plus the threat of hefty fines if they got an outside-IR35 status determination wrong), the private sector has had much more warning. Arguably, the only blanket determination threat to private sector contractors is the complacency of their hiring company.

Don’t bury your head in the sand. Have a professional IR35 contract review done; while it probably won't be taken as stand-alone evidence in an investigation, it could well tip the scales in your favour.

It’s also advisable to take out IR35 tax investigation insurance. If you’re a genuine contractor you should have nothing to worry about, but IR35 investigations can be lengthy and notoriously subjective – insurance covers the court costs that could arise from an HRMC case, as well as representation by a tax specialist at a tribunal.

 Work through your company only

Make sure your contract clearly specifies that the client or agency is hiring your company, not you as a person. Your company should be the provider of your services, at all times – this is extremely important to get right.

This is one of the main arguments being used against Eamonn Holmes in his IR35 case.

Avoid doing any tasks outside of your contracted job

While it may seem easier to just accept the odd extra task while working for a client, this behaviour could actually get you into IR35-related trouble. Any work outside the scope of your contract could be interpreted as client control – i.e. that you’re actually employed by them.

This is a common problem in role-based (as opposed to project-based) contractor positions, so could cause real problems within the energy sector. These lines are easily blurred so you should take extra care if this applies to your work.

Avoid long termination notice periods

A big drawback to contracting is you don’t have employee rights. Having a specified notice period in your contract is understandable, but including such a clause may imply that your client is obligated to give you work and that you’re obligated to complete it. This is called mutuality of obligation, or MOO.

This is particularly apt for business consultants and IT contractors who work on projects that can be postponed or cancelled altogether on a whim. Although it’s understandable to want protection from the effects of an unstable income, unfortunately, that kind of safeguarding is synonymous with having employee rights.

Avoid set work days

If the client is contractually obliged to provide a set amount of work per week or you’re obliged to do your work within set hours, that’s very much an employer-employee relationship.

You should be able to dictate when you do your work, as long as it’s completed satisfactorily and to any deadlines specified in your contract. You can, however, include an ‘estimated hours per week to deliver the services’ clause.

Avoid uniforms or employee name badges

If you’re a contractor acting like an employee by wearing an employee name badge or company uniform, HMRC will class you as an employee.

While it may not affect a preliminary IR35 investigation, it could well swing a judgement. This is a trap many contractors fall into when working for large, private corporations.

Energy sector relies on contracting workforce

Typically, the energy sector relies heavily on a flexible, specialist workforce for business to run smoothly. Hirers and agencies will have to consider carefully how to balance new IR35 legislation (and all of the administrative implications that comes with it) and the needs of their self-employed workers – without them, the energy sector could suffer a significant financial hit.

Campbell Reith, writing for Caunce O’Hara, puts this warning to energy sector hirers:

‘HMRC has previously focused elements of their IR35 activity on workers in the oil and 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 underestimated and the sector needs to start looking at this now.’

Should you want some peace of mind, we offer a full contract review amongst other services to help you prepare for IR35. We’ll give a pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.

We also offer IR35 investigation insurance with representation from our Head of Tax and resident IR35 expert Andy Vessey ATT should it go to tribunal.

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