The current shortage of road haulage drivers stems from a number of causes, but the least talked about is a change to the way that tax is paid by contractors. These changes to the ‘off-payroll working rules’, or IR35, were introduced to the private sector in April this year. The same changes caused chaos for contractors when they were introduced to the public sector back in 2017. So, to stop history repeating itself, what can the energy sector learn from these mistakes?
IR35 tax bills
As you’d expect from an HMRC initiative, the most obvious risk is tax liability. Over the summer we have seen several high-profile HMRC tax bills issued to public sector bodies who have failed to meet the new IR35 regulations. For example, The Department for Work and Pensions’ finances, published in July, was faced with an £87.9m tax bill for the period 2017-2021. This was followed by Home Office accounts revealing a £33.5m bill and, most recently, £12.5m docked from HM Courts & Tribunal Service. It’s clear to see that HMRC have delayed prosecuting employers who have taken the wrong approach to IR35 compliance. In the time of delay, between the error and the fine, tax liabilities accumulated to a sizeable amount even before any penalties are considered. For businesses in the energy sector, unexpected tax bills of this size could have a substantial and lasting effect on finances, reputation, shareholder value and growth.
Reliance on CEST and online tools
The main change to the rules is a shift of responsibility for determining the tax status of contractors from the individual to the organisation or business that engages them. The government has provided its own automated tool to help hirers make these status determinations, Check Employment Status for Tax (CEST), but the first lesson to be taken from these public sector tax deductions is that any automated tool, including CEST, cannot be used alone to meet HMRC’s guidelines. Organisations need to demonstrate ‘reasonable care’, as outlined by HMRC. Using CEST alone does not do this.
The HM Courts & Tribunal Service report clearly states that the £12.5m deduction was for ‘incorrect assessments of the employment status of workers’. Like any software, automated tools are only as accurate as the information put into them. The off-payroll working rules are a complex piece of legislation; so complicated, in fact, that CEST produces an undetermined status for approximately 20% of contractors, which subsequently require specialist professional support to produce correct determinations.
The risk to projects
Fear of tax liabilities led many organisations in the public sector to implement either a blanket ban on the use of contractors or to introduce blanket inside IR35 determinations for all off payroll contractors – meaning that they were effectively engaged on a PAYE basis.
By doing this, the public sector quickly came up against struggles when trying to recruit the experienced contractors they needed to deliver major projects on time, as seen by the high-profile issues with HS2. For the energy sector, which has traditionally relied on the experience and expertise of contractors, this risk is significant and should not be overlooked.
In the current hiring environment, there is increased competition for talent, which a blanket ban or a blanket inside IR35 determination will only enhance. In fact, data from the Recruitment and Employment Federation’s (REC) Report on Jobs found in September that hiring activity rose sharply amid unprecedented demand for candidates, but a shortage of experienced talent is hitting every industry. Consequently, we are seeing the competition is forcing up starting pay for both permanent and temporary workers. As the data shows no indication that the competitive environment will relax, businesses should take a proactive approach to IR35 and include an outside IR35 status determination on role advertisements, where appropriate, as this is a clear demonstration that the organisation is implementing and embedding IR35 processes as business as usual.
IR35 is here to stay
Although determining an IR35 status may feel like the end of the journey, it is not. IR35 responsibility is an ongoing task, as working practices are frequently changing so contractor statuses and new roles must be regularly reviewed. HMRC’s guidelines clearly state that a new assessment must be made ‘if there are material changes to a worker’s terms and conditions or working practices’.
With many energy projects restarting after the pandemic, it could be easy to panic and start to hire contractors without a sufficiently robust IR35 management process in place. This would cause more issues and could leave the business at risk of failing to meet HMRC’s guidelines. By making simple changes to how the workforce is managed, for instance ensuring your organisation has separate policies in place for employees and contractors, and engaging with a suitably qualified IR35 specialist firm, organisations can confidently offer roles outside of IR35 and gain a competitive advantage in the current jobs market.
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