A view from the CFO Practice at Green Park
17th February 2017 11 minutes read
I last updated the market on the IR35 position two weeks ago. That article can be read on LinkedIn here.
Over the past two weeks I have been heavily involved with a wide variety of stakeholders – REC, PPMA, KPMG and Eversheds to name a few – all with the intention of gathering up to the minute information on the situation in Local Government and the potential implications of those developments for our customers – both candidates and clients.
Whilst this briefing is written with the Local Government sector in mind, the findings apply across all Public Sector organisations subject to the FOI Act.
I won’t rehash the background to this – that’s all set out in my previous article, and by now you’re probably bored of hearing how it came about and why, and just want some clarity and answers.
What was abundantly clear from a briefing session I attended this week with approximately 40 Local Authority clients is that the sector is still utterly unprepared for 6 April. More worrying still, there remains a considerable amount of inaccurate and misleading information out there – some of it coming from briefing papers being circulated to Local Authority Senior Management Teams as well as information coming from the supply chain.
1. A quick recap
As things stand, the liability for deducting tax from the PSC sits with the PSC. Regardless of whether an assignment is deemed inside or outside IR35, the Employment Business (e.g. Green Park) pays the PSC gross.
For those who will be delivering assignments inside IR35 from 6 April, liability for deducting PAYE and NICs sits with the Employment Business (or with the Public Sector organisation if you’re contracting directly with them).
It is very important to remember that this affects all payments received from 6 April not work conducted from 6 April. Therefore, if you bill monthly, you need to have new arrangements in place for 1 March – otherwise you’ll find time worked before 6 April being subject to deductions under the new system.
If you’re delivering assignments outside IR35, the mechanism for contracting does not change. But remember that the end client determines your status (howsoever they choose to and without an appeal process in place) and if that status is ultimately proved wrong by HMRC, liability still sits with the Employment Business unless you contract directly in which case it sits with the Public Sector organisation. Whether either of those parties is willing to take that risk, can insure itself against it or transfer financial liability for it to the PSC is yet to be determined.
2. What’s happening with the HMRC online tool?
Guess what, it’s not ready. Those who have seen the private beta version over the last week have fed back that it is still not fit for purpose. It is anonymous and cumbersome and there is no mechanism for recording its outcome.
All that means that clients are at a loss as to how to determine whether a role they are hiring to or an interim they wish to retain beyond 6 April will be inside or outside IR35.
I mentioned IR35 contract reviews that firms like Croner offer in my last update. If you’re unsure as to whether you’d be inside or outside IR35 or if you believe you’ll be outside but your client is likely to deem you inside, a contract review may be for you.
Clearly if you are an Office Holder (albeit there is no proper definition of this) and / or you manage staff, the test is irrelevant. You’re inside IR35.
Equally if you’re predominantly off site, use your own kit, are utterly autonomous under the Supervision, Direction and Control test, don’t manage staff, don’t use an office, don’t use the client’s email system and are working in a consultancy / advisory capacity, chances are you’re outside. Common sense is what is needed here.
3. How are Employment Businesses gearing up for this?
Your Employment Business will need written confirmation from the end client as to your IR35 status for any current assignment subject to payments after 6 April and for any new assignments it is putting you forward to from now on. It’s taking on the liability after all. The client has 31 days to provide that information. If it doesn’t, liability transfers to it. The chances of that happening are very slim.
3.1 Outside IR35
As I said, if you’ll be outside IR35 from 6 April, in theory you carry on regardless. However, bear in mind your Employment Business will be taking on that liability I mentioned in that situation which may lead to a contractual negotiation about transfer of liability.
3.2 Inside IR35
If the end client determines the role to be inside IR35, everything changes. Responsibility for tax deduction moves from the PSC to the Employment Business. In reality it won’t happen that way as Employment Businesses aren’t geared up to deduct tax at source from PSCs. HMRC will require them to do so gross, which would not take account of the PSC’s full tax position and would be detrimental to cashflow and lead to inaccurate deductions. It will also be commercially unviable for Employment Businesses to fund insurance against the liability that is transferring to them – underwriting that risk is prohibitively expensive.
