Hiring interims within the off-payroll working rules

Ilana Samuels, our Operations Manager, discusses how the impending off-payroll legislation within the private sector will affect clients hiring interim managers and explains the options for doing so

The Intermediaries Legislation (commonly known as IR35) was first introduced in 2000 to counter alleged tax avoidance via the use of ‘personal service companies’. Over the years since, HMRC has made a number of small amendments with one significant change; in 2017 the off-payroll working legislation within the public sector was added making it so the responsibility for determining the status of an interim role (this being whether the taxation is to be applied or not) no longer fell on the interim but rather the determination had to be made by the end hirer – this being the client, with the recruitment agency carrying the liability of ensuring the correct deductions were taken. In April of this year, these rules will be applied to the private sector. Critically, HMRC have changed the legislation so that in addition to companies classified under the freedom of information act being affected, the rules will apply to all medium to large organisations with small companies being measured by the criteria of the Companies Act of 2006.

Clients must now take reasonable care and have a transparent justification for why the role is either inside or outside the legislation; HMRC can investigate and will ask for a clear explanation of the determination. This determination process is facilitated by producing a clear role description outlining the main tasks of the interim assignment. Clients need to consider whether they require an interim manager to undertake a pre-existing role as a replacement, for example a statutory c-suite role such as a CEO, CFO or COO, as these are most likely to fall inside the legislation, or if the talent need is for a project director to work on one specific business development or transformation programme, this would – largely – be determined as outside.

Following the Check Employment Status for Tax tool (CEST) and the recently published guidelines provided by HMRC can help guide through the process and deepen understanding of the factors that make up the determination. Another way of taking caution to this new legislation is using an insurance provider, such as Qdos, who will put the role through their own tests and underwrite the decision made on an interim assignment’s IR35 status, which can be used in the case of an HMRC investigation.

There are three primary options for hiring interims, and after the legislation is in place each will alter the way in which the newly defined taxation needs to be adhered to and paid. When choosing the method, it is important to have a conversation about what works for both the organisation and the candidate.

On the agency’s payroll

Many interim managers have their own limited company that processes the full payment for the interim assignment with reliance on a partnering accountant to pay out the necessary tax deductions based on the income of the company. Odgers Interim are, however, offering candidates that fall inside the legislation, and are therefore deemed an employee for tax purposes, the option to join our payroll. By putting the interim on our payroll for the duration of the assignment, we pay HMRC employer’s NI and the apprenticeship levy on behalf of the client. To emphasise, this is not a cost that the firm swallows but will be charged on top of the standard agency fee charged to the client.

Umbrella company

Some interim managers opt to be employed by an umbrella company, which on the face of it comes at a comparably reduced cost for the client. This option does mean that the interim falls outside the off-payroll working legislation as they are a permanent employee of the umbrella company. It does not, however, by-pass the taxation as the umbrella company is responsible for paying the relevant taxes for their employees. Interims pay a fee to the companies to take on the accountancy involved in being a contract worker and comes at a cost to them, rather than the client. I would like to highlight the importance of engaging with an FCSA approved umbrella company when hiring an interim to have the security of this accreditation that has been granted for following a set of standards for compliancy and transparency. We ourselves only work with FCSA approved umbrella companies.

Something that must be considered is that we have been seeing interims affected by the legislation in the public sector increasing their day rates. With PAYE and NI deductions made to their earnings, propositioning themselves with higher pay has been a critical way to off-set the taxes now being applied.

One-off fixed fee

Rather than paying a day rate to the hired interim manager, clients may opt to pay them a salary and in turn pay a one-off fixed fee to the agency for the recruitment process. This option takes the agency out of the equation and employs the interim manager as any other employee on their payroll, including paying the NI and apprenticeship levy on each payslip. Another change to the employment is that the interim has the rights of being the client’s employee – including sick pay, holiday allowance and pension.

The off-payroll working legislation was reformed for the public sector nearly three years ago which has given the interim market ample time to understand the changes and how it affects business. I would like to stress that although many large financial organisations have announced a blanket approach to the hiring of interims as a way of deflecting the need for an individual approach to determining the status of a role, this does not comply with the off-payroll working rules. Organisations need to understand the technicalities of the legislation, use the recommended CEST tool and consider the best approach of hiring for each role and each interim senior leader.

On a final note, the off-payroll working legislation is currently under review which is planned to be concluded in mid-February. However, we feel this is the government simply upholding a promise they made in the December election and it will most likely proceed on schedule to be in place in April.

