As IR35 implementation for the private sector gets ever closer, should interims be worried?
It might have been around since before the turn of the millennium – when a titular press release from what was then the Inland Revenue heralded the arrival of this contentious piece of tax legislation – but it was only when it was guaranteed to hit the way contractors were engaged in work within the public sector that IR35 started to make headlines.
Fast forward a couple of years – and through two successive Governments – and now there is a furore about the manner in which IR35 is expected to hit the private sector. Although the reasons for this change have been publicly stated – to bring PAYE and off-payroll workers taxation into line, as well as to fill an apparent £400million blackhole in the treasury – many have voiced their disgruntlement at both the logic of the decision and the impact they believe it will have. Some are making noises that suggest without root-and-stem review of the changes, the impact on contractors, from interim to other freelancers, could be apocalyptic.
Despite Chancellor Sajid Javid’s treasury promising to review IR35, after making an off-manifesto promise to do so during the Conservative’s victorious election campaign, officials have stated that this will regard its implementation rather than forestalling the changes at all. As such, backs are up.
In late January, 15 leading recruitment firms signed a letter to Javid calling for private sector IR35 tax changes to be delayed, citing predicted damage to national economic growth, businesses making the wrong call on individual taxation circumstances, and entire projects being ‘binned off’. This came after IBM applied a blanket ban to IT contractors operating through personal service companies (PSCs), in order to not be caught by IR35. Lloyds Banking Group and HSBC have done similarly. Many believe this will hit genuine contracting, business strategy and the flexibility that investors nowadays demand.
However, this headline-making brouhaha doesn’t capture the impact proposed changes will specifically have upon the interim market. Whilst there is focus on contractors as a whole, not much has been said about the interims, the majority of whom operate through PSCs and are acutely aware of IR35. In fact, Tony Evans, an experienced interim CEO and member of the Association of Interim Executives, believes that interims get unfairly caught up in changes to contracting as a whole and thus ignored when such legislation gets ‘rammed’ through.
“We tend to get overlooked and become collateral damage as the IR35 regulations have evolved over the last 20 years and it causes no end of problems,” he explains. Evans highlights that one provision within the legislation – regarding whether an individual engaging in work with an organisation as an ‘officer’ and thus should be ‘caught’ by IR35 – makes it seem like interims are being discriminated against because they usually take on senior positions. “I believe HMRC wish to capture the top end and if they can capture the top end then they can justify everybody else being caught by IR35,” he adds.
Yet, it’s not just a concerted effort to catch interims that Evans percieves. He believes the legislation is out-moded and not as nuanced as it could be. As Evans sees it, interims are only one part – and a genuinely small part at that, with one decent estimate being about circa 10,000 operating in the UK, with only 1,000 at the top end, only offering a hyper-specialist service – of the freelance-contracting community, and are getting wrapped up in changes not intentionally aimed at them. “It’s just very unhelpful,” he adds.
There’s also the economic impact. With blanket decisions being taken as to an interim's or contractor's tax status, Evans believes this will be damaging to both the abilities of interims to pick up work and also the companies they engage with to be successful. He believes day rates will go up as individuals look to offset the impact of higher tax. He also believes it might make UK interims less competitive, as many compete on the internal market. And as the contracting and interim route looks less competitive, Evans fears there could be a talent shortfall. “Crisis would be too much of a full-blown term but there would be a skills shortfall just by implementing [IR35],” he explains. “Organisations will at least have to recognise they will have to spend more money to get their hands on the skills they need.”
However, despite the widespread backlash some don’t believe IR35 will impact the market as others are predicting. John Laycock, Partner & Head of Interim Management at Anderson Quigley, says: “Similar to the millennium bug predictions of 2000, the material impact on the market has not been nearly as disastrous as some ‘experts’ had forecast, in fact, demand for senior level interim managers in Anderson Quigley’s markets has increased as clients and candidates have adjusted to the changes.
“Factors contributing to this growth have been the increase in fixed term contract appointments where in most cases an ‘interim premium’ has been applied in addition to the permanent salary. There has also been a wider acceptance of the use of umbrella companies by the interim community and the continued need for interim managers to undertake project-based work. While the April 2020 changes may cause short-term turbulence, the public sector’s experience shows that it is not something to fear.”
Natasha Makhijani, Group CEO at Oliver Sanderson, an interim service provider, also notes that it is possible to lessen the potential negative effects of the incoming tax changes. “IR35 is causing concern, but there are products available that can help mitigate uncertainty around this topic by ensuring we work in conjunction with HMRC regulations and IR35 guidelines.”
So, what does this mean? For interims, will it be business as usual or will it all end in doom and gloom? Will they have to put up day rates? Will companies be scrabbling for top interim talent as some take on PAYE work or disappear from the market. The answer appears mixed. What is more of a given is that top interim service providers will be looking for solutions in order to ensure that talented individuals get the work they deserve and that organisations get the talent they need.