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Stephen Fitzgerald: Solutions in short supply for IR35 interims

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  • by Stephen Fitzgerald
  • in Blogs · Jobs · Resources · Stephen Fitzgerald
  • — 14 Jun, 2017

Stephen Fitzgerald

Readers may recall that I explored the issues associated with the changes to the treatment of intermediaries in IR35 some four months ago.

Well despite the complaints from the interim management community HMG went ahead with implementing the changes from April this year. This article explores some of the issues associated with the bedding down of the new arrangements.

So far as those interim consultants being deemed as outside the scope of IR35 the news is reasonably good.  In essence little has changed, for these roles the interim can continue to use their personal service company without being charged income tax at source through the Pay as You Earn (PAYE) mechanism.

Significant numbers of interim roles have been defined in this category which has helped interim managers and organisations.  The risk lies though with the organisations, there have been instances in the past where Her Majesty’s Revenues and Customs (HMRC) have intervened in public sector organisations where they have been considered to have incorrectly interpreted the tax rules. This is a risk which can impact on both public sector organisations and the interim search and selection firms working on their behalf, caution needs to be exercised!

However, it is for roles within IR35 there has been fundamental changes.  I have seen a number of postings on the internet suggesting that the interim managers are a bunch of moaners and that they should simply accept that they can pay a chunk more tax and treat it as a fact of life.  Many of us are happy to pay more tax, however, it seems harsh to be paying the same rate as a permanent employee when not experiencing the other benefits such as annual leave, sick pay and security.

Depending on personal circumstances it is suggested that the increased income tax and national insurance burden for an interim manager within IR35 is in the region of 40% if all else remains equal.  Another issue is the added complexity that being within IR35 brings.  Public sector clients and the smaller recruitment agencies are resistant to providing a payroll service as this raises issues of employment rights, equal pay and administrative burden.  Some of the larger agencies are running a payroll service but generally, recruitment firms are insisting that interims continue to use their personal service companies or an “umbrella” provider of payroll services.  For those inside IR35 the personal service company route is generally considered to be not tax efficient.  This leaves the umbrella company.  These organisations are now becoming an unavoidable fact of corporate life for many interims but does mean that between the client and the interims there can be two further intermediary organisations.

The impact of all this is that, tiring of the complexity, some interims are calling time on their businesses or avoiding roles within IR35. In some key professional areas this is beginning to create a shortage of candidates and putting a pressure on rates.  In the local government sector, indications are suggesting that the rates for professionally qualified chief financial officers in the local government sector are drifting towards private sector rates, although disposal Income, net of tax and NI will probably remain the same.  However, those clients and agencies that believe that all the financial burden and risk associated with the IR35 arrangements can be passed to the interim manager may find that there is a price to pay…

Ultimately, the changes are bad news for clients, agencies and interims and good news for HMRC, at least in the short term.  Plans are that the changes will be rolled out to the private sector before the end of the calendar year.  This will probably cause more chaos and discontent on a much wider scale.  However, on the positive side it will at least be equitable.

As ever, public sector organisations are making the new arrangements work, but it has caused a degree of turbulence and required some contortion.  It will be interesting to see how the wider business community responds!

Stephen Fitzgerald is an Interim Finance Director
@SHJFitzgerald

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