IR35 and the energy sector

We’re sure most of you know by now that the IR35 legislative reforms (originally due for April 2020) are set to be introduced April 2021. They were delayed last-minute in March this year as part of the government’s response to the coronavirus pandemic.

However, it is pretty much set in stone that the reforms will be happening next year and so all contractors, clients and recruiters must prepare – perhaps no more so than in the energy sector which traditionally has relied heavily on flexible workforces.

In the run up to April 2020, the energy sector was gearing itself up for these changes but saw itself in something of a quandary, torn between the risk-averse stance of the financial sector (putting all contractors inside IR35 or refusing to work with them entirely), and potentially losing highly specialised talent essential to this rapidly moving industry.

A quick guide to the IR35 reforms

The new IR35 reforms in the private sector follow on from the earlier public sector reforms. They’re designed to sniff out potential ‘disguised employees’ – those who are to all intents and purposes a permanent employee, but are hired as a PSC contractor and so are getting a much more favourable rate of tax than their colleagues.

The reforms shift the onus of this from the contractor to the end client, and place the tax liability with the fee-payer. This means that your IR35 status is decided by your end client using a Status Determination Statement (SDS) – which you have the opportunity to appeal – and you are placed either outside or inside IR35.

If you are inside IR35, you will be taxed at source just like an employee, and your fee-payer (usually your end client or your recruiter) becomes responsible for ensuring the correct tax and NICs are paid.

Of course, this is a highly simplified explanation, but you can find a more detailed look at the private sector reforms over on our blog.

Why is the energy sector so specifically affected?

All businesses that use contractors will be affected by the IR35 reforms, but the energy sector is heavily affected simply because it uses so many contractors. In May last year, this was set out clearly by Deborah May of Energy Voice: ‘The use of PSCs in the UK oil and gas industry suited both the individual contractor and the end user business, with the structure providing flexibility for both in terms of contract duration, which is particularly useful for project-based work.

In addition, businesses that engaged with PSCs were able to contract with certainty on costs – usually via an agreed fixed day rate – and the PSC bore the liability for determining and paying any PAYE or NIC obligations under the IR35 legislation.’

The main issue is that the new rules will impact flexibility, the availability of talent, and the cost to the client. For instance, contractors caught inside IR35 may well increase rates to allow for the higher tax rate.

Because of the project-based nature of work within the energy sector, it doesn’t necessarily suit to engage only permanent employees, but some more risk-averse businesses many be inclined to place all contractors inside IR35 to avoid headaches later on. But this could then have a knock-on effect in terms of some talent then not wishing to work with them.

I’m an Energy Sector worker, how can I get ready for the IR35 reform?

You have just over half a year until the reforms come into effect so you need to use this time wisely. If you haven’t already started, then as a minimum you need to:

• Make sure you’re au fait with all of the IR35 jargon
• Check your contracts to ensure nothing within them suggests you are anything other than in business on your own account
• Take a long hard look at your working practices and see how they stack up against the major and minor status indicators which are detailed here
• Speak to clients about changes you need to make to any of these things in order to ensure you are working outside IR35

Another thing you can do is insure yourself with IR35 Protect, which is designed to take the risk out of IR35. The policy flexes to whoever holds the liability. Right now, that’s you but, come April 2021 it’ll be your fee-payer, so this policy makes you a more attractive option as an energy sector contractor as you come with built-in protections.

The policy covers up to £100,000 of taxes, penalties and interest from HMRC as well as status enquiry defence costs and other, more general legal costs. It also includes IR35 Status Reviews by a panel of experts, to help your clients make the right decisions regarding your status.

Speak to our helpful team today on 01242 808740 to see how Kingsbridge can help you.