09 Mar 2021
What IR35 means for offshore wind
About half the 22,000 offshore workers in the UK’s wind industry are contractors. To say that the offshore wind sector is going to be seriously impacted by the new changes to IR35 is an understatement.
Although COVID-19 delayed the new IR35 rules by a year – they were to come into force on 6 April 2020, but will now take effect on 6 April 2021 – many companies are still not properly prepared. IR35 and what it means for employees and contractors.
The IR35 legislation determines a contractor’s tax status. Created in 2000 to prevent companies dodging taxes by treating “disguised employees” as contractors.
“Disguised employees” are contractors who essentially do a full-time job for a client as if they were employees, but aren’t counted as such. These contractors set up a “Personal Service Company” or PSC, which functions like a limited company but for just one person.
IR35 sets down criteria that determine whether or not they count as employees of the client. Those who do (“within IR35”) have to be taxed as employees, which means tax and National Insurance will be automatically deducted from their earnings. Those who don’t (“outside IR35”) can go on handling their own taxes.
The main principle of IR35 is that if the contractor only provides their services, not their own skills, to the client, they fall outside IR35. This can be complicated In the offshore industry, where “specialism” of service can also put contractors outside IR35. Make sure you have the advice of a good accountant if you’re at all unsure on this front, as it’s a very grey area.
The rest of the criteria follow from this principle:
1. Mutuality of Obligation
Clients aren’t obliged to keep providing work for contractors, and contractors aren’t obliged to keep doing it. If you have a mutual obligation like this, chances are you have an employer-employee relationship.
2. Supervision, Direction, and Control
Contractors control how they do their work. If the client is providing a lot of supervision and direction, they’re acting more like the manager of an employee than the client of a service provider.
Contractors should be able to send the client a substitute worker in their place to complete a job.
4. Corporate Involvement
Contractors being on the company org chart or list of employees, receiving company benefits, having a company business card, or being part of the company structure in any way implies that they’re inside IR35.
5. Provision of Equipment
Unless there’s a safety, security or practicality issue, contractors, not clients, should provide the equipment for a job.
6. Payment Basis
Contractors should set their own rates and invoice the client, not be paid a regular wage.
7. Financial Risk
As self-employed people, contractors take the financial risk of paying their own expenses.
8. Right of Dismissal
Contractors can only be dismissed if they’re in breach of contract. They don’t get a statutory notice like employees.
Contractors are “suppliers” of the services to the “customer” (the client) and nothing more or less
Changes in IR35
Under the old IR35 legislation, contractors determined whether they fell under IR35. In 2017, public sector organisations were made responsible for determining their contractors’ tax status. This will apply to the private sector from 6 April 2021. Businesses will have to manage and pay for the income tax and National Insurance contributions of contractors who fall inside IR35.
Small companies are exempt from this. To count as a small company, they must meet two of these three criteria:
Average number of employees not over 50
Annual turnover not over £10.2 million
Balance sheet total not over £5.1 million
All other companies have to submit a Status Determination Statement (SDS) to any contractors, as well as agencies that supply them with contractors. Until they submit the SDS, the clients are liable for their contractors’ income tax and NICs. If there’s any dispute over the SDS, they have to resolve it in 45 days, or they’ll also become liable for tax.
HMRC won’t subject contractors who are paying these taxes for the first time – or their clients – to a tax history investigation. However, limited companies will lose the 5% expenses allowance to help them meet these rules.
Preparing for IR35
Because the offshore energy industry relies so heavily on contractors to complete projects, the IR35 changes will have a major impact on contractors and companies based in the UK.
Non-UK clients still have to determine the IR35 status of any UK-resident contractors who work for them, and still have to deduct tax and NI contributions if the contractor falls inside IR35. This means UK contractors who want to protect their tax position will have to give up their UK residence – and at a time when many EU-born residents are leaving anyway thanks to Brexit, that’s exactly what some are likely to do. On the flipside, UK-based companies might seek contractors outside the UK and pay locally.
These complications make it absolutely vital to be prepared. Whether you’re a client or a contractor, take the following steps.
1. Take HMRC’s Employment Status for Tax Test
Look on the HMRC website to find a test that will help you determine your or your contractor’s IR35 status. Review all your answers carefully.
2. (Contractors) Review Your Contracts
If the test shows you fall under IR35, it might help to rethink how you negotiate contracts. Write down exactly what terms you’re willing to work under, what services you’ll provide, what your hours and place of work will be. Also, add that you’ll use your own equipment.
3. (Contractors) Show You Run A Limited Company
If you’re a contractor with a limited company, it’ll help if you can get a company website, and ideally, dedicated office space (not your kitchen table), to demonstrate it.
4. Talk To Your Recruitment Agency
Offshore recruitment agencies are going to play a crucial role in helping clients and contractors navigate these confusing waters. Talk to recruiters about how they plan to address the issue and how they can help you.