Concern has been raised over the cost to businesses and the potential shrinking of the North Sea workforce over plans to change contractor pay rules.
HMRC published draft legislation last week outlining greater detail on the IR35 changes, which are expected to widely impact the oil and gas sector.
IR35 comes into force in the private sector next April, which will stop contractors who are effectively employees of a company “disguising” themselves to pay less tax.
Large and medium-sized firms will be responsible for assessing whether contractors are genuinely self-employed, rather than actually working for the company engaging the services.
The 11-page document sets out that the potential cost for any firms defaulting on paying the tax could fall on the end user – the employing companies or operators at the top of the supply chain.
Brian Rudkin, head of employer services at accountancy firm Johnston Carmichael, said the document was widely “as expected”, but it will not be easy for firms to comply.
He said: “The complexity is probably going to add to the concern that a lot of blanket decisions are going to be made.
“The risk to business is too high to get this wrong so my view is that a lot of the larger businesses are going to remove the risk altogether and just say everyone is going on payroll.”
As well as “end users”, the changes are expected to impact the wider supply chain including service providers and labour agencies.
Mr Rudkin added that there is the potential for the changes to shrink the North Sea contractor pool.
He said: “The big challenge and concern will be around how projects are resourced going forward and whether the talent pool in the North-east will shrink going forward.
“What we don’t know is how many contractors are going to start working overseas because they don’t want to be penalised by our tax system here in the UK. There’s a lot of concern that might happen which would cause an issue for the whole sector.”
The Treasury has estimated IR35 off-payroll rules will bring in an additional £2.9bn in taxes by 2024, following similar measures being brought into the public sector in 2017.
The draft legislation states that the expected one-off impact to recruitment agencies across the UK implementing the system will be £14.4million, with the ongoing annual impact being “negligible”.
Mr Rudkin added this may be “underestimating” the wider cost of the changes.
The draft legislation outlines that end users and employment businesses may be liable for any failure to account for the tax further down the labour chain.
Karen Davidson, partner in corporate tax and incentives team at law firm Brodies, said this will be a concern for both parties.
She said: “If the paying entity defaults in paying the tax, the draft legislation provides for HMRC being given the power to push that liability onto the first agency in the chain – or if that agency defaults onto the end user.
“The potential shift in liability will be concerning for both end users and employment businesses alike.
“They will each need to consider whether the steps they have in place to diligence and secure their labour chain are sufficient to protect their business from this potential liability.”
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