Norfolk’s thriving offshore energy sector could face a skills crisis when new HMRC rules regarding how contractors supply their services, according to a tax expert.
The decision to extend the current Public Sector IR35 rules to the private sector from 5th April will apply across all sectors – but will have a disproportionate impact on the offshore industry, which has a high level of reliance on experienced individual contractors, say Mary Schofield, partner at Lovewell Blake.
“The new rules effectively shift the burden of determining the employment status of a contractor from the contractor themselves to the end client. With potentially big penalties for falling foul of the legislation, there is a risk that end clients are going to play it safe and treat contractors as employees,” said Ms Schofield.
“This would mean the end organisation paying the contractor will be responsible for accounting for tax and national insurance on all amounts payable to the contractor, whether they are paid through an intermediary such as a personal service company or not. This will include the responsibility for paying employer’s NI, and they will have to consider the implications of employment rights such as holiday pay and sickness pay.
“in the offshore industry, this could lead to a shortage of skilled workers in the sector, as contractors decide between accepting lower day-rates (because clients will face extra costs), going and working elsewhere in the world – or simply retiring, given that many skilled people become contractors towards the end of their working lives.”
Although the new rules only apply to large and medium firms (broadly speaking those employing more than 50 people and/or turning over more than £6.5 million) it may also have an effect on smaller businesses supplying services to larger clients via contractors – a common occurrence in the offshore sector.
“This is first and foremost an anti-avoidance measure which is designed to bring in more tax revenue,” said Ms Schofield. “That is the primary focus for both HMRC and the government, but they have not given enough thought as to how the situation will impact on sectors like offshore which rely on large numbers of contractors.”
With time running out before the new rules come into effect on 5th April, Ms Schofield is advising businesses to review their non-payroll labour portfolio, to establish which contractors might come under the new rules. This needs to be followed by a full IR35 assessment to enable new contracts to be negotiated where a contractor’s status will change.
“This will undoubtedly bring in more tax for the HMRC, but it will also impose considerable extra cost and administrative burden on both end clients and contractors,” she said. “But you can’t stick your head in the sand and hope it will go away – the cost of getting it wrong is simply too big.”
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