IR35 – Can I stop covering my eyes yet?

Welcome to day one of the new tax year. And day one, year zero of the new wave of IR35. It’s fair to say the last 4 months have been challenging for all those of us involved in wading through the treacle that is IR35 – clients, recruiters and interims alike. Did we survive? What’s new and will HMRC achieve anything out of it or will it simply serve to tie the Public Sector up in more expensive recruitment knots?

For the thousands of you who have been kind enough to read, share and comment on my previous articles on IR35 in recent months, I needn’t rehash the details, but if you’re curious, the original articles can be read here. For anyone reading one of my articles on the subject for the first time, I hope I can simply give you some insights on the matter from the perspective of a recruitment consultant specialising in placing senior interim managers in the Public Sector, most specifically in to Local Government. These are the most profound changes I have witnessed as a Public Sector executive recruiter since IR35 was introduced 17 years ago today.

As my children say whenever we set off on a car journey, usually before we’ve left the driveway, “are we nearly there yet?” Well yes and no. Certainly from a Green Park perspective we are. Every single one of our Local Government contracts has been renegotiated. In the end, only one of our interim manager’s contracts was terminated because of IR35. In that case it was because that particular London Borough’s HR department has taken an ill-informed view that all interim managers must be inside IR35 and that the HMRC test need not be applied despite the assignment overtly being outside IR35. More on the varying policy responses later.

Did we survive?

As ever with these things, failing to prepare is preparing to fail. As soon as the draft legislation was published on 5 December, four months of relentless work started. What has surprised me greatly has been the distinct lack of good advice out there from the executive recruitment industry – indeed many high profile interim providers have remained remarkably silent on the subject. Various groups threatened judicial reviews to scupper or delay the legislation but there was never any doubt it would go ahead as planned.

Nationally across our Local Authority clients the responses have varied enormously. I am pleased to say though that despite some false starts, common sense has largely prevailed and in the main, correctly judged outcomes have been reached both for existing contracts and new ones that have started in recent months.

For the recruitment industry, everything settles down now. New requirements simply need a determination of inside or outside IR35 at the beginning of the recruitment process so that we can brief and price candidates appropriately. Where the client is unable to determine IR35 status, or where frankly it could change depending on how the assignment is approached, we simply ensure candidates are fully aware so they can price their time based either on being inside IR35 via an umbrella company or outside via their existing limited company. Then we contract according to the IR35 outcome agreed upon.

But what about our clients?

Local Authorities are a resilient bunch and life goes on. IR35 is a massive headache but it’s a mere flesh wound compared to the last seven years of austerity. I’ve seen every policy response imaginable in the last 8 to 12 weeks quite literally from some declaring that all off-payroll contractors are automatically inside IR35 and have to take a pay cut to stay (yes really) right through to those doing everything they can (even against advice) to ensure everyone is outside IR35.

The majority sit somewhere in the middle preferring as a policy to have as few interims outside IR35 as reasonably possible because even though they finally get the fact that liability sits with the intermediary (me!) and not them, they still don’t want even a whiff of noise about being involved with interims paying incorrect levels of tax.

Most have, very publicly, and quite rightly, refused any discussions about interim pay increasing when moving from outside IR35 to inside IR35. After all, why should their tax paying communities fund the increased tax bills of interim managers? The problem is that many also very publicly and provocatively implied that all interim managers are tax dodgers and that they would just take the hit and stay on in their assignments. Without getting in to the philosophical debate, all I’ll say is that the system was as much at fault as some individuals. The system enabled PSCs to pay minimal levels of PAYE and Employer’s NICs by making them solely responsible for the correct interpretation of IR35. Some did sail close to the wind for sure, but the vast majority paid what the system required of them.

However, what most Authorities chose to ignore was that interims had entered in to a contract for services with them based on the prevailing tax system at the time. With that system changing from today, their cost of sale would rise up to approximately 25% if their contract were deemed inside IR35 (with that determination no longer being in their control). The Authority’s view was “tough, you haven’t been paying your taxes correctly then, so you should continue the assignment and take the financial hit or leave”. The interim’s view was “my cost of sale is rising, I wish to renegotiate”. Cue stalemate. And I know of dozens of cases where a deal could not be reached and assignments have terminated as of 31 March as a result. In some very high profile cases, that directly puts major £multi million savings programmes and essential service recovering programmes eg in Children’s or Adult Services at risk of failure. Now you could argue an interim should never walk in that situation. None of ours have, but I know many who’ve felt they had no choice, particularly in cases where IR35 has been used as a stick with which to beat their reputations.

