New IR35 tax rules impacting thousands of workers across the oil and gas industry and beyond come into effect today.
Announced in 2019, with a year’s extra delay due to Covid, the controversial off-payroll working regulations are now in force for freelancers and contractors in the private sector.
The IR35 rules aim to ensure that workers, who would normally be classed as direct employees of one company, pay the same income tax and national insurance contributions as their equivalent co-workers.
The reforms have forced changes in the employment status of thousands of people in the North Sea sector, who typically work via their own personal service companies (PSC) for tax reasons.
The onus on determining whether a worker is a direct employee – “inside IR35” – falls to medium and large businesses, which has led to some disputes in the industry.
Accountancy firms have been on either side of the argument, some saying it could hit the sector hard, and others saying it will simply “level the playing field”.
Brian Rudkin, director and head of employmer services at Johnston Carmichael, said it is an “important milestone” but the reforms have “serious consequences for many operators, service providers, labour providers and contractors at a time when the sector can least afford it in these volatile times”.
It has previously been reported that some workers in the industry will see wage cuts of 25% due to the reforms.
Meanwhile, a House of Lords report last year called for “wholesale reform on IR35”, describing it as “flawed and unfair”.
That report, from the Economic Affairs Finance Bill sub-committee, highlighted that some oil firms have imposed “blanket status determinations”, with some deciding “not to use freelance contractors at all” to ensure compliance.
It added that IR35 left some workers as “zero-rights employees”, with none of the rights of an employee or the tax benefits of being self-employed.
Mr Rudkin said concerns appear to have been dismissed, but the ongoing Covid situation has lessened the impact as demand for North Sea labour is lower.
“However, when activities return to a more normal level, it is expected that the impact of these changes will be more keenly felt across the board, especially from a cost/profit perspective”, he said.
“Levelling the playing field”
In return for becoming direct employees, workers should be receiving the benefits such as job security, pension arrangements and sickness absence
Michael Reid, managing partner at Meston Reid and Co, said the IR35 rules are “not a major issue, just levelling the playing field”.
Mr Reid highlighted that the reforms have been known for two years and, for a city like Aberdeen dominated by oil and gas which has heavy use of contractors, it may seem a “bigger event and a bigger impact” but most of his clients take the view of “well, fair enough”.
Many people will continue to operate PSC firms, invoicing multiple clients.
He said: “It is not a wholesale wipeout of one-man companies, it is simply a recognition that, for a lot of people, it is simpler and more streamlined to work as a highly-paid employee than to have a one-man company.
“One man companies typically go and work at a major oilfield services provider, they use their desks, use their computers, use their toilets, they come and go 9-5.
“They’re effectively behaving as an employee but they’re able to use the device of a one-man company to tax plan better – tax plan more efficiently as they would put it.
“All that’s happening is that a lot of these one-man companies are effectively being treated as employees. Just regularising their position.”
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