2019 has seen a string of contractor culls in the private sector thanks to the IR35 reform. Whether it’s pushing flexible workforces to PAYE or umbrella companies, or simply not engaging PSCs after a certain point, the likes of HSBC, RBS, and Barclays are sacrificing the pros of using contractors (or which there are numerous) in an effort to avoid the off-payroll rules altogether.
However, there is one company that’s getting it right. Aberdeen-based oil and gas company Wood is indeed going about preparing for the private sector IR35 reform correctly and sympathetically, setting an example for the rest of the energy sector.
Aberdeen energy sector company gets IR35 prep right
On the 7th November, Wood notified all of its PSC contractors that preparations for the April 2020 IR35 reform had begun, as reported by oilandgaspeople.com. Contractors were told that IR35 status tests are underway and are due to be finished around mid-December, indicating that the energy sector company are looking to retain their self-employed workforce despite the perceived financial risk of the new off-payroll rules. Contractors will be notified of the status test results in early 2020.
There are a couple of key points as to how Wood has got it right where others have failed.
Wood is not using CEST for IR35 determinations
Wood has shunned HMRC’s Check Employment Status for Tax (CEST) tool in favour of expert IR35 consultancy and in-house determinations. CEST is problematic in many ways. Primarily, it doesn’t take into account mutuality of obligation (MOO), one of the three key status tests that determines if a contractor is genuinely self-employed or not. MOO has helped the likes of Lorraine Kelly, Loose Women’s Kaye Adams and presenter Helen Fospero win IR35 tribunals over the last 12 months.
Matt Tyler, Larsen Howie’s IR35 Consultancy Manager, explains why mutuality of obligation shouldn’t be overlooked when accurately determining status.
“HMRC’s opinion on mutuality of obligation is that if you accept payment in exchange for labour then you are indicating employment,” Tyler says. “This is simply not the case, as has been demonstrated in the cornerstone Jensal Software case and again more recently in the RALC Consulting case. In my eyes, these results only go to show the value in having an IR35 review performed by an expert rather than relying on an automated system (particularly CEST) as such systems may well miss the nuance that an expert would pick up on.”
There’s also been news of end clients getting stung for using CEST, negating the taxman’s pledge to stand by the tool’s results. The most notable example of this is NHS Digital, who were billed £4.3m in ‘owed’ tax and penalties for incorrect status determinations after testing all of their contractors with HMRC’s tool. Wood is wise to use an alternative status determination method to avoid financial woes for both themselves as a business and their contractors.
Wood is using managers to make IR35 determinations
The energy sector company has taken care that IR35 status determinations are conducted by Wood managers, and not an impersonal central function. Not only does this ensure that contractors are assessed by people close to them within the company who know their typical working practices well, but it also maintains a sense of humanity when making these assessments; if the individuals making the determinations work with the contractors regularly, they’re more likely to take reasonable care. It’s crucial that the person making the determination gets the contractor’s day to day relationship with the company right – in a tribunal, it’s working practices that HMRC scrutinise rather than written contracts.
Alison Woods, partner and employment law specialist at CMS, speaks about the importance of having status determinations done by managers on the ground in Energy Voice.
“Businesses wanting to maintain the status quo with their existing arrangements must bear in mind that HMRC will be guided by the reality of the working relationship, and not simply the terms of the written contract,” Woods says. “Both aspects are important but, where the audit identifies that changes are needed to ensure the contractors are truly seen as self-employed, any changes will need to be more than a ‘paper exercise’.”
“For example, including a right in the contract for the contractor to send another individual in their place will be ignored by HMRC if it is clear that the client would not accept such a substitution.”
Energy sector companies should follow Wood’s example in IR35 prep
While the final IR35 legislation is yet to be presented (which, thanks to the Budget 2019 cancellation will likely be revealed in the Spring Statement), it’s clear that HMRC will be actively targeting industries that typically use a large flexible workforce. With the financial sector buttoning down the hatches and IR35 status nudge letters already sent to pharma giant GlaxoSmithKline en masse, the energy sector should expect taxman probes.
Only time will tell how Wood decides to move forward with its contractors after the status determinations have been completed, but for now, other energy sector companies should take a leaf out of their book.
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. Alongside this, we offer IR35 investigation insurance with representation from our Head of Tax, IR35 specialist and Jensal Software defence Andy Vessey ATT, should it go to tribunal. We also have a tailored product that offers energy sector contractors comprehensive cover under one easy to manage policy.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.