Contractors Forget Substitution

Oil & Gas contractors’ personal service always a requirement

Last Wednesday, in two separate sessions, the House of Lords Select Committee on PSCs took evidence from representatives from the Department of Health and the Local Government Association and also the oil and gas and construction sectors. The private sector was represented by:

  • Michael Coughlin, Executive Director of the Local Government Association (LGA);
  • Gordon Fleck, Policy Manager at the Department of Health;
  • Tim Sands – Deputy Director for NHS Pay, Pensions and Employment Services; and
  • Ralph Coulbeck – Director of Strategy for NHS Trust Development Authority

The public sector representatives were:

  • Dr Alix Thom – Employment & Skills Policy Manager for Oil and Gas UK; and
  • Robert Fort, Tax Director at Amey Plc, provide of public services.

How many PSCs are being used in the respective sectors?

Local government

Michael Coughlin had obtained statistics, on a voluntary basis, from regional councils that indicated between 5 – 10% of 353 councils are using PSCs. Council’s use PSCs in a number of situations particularly to cover interim periods when a vacancy has arisen and short term specialist expertise. These contractors tend to be earning over £50,000 p.a. falling in salary bands of local council senior management of which there are 20,000.

Although there are contractor’s earning below £50,000 p.a. Mr Coughlin did not know their number.

Department of Health (DH)

The Department of Health use PSCs in a similar manner to local government, i.e. for specialist skills and interim roles.

At one time the number of ‘off payroll’ appointees engaged at board level was 135 but this has been reduced to less than 30.

Those contractors below senior level total 337, of which around 66% have given adequate assurance of their IR35 status.

No statistics were available for those earning less than £220 per day.

Oil & Gas Industry

The oil and gas industry supports 450,000 jobs throughout the UK and there is a high use of PSCs, particularly in the areas of engineering design, construction and project management. Dr Thom said that 80% of the workers are contractors. The increased usage of PSCs is driven by individuals but also because of supply and demand and to be able to compete globally. UK expertise in this field is highly valued throughout the world.

Amey

PSCs are used for specific purposes, mainly in professional and specialist roles due to shortages of expertise. Contractors fill gaps in areas such as consultant engineering, finance, legal, I.T and back office.

Robert Fort estimated that Amey use between 200 – 500 PSCs but did not have any data to suggest whether his company’s usage of PSCs had increased or decreased. He proclaimed that his company do not use PSCs to disguise employment and any permanent/designated roles are only fulfilled by permanent members of staff. A truly ethical employer.

Are workers forced through PSCs?

A familiar theme was reiterated by Tim Sands who claimed that those contractors in senior appointments insist on using a PSC to fulfil the contract thereby dictating the arrangements to the Department. No evidence of this however was found within local government.

What impact has the public sector appointees rules had?

It was agreed that the new rules had heightened awareness of the ramifications of engaging PSCs within the public sector and created greater transparency.

Local government

Whilst local government were specifically excluded, the LGA nevertheless carried out a review of their arrangements and also discuss the issue of PSCs.

PSCs are not used for lower paid roles.

It is not uncommon for agency staff to be used to fulfil social worker positions.

DH

Where temporary nursing staff are required the DH use agency staff but use PSCs for locum medical staff.

Are PSCs used as a cost saving exercise?

Better value and access to expertise is achieved by the DH using PSCs during fixed term contracts but the Department is not making extensive use of them.

Whilst contractors may be able to negotiate a higher rate of pay it was pointed out that such pay did not reflect the ordinary employment rights that an employee has access to.

Are there any obligations placed on contractors to disclose their income within local government?

This may vary amongst local councils. In most instances the contract will include an assurance clause that a freelancer is meeting their tax obligations which is seen as sufficient.

What are the difficulties in engaging workers via an agency?

Micheal Coughlin said using agency workers can make it more difficult in building up teams and Mr Sands simply responded by saying that the DH were trying to minimise the use of agency staff.

Do procurement teams have adequate knowledge of IR35?

The DH reported that knowledge within the department is improving and it has arranged for HMRC to deliver master classes on IR35!

Is any assistance given to workers to help them understand the IR35 rules?

DH

Not directly as this is viewed as the contractors’ obligation since it is they who choose to operate through a PSC.

Local Government

Mr Coughlin said that an employer could suggest that an individual take advice as the employer would not possess sufficient expertise. Such a policy varies from council to council.

Oil & Gas Industry

Dr Thom took the view that as all PSCs have accountants then they should be taking advice from them on IR35. Interestingly, she had not been aware of HMRC’s IR35 contract review service.

Amey

Even though Amey have no responsibility for a workers tax affairs they would provide help with any tax problems a worker may experience.

Does IR35 give any causes for concern?

For both the DH and local government this is not a significant issue. One area that could prove problematic for NHS Trusts however is where workers are forced onto the payroll after 6 months because the Trust has been unable to secure a permanent member of staff.

The DH have the situation under control and NHS Trusts have a good grip on compliance.

What are the advantages in using PSCs?

Mr Fort gave three reasons why the use of PSCs is beneficial to engagers:

  1. Tax protection and benefit. The engager avoids paying employers NIC and is protected from the risk of getting a workers employment status wrong.
  2. Primary operational benefits. During times of peaks and troughs it is extremely helpful to use temporary labour. Amey do not want to employ staff only for them to be sitting around doing nothing during slack periods.
  3. Employment law. When employing someone for longer than 3 months involves a lot of administrative burden and is not appropriate for a 3 – 6 month contract.

Are substitution clauses commonly used by PSCs?