Regardless of what may be said publicly, side bar deals to retain essential interims have been concluded the length and breadth of the land. In the main, the compromise has been that the Authority has agreed to fund the 13.8% Employer’s NICs costs that they would otherwise pay if the interim had gone on their books directly. Of course that is mainly true of interims in the most senior and business critical of roles.

So what’s new?

The winners in all this are the umbrella companies. They will have made a fortune, however if you’re signing up to one now for the first time, watch for poor customer service and poor financial advice (ie those that over promise and sail close to the wind on what is allowable). Be assured there are good ones out there and we now have a limited approved list we are prepared to work with.

The 11th hour emergence of the HMRC test on 2 March was a welcome sight, even if it is a particularly ugly butterfly that has emerged from its chrysalis. Although be warned HMRC can tinker with the algorithms that sit behind the test (allegedly) so while a surprising number of early test results were coming back as outside IR35, I doubt that will remain the case. Remember that it is a blunt instrument – a square peg for every shaped hole.

Having the test available finally removed the last excuse most Public Sector bodies had against springing in to action, and unsurprisingly a flurry of test results started coming through from clients within hours of its launch. It unblocked a lot of stalled negotiations and finally convinced all but those most opposed to interim managers that having people working outside IR35 remains a legitimate way of getting things done.

One thing that has held up some negotiations and will yet scupper many a placement is the sudden rise in requirements from clients for work packages for assignments outside IR35. Now, the REC (Recruitment and Employment Confederation) view is that if the scope of a role already falls outside IR35 without the introduction of financial risk, a work package that links payment to the delivery of milestones is unnecessary. We all agree that a statement of works with sensible milestones is the cornerstone of any assignment – it’s just good management. However, an increasing number of Public Sector organisations have latched on to this and are insisting that their interims joining outside IR35 take on financial risk. Very few interims routinely already do this, and with risk there is usually reward associated too – ie a fixed sum to deliver an outcome regardless of how long it takes. Perhaps unsurprisingly very few clients seem to be up for paying the same fee if the candidate delivers the work in half the time, and no-one has quite got their heads around how the agency protects its fees in these situations when it has no direct supervision, direction or control over the interim.

So what has HMRC achieved?

They’ve tied the recruitment industry and its Public Sector clients up in knots for months on end (tick). They’ve forced an as yet uncounted number of interims in to leaving their roles (tick), moving to the private sector (tick), retiring (tick) or refusing to take on roles inside IR35 (tick). The market has simply adjusted upwards for roles inside IR35 meaning that candidates are now quoting between 15 and 25% more than they used to for roles where they’ll be taxed at source (tick). In that respect it is a seller’s market. When I coined the phrase ‘unintended consequences’ last summer one day at an early IR35 REC meeting, these were precisely the issues we could see coming.

Will HMRC increase revenue collection by the estimated £440m they think they’ve been missing each year? I sincerely doubt it.

What will the cost be to the Public Sector in assignments prematurely terminated putting savings and improvements at risk, the talent drain, and the increased cost of recruiting inside IR35? Not to mention the huge financial burden placed on every single public body that uses interims just to get their house in order these last few months? Some London Boroughs had 400-500 PSCs working for them before these changes (at all salary levels) so even tracking who they had let alone renegotiating contracts was a nightmare.

What next?

As I said, things settle down now. The industry should by now have adjusted to new delivery models and recruiters ought to be more than able to give their clients sound and accurate advice both on how these changes have affected the market, and their responsibilities under the legislation.

It remains to be seen whether these changes will in themselves cause the market to stall as clients have to come to terms with the reality that recruiting inside IR35 is now up to a quarter more expensive than it used to be. For assignments outside IR35, the willingness or otherwise of the market to engage in payment by milestones is an ongoing and interesting debate.

Please feel free to share this article and to comment below. It may be day one, year zero, but it ain’t over just yet. And just you wait until they apply these changes to assignments in the private sector…because they will!

Disclaimer:

As ever please note that none of the information contained in this article can be considered as advice in any legal sense, nor can it be relied upon for accuracy – this is simply an update on my interpretation of the current situation. The contents are not intended to be exhaustive and the situation is changing rapidly therefore we strongly advise you to take independent qualified tax and financial advice.