Keeping compliant, Part 1

Adrian Learer, plan.it Chartered Accountants, UK, explains how oil and gas contractors can maximise profitability whilst ensuring tax compliancy.

The law of supply and demand impacts most areas of the economy, and the job market is no exception. With the energy industry in general experiencing a dearth of qualified professionals, the well documented skills shortages in the oil and gas sector are providing great opportunities for contractors.

Oil and gas contractors are currently in high demand due to this talent shortage – and can also command great rates of pay. Furthermore, because of concerns that the skills gap will only expand further in the future, contractors who are able to pass on their specialist expertise to permanent members of staff are a particularly attractive option for energy organisations looking for long term growth.

According to the most recent bi-annual Aberdeen and Grampian Chamber of Commerce Oil and Gas survey, which is independently conducted by the Fraser of Allander Institute, 40% of energy firm operators and 66% of service and support contracting companies currently have staff shortages. As a result, contractors are being pressured to become permanent employees as companies look to ensure that they have the skills and experience that they need. The survey also predicts an increase of 20% in demand for oil and gas contractors during 2013.

Making the right choices

However, whilst there is no doubt that operating as a contractor can be financially and professionally rewarding, there are important factors to consider – whether operating as a contractor for the very first time, or not.

Top of the list is taxation: paying the right levels of tax is a significant and complex issue for any energy contractor. Whilst contractors may be able to demand higher rates of pay than their permanent colleagues, this is balanced out by the benefits that they do not get as a contractor: paid holiday, sick pay etc. So, it makes sense for contractors to ensure that they are maximising the tax incentives available to them – whilst remaining on the right side of the law.

Tax avoidance has been a particularly hot topic in the media over the past 12 months, provoking strong reactions. Many examples of tax avoidance (as opposed to evasion) do walk a fine line between compliance, avoidance and evasion – inviting an element of moral judgement from media commentators amongst others. Furthermore, with HMRC’s government-imposed target of raising an additional £7 billion a year in tax revenue, their scrutiny is only likely to intensify.

Some contractors have inadvertently found themselves in the spotlight, with HMRC closing down a major offshore umbrella provider who avoided paying millions of pounds of employers’ national insurance contributions (NI). In another case, a large UK umbrella company operating a ‘pay day by pay day’ tax relief scheme is now facing a £58 million claim from HMRC. The message that is coming across loud and clear is that contractors need to ensure that they have organised their tax affairs in a way that is both advantageous and legal.

Asking the right questions

Unfortunately, there are a number of areas of tax and employment legislation that interact to make this a particularly complex area for contractors – irrespective of the industry that they operate in. Furthermore, as a contractor, how your business is set up is crucial. So, what are the current key questions and answers surrounding oil and gas workers and tax compliance?

Can a UK based oil and gas contractor work through an offshore entity?

There is no reason why not. The key is why such an artificial arrangement is created, especially where the contractor is from the UK and working in the UK.

Offshore employment intermediaries have invariably been established to avoid tax and NI. In some instances, the intermediary ‘employer’ accounts for UK PAYE but avoids NI as it has no permanent presence in the UK. In some instances, the position is compounded by UK tax being reduced by unapproved travel and subsistence schemes; whilst in others, UK PAYE is not accounted for at all, claiming that the contractor is ‘self-employed’.

Subject to a current review announced in the 2013 Budget, the employer’s NI loophole is highly likely to be closed in the future. Furthermore, it is unlikely that any PAYE saving arrangements will bear close scrutiny or confer any advantage over a UK based solution.

However, the most important point that engagers need to understand is that complex, existing UK tax legislation can make end users fully liable for the PAYE and NI liabilities of contractors engaged directly or indirectly via an offshore entity. This is a significant risk, and if interest and penalties are added to the tax bill, the result can be catastrophic.

Part 2 of this article can be reached here.

Adapted by David Bizley

Read the article online at: https://www.oilfieldtechnology.com/exploration/11112013/keeping_compliant_part_1/