HMRC to go after ‘low hanging fruit’ in oil and gas sector as end of IR35 ‘soft landing’ period looms

Oil and gas firms that are not IR35 compliant could soon be hit with “penalty charges” as the ‘soft landing’ period wraps up.

Changes to the off-payroll working tax rules were instigated by Her Majesty’s Revenue and Customs (HMRC) for the private sector in the UK in spring last year.

Since April 6 medium and large oil and gas firms have been responsible for ruling whether a freelancer is self-employed or directly employed.

The reforms were designed to prevent contract workers from operating as ‘disguised employees’, whereby they paid less income tax and national insurance than normal staff who fell inside the IR35 rules.

A year-long soft landing period was given to help companies adapt to the new way of operating without fear of being hit with financial penalties.

But with it due to expire a year to the day since the reforms became active, there are fears that disruption could be amplified again.

Expiry ‘ups the ante’

Brian Rudkin, director and head of employer services at Johnston Carmichael, says the expiration “ups the ante somewhat on the implications of getting a contractor’s tax status wrong”.

He said: “Adding penalties into the mix could become very expensive indeed for operators within the sector.

“Penalties start at a minimum of 15% for ‘careless’ errors identified by HMRC, rising to 100% of the liability in the most serious of cases, which could add significant cost to any settlement of tax/NIC with HMRC.”

Oil and gas under the spotlight

The ending of the soft landing period is particularly “important” for oil and gas firms.

Along with financial services, the sector has selected by HMRC as one of the first to be scrutinised by IR35 compliance teams.

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“HMRC clearly believes there is low hanging fruit in the sector, fuelled no doubt by the number of contractors still working in the sector with an ‘outside of IR35’ status,” Mr Rudkin said.

“It will be interesting to see how the sector fares with such scrutiny but I suspect there will be casualties somewhere along the line.

“Even if an operator is able to stave off an HMRC challenge on how they have treated contractors, the time, resource and cost involved in managing such an HMRC challenge could be equally as harmful to the business in the long run.”

Public sector experience a warning shot

As has already been shown in the public sector, which has been subject to the IR35 reforms since 2017, the costs of being stung for non-compliance can be vast.

The Department for Environment, Food and Rural Affairs (DEFRA) became the fifth government section to be issued an IR35 related tax bill last year when it was hit with a charge of £48 million.

Similarly, HMRC issued a tax penalty of £72.1m to the Ministry of Justice for IR35 non-compliance.

Matt Fryer, head of legal services at Brookson Legal, said: “For businesses, an unexpected bill of any size can have a severe and long-lasting impact.

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“It’s also important to note that DEFRA, and the other government departments issued tax bills, thought they had implemented IR35 correctly, which allowed liabilities to build up over a period of years before HMRC investigated and uncovered the compliance issues.”

Seb Maley, chief executive of insurance specialist Qdos, added: “Numerous energy businesses have already been approached by HMRC regarding their IR35 compliance and now, with the tax office soon able to issue financial penalties, I fully expect activity in this area to ramp up even further.

“Recent developments in the public sector show the staggering cost of non-compliance, with tax demanded by HMRC from various government departments sitting close to £250m – a figure that includes millions of pounds worth of penalties, issued due to the careless application of IR35.”

A robust approach needed

In order to ensure they are not on the receiving end of an IR35 penalty, energy companies have been encourage to review their employment processes ahead of April.

To mitigate the risk completely, some firms have placed all contractors inside IR35, something Mr Fryer described as a “knee jerk reaction” that “cuts off access to genuine freelance talent”.

He added: “The sensible approach is to have a robust IR35 approach in place to ensure that all roles which should be outside of IR35 have the appropriate structure and contracts in place, helping organisations to recruit talented contractors needed to deliver post-pandemic growth.”

Further changes on the horizon?

Given the disruption that the IR35 reforms have caused to oil and gas contractors, there will be those crossing their fingers that HMRC may loosen them again in future.

But managing partner at legal firm Meston Reid & Co Michael Reid believes any further alterations are unlikely at this stage.

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He said: “When this first came out it hit the public sector in 2017, and there have been no changes to it since then. I think therefore the government have got what they want at the moment, which is a lot of people becoming employees.

“I wouldn’t foresee any immediate change, but what might happen is HMRC poking at a few remaining personal service company to see if they really pass the test.”