So, what does that mean? Well, most, maybe all, Employment Businesses will no longer contract with PSCs for work inside IR35 but there is an alternative. The sector as a whole is shifting towards Umbrella Companies as the logical alternative to PSCs for work inside IR35.
3.3 Umbrella Companies
There is no getting away from the full burden of PAYE and NICs when delivering work inside IR35. That’s simple fact. If your choice is to continue to make yourself available to do work inside IR35 and going on the books isn’t an option, then Umbrella Companies represent the best solution.
For the interim, an Umbrella Company is likely to be the most financially efficient way of delivering work inside IR35. You become an employee of the Umbrella. You are not a shareholder or a contractor, therefore Corporation Tax does not apply. The Umbrella can take proper account of more complicated tax elements such as payments in to pension schemes when calculating deductions.
For the Employment Business, it no longer has the burden of administering a payroll that deducts tax at source and critically the liability for taxation shifts to the Umbrella (note not the interim).
For the end client, Umbrella Companies sit outside IR35 altogether. Therefore, no online test is needed if they are contracting with an interim via this route and the interim can undertake any duties required, even as an Office Holder.
Where’s the catch?
There isn’t one that we have found yet. The various Umbrella Companies offer slightly different services and structure their costs differently. We do not recommend any providers, but those such as Paystream, Giant, Parasol and Contractor Umbrella are mentioned frequently by our interim network.
If you’re used to working with a trusted accountant and tax adviser, working via an Umbrella may take a little getting used to.
4. What does this mean for my PSC?
Nothing. We expect that interims who have a PSC will keep it open to deliver assignments outside IR35 through it. They’ll only use an Umbrella Company for work inside IR35.This will of course affect people differently depending on their current circumstance below. In all cases, we recommend that interim managers take professional advice on any implications for their pension situations and allocation of expenses through their PSC.
5. What’s next?
5.1 Seeking new assignments now
If you’re available now, Employment Businesses have a duty of care to appraise you of the likely IR35 status of any role they are putting you forward to.
If it’s outside IR35, the existing system effectively prevails but with a test applied.
If it’s inside then the Employment Business needs to be giving you a clear picture about how you might contract with it for that role and critically how you might price that work. Any assignments being recruited to now ought to take account of these changes so that you don’t then have to renegotiate your circumstances from 6 April midway through a role.
5.2 In an existing contract that will probably be outside IR35
Your end client is responsible for determining whether you’re in or out. There is no appeal mechanism but of course disagreements on the margins of this will be rife. We’ve already seen interims resigning from positions likely to be deemed inside IR35 by clients when the test would likely deem them outside. More on the policy position later.
5.3 In an existing contract that is probably inside IR35
If you currently pay yourself as if you’re outside, we estimate you could be up to 20-30% worse off continuing in that role inside IR35 if you currently pay yourself dividends and draw a minimal salary from your PSC. Very few of our interims though have indicated they would leave that role altogether. Most have a degree of loyalty to the end client that will lead them towards absorbing some or possibly all of that gap if the client won’t entertain a pay rise. But that’s an individual decision about what’s affordable or not.
Chances are you’ll need to move to an Umbrella Company to finish that assignment. You’ll need to do it in time for payments processed after 6 April to be paid under that system. Typically for monthly billing interims, that means having a new structure in place by 1 March so there isn’t long to do it. That is because otherwise your Employment Business would be required to deduct PAYE and NICs from your PSC for any work completed but not paid for prior to 6 April.
Inevitably there will also be very sensitive rate negotiations. I’ve yet to speak to a Local Authority willing to openly fund an interim manager’s increased tax liability to retain them in their assignment. However, the reality is that those negotiations are already underway and increases where agreed will be couched in terms of market adjustments, expenses allocations, retention and performance against deliverables.