For more information please contact Ilana Samuels.

Comments

David Edgar at 30/01/2020 14:32 said:

This is an interesting and highly topical article but I do see one very important theme that has been touched on but believe should be expanded. That is that in the evolution of the job market the consultancy proposition has become diluted. With the stimulus of "IR35" there seems a significant opportunity to bring this back into focus and develop an evolved proposition that builds on the strengths of the consultancy approach and on a relationship with the client as a true consultant.

The term "consultant" has become liberally applied to a host of people who are not consultants but are really day workers with technical or management skills to sell. These will always be a target for HMRC and at risk of falling under IR35. FTC's or Umbrella Companies are re-active measures that basically add cost and are not attractive to everybody.

In the field of transformational change the vogue has become for clients to act essentially as employers and embed third party or directly sourced individuals into the organisation - for them to "to be part of the team". The remit or role description is too often typically a (too long) shopping list of tasks and action-focused responsibilities - i.e. doing the doing and not providing thought leadership.

The immediate effect of the "team" approach is usually to render the consultant" bound by the current culture and baggage that senior sponsors and stakeholders are actually seeking to change. In this way valuable experience and consultancy skills and training can easily become neutralised and go to waste.

This may add comfort value for the client but transformational change scenarios are not the place for comfort zones. It basically amounts to buying a dog and barking yourself as the adage goes. It just adds to levels of frustration on all sides.

All too often the emperor has no clothes (or the wrong clothes) and the skill of the consultant is to tackle this in the right way with the right stakeholders and with the remit to do so.

Going to one of the big consultancies to get that "thought leadership" input to transformational change remains an option that is utilised by some clients but is fraught with too many difficulties to list here - not to mention costs.

Instead I propose a more individual, tailored and agile option that is focused on really helping the client sponsor gain perspective and insight, to set realistic achievable and relevant objectives and to implement them.

With the advent of IR35 there is a big opportunity for individuals with a dual blend of proper consultancy skills, subject matter knowledge and experience to work with clients as a consultant proper.

This means with access to senior stakeholders and decision makers via a proper consultancy relationship and a well considered and structured consultancy proposal. One that provides focus and clarity on the objectives, the approach, timing, costs, deliverables and other essential elements.

The definition of this type of a consultancy proposal is not a skill that is typically found in client side management circles but is something that a good trained and experienced consultant will work with the client to formulate and agree.

The consultant should determine the resources too and have access to additional or alternative resources if they are required or become necessary. This is not something that individuals always find easy but by working in partnership with third party agencies this can become viable.

To summarise then. There is an opportunity for suitably skilled and experienced consultants to work fully outside IR35 and to achieve better job satisfaction. There are win-win rewards on offer for both the clients and the third party employment agencies who are brave enough to develop a new proposition as a valuable string to their bow in a changing and competitive marketplace.

sharon green at 02/02/2020 08:17 said:

This is a useful article especially as we head towards this change and it remains confusing who is in and out. Clients seem to be erring on the side of caution, as you would expect until the market adjusts and clients and consultants become more knowledgeable. I agree with David. This is an opportunity. I see a chance to differentiate and delineate resources between those doing substantive posts, cover etc and those doing true consultancy or interim projects for clients and running their own businesses. I imagine the market will contract for some time, I'm not sure how long, and then we will see more outside of IR35 roles on the market. Interesting times.

Deborah Brown at 05/02/2020 14:39 said:

I would agree with the comments made in the post by David Edgar on the opportunity that we have as interims to approach prospective clients as consultants and to position the benefits of working this way.

My experience is that clients are deciding to go for the inside IR35 approach to be 'safe' but in doing so may be missing the right person to deliver their assignment.

Change is always challenging!

Colin Taylor at 13/02/2020 14:17 said:

David raises some interesting issues and, as a public sector interim, I have personally experienced interim assignments evaporating, only to be replaced by smaller consultancy projects. In the last three years, I've carried out multiple projects for individual clients that would, in past times, have been configured as a 6 -12 month interim role. The net impact on me has been an increased lack of certainty, lower income, less days worked and a vast increase in the time I have to put into business development. For clients, I believe that many solutions are less 'joined up' as they are released in silos. As someone who chose interim/consultancy for lifestyle reasons, I have little desire to go back on payroll - but never say never! The private sector is in for a bumpy ride, but it will be interesting to see if the voices of representative companies (IoD, Chambers of Commerce, FSB etc) start to kick up the sort of fuss that the public sector was largely unable muster.