Self-employed tax reform to extend into private sector following consultation (IR35)
Following the IR35 reform in the public sector, a consultation will be held to extend reform into the private sector
Following IR35 reform in the public sector which came into force in April 2017, Phillip Hammond has put forward a consultation to be published early 2018 which will look at potential extension into the private sector.
IR35 is a piece of tax legislation which looks to determine whether self-employed workers using an intermediary (personal service companies) should be taxed as employees based on the manner in which they operate. Key tests look at whether the worker is able to provide a substitute worker to perform the services on their company's behalf, the worker's level of control over how they deliver their services, and whether there is a mutual obligation to maintain a continued service with the end client.
For contractors operating in the oil and gas industry, IR35 has been largely in the background with HMRC focussing their policing efforts on the IT contractor industry. The potential extension of the rules which were implemented in the public sector at the start of 2017 however, would bring it into the limelight for all contractors, energy sector businesses, and the recruitment agencies which place them.
IR35 in the public sector
Prior to April 2017, contractors in the public sector were responsible for determining their employment status for tax (IR35 status) like any other contractor (with the exception of some additional requirements when their contracts met certain criteria), but from April all of that changed. The responsibility for determining status was transferred to the public sector body engaging the contractor, with the fee-payer (which is usually a recruitment agency) responsible for deducting PAYE at source before paying the contractor their net fee, when IR35 applied.
Besides the control being taken from the contractor to obtain independent advice on their status and pay themselves via dividends where appropriate, many public sector bodies implemented blanket rulings that all of their contractors would be PAYE - not giving them a chance to operate as a company, and those who have taken a fairer approach to the rules are often using HMRC's online tool which has its own problems.
Extension to private sector
Since the public sector IR35 reform was introduced, it has been the view that it would be a test bed for the private sector. In the Autumn Budget 2017 announced on 22 November 2017, a consultation has been confirmed to explore the possibility of this extension. We have had a number of consultations in the recent past, so we can reasonably deduct that reform will go ahead - but it may look a little different. Whilst some reform has always gone ahead following consultations, some concerns have generally been addressed and the reform has to some extent been shaped by the comments and opinions made by the respondents. That said, the government are keen to keep the rules in line with one another, so any amendments to the existing rules put forward for the private sector will likely be mirrored in the public sector as well.
Given the history of consultations, we expect any reform to be implemented in April 2019. Now is the time for oil and gas companies to prepare for the change, and contractors to ensure they are fully aware of the potential implications on their businesses.