Contractors and those offering their services through personal service companies might have been hoping that the ongoing Covid pandemic would offer them another stay of execution from the introduction of tough new IR35 rules. If so, they were disappointed; the new regime comes into effect on 6th April this year, exactly 12 months after it was originally intended to.
Mirroring what happened in the public sector in 2017, contractors working for large private sector companies – including those working for intermediaries who sell their services on to larger firms – may find themselves deemed as employees, with both they and their employers responsible for national insurance contributions, and being treated as employees for tax purposes.
There are various criteria by which HMRC judges a contractor’s employment status, including how much control the employing business has over how and when the contractor’s work is done, whether the contractor has the right to send a substitute to do the work, and whether their contract sets out any mutual obligation for the client to offer further work and the contractor to accept it.
The net result has been that many contractors are finding themselves no longer able to operate on a self-employed basis. For some, the certainty and rights of being employed may be attractive, but many others will see their incomes fall and their work flexibility removed – and for that reason some are deciding to give up altogether.
For the energy sector, which is so important in our part of the world, that could be a problem. This is an industry which relies heavily on contractors, and one where the end user is almost always a large company, which will be caught in the IR35 net.
Many contractors within the energy sector are highly skilled and highly experienced. It’s common for those towards the end of their careers to choose contracting as a flexible way of continuing to use their skills without being tied to employment. Anecdotal evidence suggests that many of those people are deciding that the introduction of the new IR35 rules is a good time to quit for good. The loss of skills from the sector could end up being a big blow.
Of course, if these people, usually well-paid, stop working, not only are their skills lost for good, but they will also stop earning and hence paying tax on those earnings (and the tax benefit of paying yourself through a company has been whittled away in recent years, even if it remains advantageous in national insurance terms). The result could be less revenue for the Treasury – the exact opposite of what IR35 is designed to achieve.
At Lovewell Blake, we have wide experience working with both consultants and the many smaller companies who make their living by providing freelancers’ services to big operators in the energy sector. Whilst it could be argued that IR35 rightly sets out to create a level playing field and ensure that everyone pays their fair share, this is a move which could have unwelcome unintended consequences for a sector which is vital to the prosperity of our region.