The MJ: Happy Birthday IR35

It’s a year now since HMRC dropped the revised version of IR35 in our laps. Last year I saw panic, confusion, misinformation (fake news as some might say), and a lot of very worried clients and interims.

So, a year has passed. How have we got on? Did we all emerge relatively unscathed or, as we predicted, has IR35 had a negative impact on Local Government’s ability to procure the very interim talent it so desperately needs? Did we survive?

Well broadly yes, but arguably Local Authorities, hardest hit of all, are still adjusting to the effects of IR35, with some adapting brilliantly and others sadly still floundering. In wishing IR35 many happy returns, through gritted teeth, I thought it would be useful to recap some of the most profound changes and anecdotes of the last 12 months.

It all felt very rushed and poorly thought through. Publishing draft legislation on the 5th of December for implementation 4 months later, to the day, with very little guidance and an online ‘ESS’ assessment tool which wouldn’t even be out of development until March was hardly helpful.

It wasn’t just like the clock was reset. If all we’d had to do was simply to adjust how new assignments from 5 April were assessed it would have been far easier. Not easy, but definitely easier. As it was, the biggest challenge was transitioning ongoing assignments, even though the only actual change was that responsibility for the determination of IR35 status would now sit with the end client and not the interim. That’s it in one sentence. That’s what all the fall out was (and is still) about.

Since IR35 first reared its head in the noughties, interims could legally determine their own tax status with no recourse to either their recruitment agency or the end client. In many cases that enabled them to perfectly legally pay a lower suite of taxes than technically they should have, and certainly lower than their PAYE counterparts. These changes have put a stop to that and rightly so, but it is the unintended consequences of the legislation that clients and interims alike are still grappling with.

Interims determining their own tax status before last April, or working outside IR35 since, are paid gross to their limited company. They can offset their expenses, but pay corporation tax and some National Insurance contributions, so pound for pound they are better off than those operating inside IR35. Of course, they accrue no holiday and get no benefits such as pension contributions, but sympathy in that regard has always been lacking so I won’t go there.

If they’re outside IR35 the only real change is that the client makes that decision, not them, but that has now pushed a significant proportion of assignments outside IR35, which has skewed the entire system.

On paper, it shouldn’t have been difficult, but a year on problems abound. Many Local Authorities took the opportunity to purge interims from their books and forced those remaining to operate inside IR35, regardless of whether that was the outcome of HMRC’s own test.

In some cases, it was ‘take it or leave it,’ with the policy line being that these changes had to be delivered with no additional cost to the Authority. What was ignored was that the cost of delivering that assignment rose by about 25% for any interim transitioning inside IR35.  Yet, the subject of personal taxation had become so emotive that rational commercial negotiations often failed, leading to many interims leaving and not being replaced, even when their expertise was critical.

Such a policy shift seemingly sought, in a small minority of cases, to punish interims for operating legally in the existing tax system because it was tax efficient. It was a visceral reaction to the point that interims were actually labelled, formally in published policy documents, as ‘tax dodgers’. Authorities seemed to now fear a knock on the door from HMRC nearly as much as a Tuesday morning call from Ofsted, which isn’t how things should be.

The algorithms behind the HMRC test are constantly changing, meaning more and more assignments are inside IR35. To put it simply, if your interim is doing a job within the organisation’s structure and managing staff, they’re inside. End of. However, true programme/change management remains largely outside.

Because it now costs an interim about 25% more pound for pound to take an assignment inside IR35 instead of outside, the cost to hire has risen and the number of interims willing to take such assignments has gone down.

If an interim travels and stays away for work, because they can no longer offset their expenses, they’re even worse off. Additionally, the umbrella company system they now have to use deducts both employee’s and the 13.8% employer’s NICs – the latter of which the client would pay if the role was on the payroll – they are often paid less overall than their permanent counterparts.

Consequently, Authorities now pay at least a quarter more for interims inside IR35 and find them harder to attract, while an increasing number of roles can no longer be deemed outside. So, while the market remains buoyant overall, interims cost more than before and yet, they’re needed more than ever. What a dilemma.

This article was written by Neil Lupin, Managing Partner at Green Park, and published in The Municipal Journal (The MJ) on Friday the 20th of April. To read the latest issue of The MJ, click here.