5.4 Work packages
There is much discussion in the market about work packages. Provided the assignment in question doesn’t manage staff and isn’t an Office Holder, it is entirely possible that breaking it up in to work packages with clear deliverables, e.g. per month or quarter, is a viable way of increasing the likelihood that an assignment will be outside IR35. Clients see this one of two ways – either a bit of a fudge that they don’t really want to be involved with, or as a great mechanism worth exploring but it is a genuine option.
6. The Local Government view
What is completely clear is that the sector remains utterly unprepared to deal with this situation. I attended a session for the sector last week and the consistency of advice and the level of knowledge on this subject is as yet nowhere near the level it needs to be in order for Local Authorities to be able to take informed decisions.
The emerging policy position across London is very worrying. The essence of it is that if you’re going to be worse off in future, you should have been paying the ‘correct’ taxes in the first place. The inference being that you are at fault for playing the system, rather than the system being at fault for encouraging entrepreneurship and enabling PSCs to pay a different suite of taxes at a lower headline rate than their PAYE counterparts. Now I’m not getting in to the ethical debate around the rights and wrong of that, but the London view is hardening in that regard which serves to make negotiations even more difficult.
There is also a fundamental misinterpretation of the new rules, namely that liability sits with the Local Authority. It’s very worrying that Senior Management Teams are being informed in policy documents that will no doubt go to Cabinet or Committee that they are liable even when an Employment Business holds the contract with the interim (they are not, we are!) We’ve already seen examples of the tone of these reports being detrimental to the good name of interim managers which biases the debate and leads to further friction.
Interestingly outside of London we are seeing more Local Authorities gearing up for recruitment outside IR35 and already we are seeing candidates moving because of these changes. This will ultimately be to the detriment of more risk averse Local Authorities that go with the mantra of inside until proven outside based on policy rather than the scope of an assignment.
7. The unintended consequences
Instability for one. Interims are already voting with their feet – resigning in some cases from roles clearly outside IR35 that the Local Authority intends to deem inside IR35 due to blanket policy decisions made on inaccurate guidance.
Costs are up. Already we are seeing clear evidence of interims repricing work upwards for roles inside IR35. Certainly not to the tune of the 20-30% net loss they may incur from 6 April but there is already a noticeable trend of an uplift in rates being requested for new assignments of 10-15%.
The level of inaccurate information and the way in which interims are being cast as artful tax dodgers is not at all constructive in fostering a positive debate and finding practical solutions. What is interesting to me is this. If you were selling boxes to a Local Authority and your costs rose 20% due to the price of cardboard rising beyond your control you’d seek to renegotiate your charges. The end client might not like it, but it would simply be a commercial renegotiation. However, with this being about the very emotive (and vote troubling) subject of personal taxation, rational negotiations are all but off the table.
We are working flat out to help our interim managers in existing and ongoing contracts to assess their options and decide what their negotiating position is. We are also working tirelessly with our Local Authority clients to inform them of the true picture and debunk some myths about what’s going on. We have a responsibility to help bring both parties together to safeguard ongoing contracts and protect the interim from being too far out of pocket whilst protecting the end client from paying more than they can afford or need to. That’s a tough balance to strike.
With new assignments we are working on now, it’s a simple conversation about whether the client is likely to find the role inside or outside IR35 and therefore whether the interim is willing to use an Umbrella Company inside IR35 whilst continuing to use their PSC outside IR35.Our Local Authority colleagues are in a very difficult position.
It is only fair to remember that many Authorities have hundreds of PSC agency workers (when you add in social workers). I know from many conversations I’ve had with our customers that tackling this issue effectively is very high on their risk registers. Whilst some policy positions are founded on misinterpretations of the legislation, many are taking practical and positive steps to meet the challenge head on. We are working closely with our customers to reach solutions that enable them to continue to access the talent they need at a fair price point to meet the relentless requirements of austerity.
No doubt February will see further developments and changes and we will of course keep you informed as best we can.