Comment: Tax overhaul will hurt revived oil and gas sector

There is a very real prospect of tougher tax regulation in the private sector, says Pinsent Mason's Euan Smith. Picture: Contributed

Happily, the outlook is now more promising and, with an emphasis on greater collaboration between the major operators and service companies, a leaner, more efficient supply chain is contributing to an uptick in North Sea activity.

However, this progress could be hindered as the UK government seeks to introduce measures which will directly influence the relationship between businesses and the self-employed contractors who form a large part of their workforce.

In 2000, the government introduced the tax rules known as IR35 for “off-payroll workers”. This was to ensure that contractors who worked through a personal service company (PSC) would pay broadly the same income tax and National Insurance contributions (NICs) as employees, if they were deemed by HMRC to be sufficiently similar to employees in terms of their working arrangements.

In April 2017, the government reformed these rules for public sector engagements and announced it would consult on how to tackle non-compliance with off-payroll working rules in the private sector. It is safe to assume there is a very real prospect of a tougher tax regulation regime being introduced to the private sector which would mirror that in the public sector.

The main proposal is to move the responsibility of assessing whether someone is deemed an employee from the PSC to the end-user of the labour. The end-user will have to go through a process of assessing the reality of existing relationships with contractors, and potentially deducting tax and NICs on behalf of HMRC. In doing so, the risk of non-compliance would shift from the individual’s PSC to the end-user who engages that individual.

The oil and gas sector has traditionally used large numbers of contractors, partly because it offers flexibility – it is easier to staff up or down daily-paid contractors than employees when work levels fluctuate. Companies may find they have to re-examine the working arrangements they have in place with those contractors, to ensure that there are none who would fall foul of the government test of “deemed employment status”, requiring the deduction of tax and NICs at source.

If this comes to pass, it will represent a significant administrative burden for North Sea businesses. HR, tax and compliance resources will be stretched to audit and identify individuals who should be given “deemed employment” status under IR35.

Logistical issues aside, contractors are likely to take a dim view of this new dynamic. If they are to be treated as “employees” as far as tax and NI is concerned, they may take the view they are better off being full-time employees on payroll, enjoying the benefits associated with employment status.

As well as the increased administrative burden on businesses, the contractor’s “day rate” will be less appealing if income tax and NICs are deducted prior to payment to the PSC. Will contractors accept that upfront reduction in income, or will businesses accept a proportion of the new upfront cost? Will businesses accept the increase in cost and in risk?

Senior industry players are working with bodies such as Oil & Gas UK to present a unified response and contribution to the government review. There are genuine concerns amongst major employers about how this will impact on day-to-day operations and longer term planning, not to mention balance sheets.

This new regime could come in to force as early as April next year and, while industry bodies will make a strong case for minimising disruption to the North Sea and its renewed confidence, this is an unwelcome distraction which heralds a red-tape rigour the industry could do without.

Euan Smith, partner and employment law specialist at Pinsent Masons.