Adrian Learer, plan.it Chartered Accountants, UK, explains how oil and gas contractors can maximise profitability whilst ensuring tax compliancy.
Can an oil and gas contractor work through their own UK limited company?
Whilst the initial answer is yes (there is no restriction on a contractor setting up such an arrangement), the key question is whether this offers any significant advantage for the contractor?
For contractors working in the UK, the main question is one of IR35, the intermediaries’ tax legislation introduced in 2000. In a nutshell, this legislation is aimed at countering ‘disguised employment’ and states that if not for the existence of the intermediary there would be an employment of the worker by the end user, then the worker will be fully taxed as an employee regardless of the way they choose to operate in practice.
The detail of determining status for IR35 is too complex for this article; suffice to say that up to now, carefully formulated contracts and working practices have facilitated many freelance workers successfully operating in this way.
However, for contractors whose contracts are not caught by IR35, there are substantial tax advantages that can be gained. As well as tax relief on a wide range of expenses incurred, the ability to extract funds from the company in the form of dividends as opposed to salary can save on both employees’ and employers’ national insurance, totalling approximately 25% of income drawn.
Can an oil and gas contractor work through a UK umbrella company?
The PAYE umbrella company is a very simple way of working and remains a good viable alternative to working under PAYE directly for an agency or end user.
The key advantage of this way of working is derived from having an overarching employment contract with the umbrella company, which in turn provides continuity of employment, flexibility, employment rights and the opportunity to increase take home pay via the deduction of expenses incurred wholly, exclusively and necessarily in performing the duties of paid employment.
However, there has been much debate over exactly what expenses can legitimately be claimed, especially with regard to travel. This makes it essential to get trusted, expert advice and the professional umbrella company provider should be able to maximise these claims, subject to individual circumstances.
What about working overseas?
As an industry that operates internationally with a high global demand for the skills that experienced oil and gas contractors can bring, this is an important question. In short, both UK limited companies and umbrella companies can theoretically be used when working overseas - but are usually less than ideal.
Where work is actually performed overseas, then a UK limited company would need to be registered for tax in the local territory and it is invariably easier to work through a local limited company or umbrella based in that territory.
Most foreign countries will permit a UK umbrella company to send a worker overseas for up to 183 days in a tax year and be exempt from local taxes, but this may not apply to local social security/national insurance liabilities. In addition, in countries where ‘chain law’ applies, tax liabilities can move up the chain to the local employer, as a result of which many such employers are insistent on local taxes being paid from day one.
This is a very complex area that can result in inadvertent breaches of local regulations or double taxation, and so specialist solutions need to be considered by all oil and gas workers, and their recruitment agencies if operating in this situation.
There is no doubt that operating as a contractor in the energy industry has significant attractions, offering the potential to have more control over your career path as well as freedom, flexibility and the potential for generous financial reward. However, even the experts admit that this area of tax is a complex field, with regulations and reliefs that are constantly changing. As a contractor, it is unrealistic to expect to remain up to date and informed of all these changes. Ultimately, the best advice for any oil and gas contractor (and their prospective engager), is to consult with accredited specialist accountants to ensure that they always obtain the best advice for their individual situation - and remain fully compliant.
Part 1 of this article can be reached here.
Adapted by David Bizley
Read the article online at: https://www.oilfieldtechnology.com/exploration/12112013/keeping_compliant_part_2/