Rather alarmingly both Thom and Fort were in agreement that substitution was not a reality for any of their workers as they wanted and expected the personal service of the freelancer.

Although Thom conceded that substitution could take place in a minority of cases, Fort stated that his company’s contracts do not refer to the issue as substitution as it would not be appropriate.

Thom did point out that a PSC could use other employees within their companies to carry out some of the work involved. The good doctor however needs to take a reality check as we are talking about one man/woman companies here!

10 Comments

  • James Wilson says:

    The headline on this story is confusing. Is this a statement that contractors are forgetting substitution, or that you think contractors should ignore substitution from now on? A summary paragraph in the article on your conclusions as to what the testimony meant would have been useful.

  • Tom L says:

    It never seems to get mentioned that one of the reasons for PSC’s is constant government tinkering over the years, the assumption seems to be that a contractor uses a PSC so to get access to dividends etc. When I went contracting in the 1980’s I simply wanted to earn more, I knew nothing of dividends etc… but a firm wouldn’t take you direct, you had to go through an ahgency, that was so the firm transferered any risk of having to pay tax and NIC’s to the agency, the agency didn’t want that risk so wouldn’t give you a contract unless you had your own company…. that;s how I ended up with a Ltd company, simply because without it you couldn’t get freelance work

  • Oilfield Trash says:

    Great……shot in the foot by the representative of an organisation that purports to represent our industry and it’s workers. Does Oil & Gas UK realise the implications of Dr Thom’s substitution statement?

  • Dod says:

    Not Surprising, many years ago Dr. Thom was the head of HR for Wood Group here in Aberdeen and absolutely loathes contractors. She was behind many of the underhand schemes implemented up here to screw the dirty contractors.

  • John-L says:

    Many contractors in the Oil & Gas Industry have a substitution clause in their contract and have actually used a substitute at some point.
    It seems to me that Dr Thom only represents a small section of the industry, certainly not at the grass roots level. Is she single handedly trying to bring the industry down? It’s a wonder she managed to get the exalted position in the first place.

  • Peter says:

    IR35 was just for HMRC to get more money from easy prey. The number of contractors honestly falling under IR35 is probably over 80% because if you report to someone within a company and work within a team then you automatically fall under IR35. The rules are gradually changing following court cases defining what is deemed employment.
    Perhaps a flat rate tax of 30% for consultants falling within IR35 would be better than leaving contractors at the mercy of an HMRC investigation. This would also hopefully reduce tax avoidance.
    It needs to be fair because currently contractors work hard and have no employment rights.
    These reviews always lead to HMRC getting their way.

    I suggest all contractors email their MP and demand IR35 be abolished!

  • Tom L says:

    Mail your MP ? Benn there done that and with two different MP’s over the years…. you get the standard response about paying your fair share of tax… they don’t understand the issue, don’t care about the issue and just assume we’re all tax dodgers…. at one time, when Labour was in power, The Tories promised to abolish it it was so wrong…. then to review it… now to improve it …. !!!!

  • H.Beans says:

    What on earth is Dr.Thom playing it. Here we have somebody who is supposed to be representing the Oil & Gas industry and the professionals who support it and she blurts out this rubbish to the House of Lords Select Committee. As per previous comments, a real knife in the back.

  • Tony says:

    Is PCG or any other body representing contractors going to refute Frau Dr’s biased propaganda? Even if she is correct in her firm’s case (who knows, she may not have a feckin’ clue, probably doesn’t, she is HR after all), it does not therefore follow that the ROS is generally hollow. Equally, if the agency or client is peddling a contract allowing substitution but then has no intention to allow it or it is not reflected in the upper tier contract, let them foot the bill.

    In the cow’s case, let her foot it personally and see how much nonsense she spews.

    “Mail your MP ? Benn there done that and with two different MP’s over the years…. you get the standard response about paying your fair share of tax… they don’t understand the issue, don’t care about the issue and just assume we’re all tax dodgers…. at one time, when Labour was in power, The Tories promised to abolish it it was so wrong…. then to review it… now to improve it …. !!!!

    Yeah, and the MPs and people like Hodge are the biggest damn tax evaders of them all. Funny stuff if it weren’t so costly to us contractors.

    “I suggest all contractors email their MP and demand IR35 be abolished!”

    Agree. They should address the obsolescence of NI head on, IMO, and look to reducing tax burdens overall. NI is just another cash cow for the profligate government.

    “Many contractors in the Oil & Gas Industry have a substitution clause in their contract and have actually used a substitute at some point.
    It seems to me that Dr Thom only represents a small section of the industry, certainly not at the grass roots level. Is she single handedly trying to bring the industry down? It’s a wonder she managed to get the exalted position in the first place.”

    Probably the old fashioned way. 😉

  • Tony says:

    That said, I think the article’s title is misleading and is jumping to conclusions.

Leave a Reply

Your email address will not be published.

★ ★ ★ ★ ★

Very pleasant. Excellent price for what I needed. I will be a returning customer.

Rhino Review

Mr Paul D

Great staff. Customer focused and a team who recognise and understand their customers 100%.

Rhino Review

Vijay S

Fantastic accountants who helped me submit my last 2 years personal tax returns! I really rate this company!!!

QAccounting Review

Natalie

Fantastic service.

Rhino Review

Marco G

Been with QAccounting for several months now, very good service, very personal and the best prices I have seen.

QAccounting Review

Muhammed A

I switched over to QAccounting a few months ago and haven't looked back. I get to speak to my own client manager and accountant, the prices were the best I had seen, and I paid exactly what it said online (no extra costs). Very happy with QA.

QAccounting Review

Jeremy H