IR35 - if you are an interim lawyer with any sort of exposure to the public sector, then these letters and numbers have been following you around like a bad smell since last April. Of course you would have started giving off a faint whiff back in 2000, when the so called ‘intermediaries’ legislate on was first introduced. Yet it is over the course of the last 12 months that contractors, recruiters and hiring clients alike have been forcibly led into HMRC’s legislative quicksand. Now that we are all stuck waist deep, it seems fitting that I evaluate how on earth we got here and if we are sinking further.
Before I can best evaluate where we are now, it helps to re-visit the events that led us here in the first place. This is relevant, not least because, this series of events will no doubt unfurl again when IR35 is rolled out to the private sector, presumably in 2019. For that reason I have split my thoughts into two blogs; Part One follows and Part 2 will be available in due course.
IR35 - Part One.
You will recall that Intermediaries Legislation (IR35) aims to counter tax avoidance. I hasten to add this is a noble aim that I fully support, but IR35 is specifically aimed at contractors whose rates are paid into limited company accounts - Personal Service Companies [PSCs].
HMRC argues that for many, if the PSC didn’t exist, then the contractor would be an employee of the client (or agency) and therefore should be subject to the same tax deductions as their permanent counterparts. When written as plainly as this, I can’t help but agree. Tax is that inevitable part of working life we all (however begrudgingly) must become accustomed to. And again in principle, the more tax that is collected, the more revenue is being directed back into our crucial public services.
This isn’t recent news. Since April 2000 PSCs have been determining their own IR35 status (nearly all were deeming themselves outside IR35), and the agency/client would pay the PSC accordingly. If you are outside the remit of the legislation, I can pay you a gross hourly rate, like I would pay any company whose services I have contracted.
Herein lies the rub… HMRC would have us believe that many of these PSCs who deemed themselves outside of IR35, were in actuality disguising their true employee status. Is this the case? This is not for me to determine. I am quite clearly no financial advisor as my credit card statements indicate. But from the viewpoint of a recruitment consultant, I could see clear differences between a PSC contractor and a permanent employee, so it could easily be accepted that their tax obligations would be different.
Up until April 6th 2017, the public sector had forged a sort of “workable stalemate” with the contracting world. The two bodies were in equilibrium: with contractor’s clearly seeing the benefit of taking an interim role as their higher remuneration would make up for the lack of job security. And on the other side: hiring managers were able to fill vacancies quickly, for a reasonable charge that significantly undercut the cost of outsourcing to the private sector. In recruitment terms, if all parties are getting a good deal, then a consultant is doing their job well and for the most part this was the case.
But last April 6th, the onus of evaluating tax status moved from the PSC to the client or the recruitment agency (aka. non-financially qualified, for the most part impartial, slightly neurotic ME!). HMRC did release an online questionnaire-like tool to help me make the decision. I’m actually laughing as I re-read that last statement…those of you who know the online tool I’m referring to, will also remember it was only released mere days before the changeover and it didn’t work properly. For fairness I will add that all parties were given ample notice that the changes were coming in. However, the actual magnitude and effect of the decision, despite being hypothesised relentlessly, was only really digested that changeover week.
I wonder if other interim recruiters still remember that week, or if they have permanently erased it from their minds? I’m laughing about it here but I don’t recall it being quite so funny a year ago. You see that first week of changeover was disastrous. Where pre-April 2017 it was the way the PSC operates being assessed, now not only was it the agency/client doing the assessment, but they were assessing the assignment, NOT the PSC.
That seemingly simple change meant that nearly all assignments would fail HMRC’s test. On April 5th the PSC might have been outside IR35, but on the 6th April they would fall inside IR35 and thus have significant amounts of tax deducted from them.
The assessment and the effect
Why does assessing the assignment affect the outcome so much and mean than masses of contractors would now have to renegotiate terms with their agency/end client in order to get the same deal? The main issue with assessing tax status under the new legislation seemed to revolve around whether the hiring manager would accept a substitute lawyer or not.
You see, if I wanted a porch built I might hire an individual, but it is more than likely I will hire a company, say: Porch Builders Limited (PBL). Whoever completed my porch will not bother me, provided they work for PBL. I might see a number of different workmen over the course of the project but the company will remain the same. In sum: I do not mind who the substitution is. I have employed a company. The work I am providing PBL is outside IR35.
Now let’s change the example to something much more realistic than me buying a porch (for my 2nd floor city centre flat!). I am now head of a council legal department (I retract the word realistic!). I cannot fill my permanent vacancy but the work is tax payer funded and must be completed, therefore I will hire an interim until I can fill my role permanently. I interview John Smith who works for John Smith Lawyers Limited. John is great but half way through the assignment he falls ill and has to leave. I now need to replace John. I can’t accept any substitute without interviewing them first. I won’t accept any old substitute. In this scenario the assignment I am offering is deemed ‘Inside IR35’ because the company can’t provide, and I won’t accept, a substitute. This second example is very common and makes up for most interim assignments in the public sector.
Prior to April 2017, whilst substitution still formed a part of the assessment, as long as the PSC operated in a way that meant if needed they could provide a substitute, for the most part they could still claim themselves outside IR35.
Whilst the actual legal work on offer might be deemed a legitimate project, the type you could hire a company for, it isn’t that project that is being assessed for tax purposes. It is the permanent vacancy the manager is covering. In the above example, the hiring manager, has an empty seat to fill and if filled that new employee could undertake work on any number of different projects just like any other employee. Going back to my first example, I wouldn’t hire a porch building company and half way through building my porch ask them to start work on cleaning my bathroom.
The new IR35 legislation asks hiring managers to assess the work in context of the overall organisation and to state if the work they are asking an interim lawyer to cover is actually just part of a wider caseload.
This is now quite common knowledge among interim/locum lawyers who have remained in the public sector, but going back 12 months and these realisations were unraveling mere days before the changes were due to take place. Which meant there was a huge amount of uncertainty over where the market was heading.
There is nothing particularly heinous about assessing tax status this way, but that week in April 2017 HMRC disrupted the “workable stalemate” I mentioned above. By disrupting the equilibrium, the task was then to restore it in such a way that all parties could benefit again and the contracting market could continue to thrive.
I cannot understate how important legal contractors are to the public sector. Last year, there were estimated to be over 1300 in local government alone, so ensuring the survival of such an important body of people was at the forefront of everyone’s minds.
Well it’s fair to say that the market did survive. I still have a job (thankfully), that keeps me very busy and there are hundreds of satisfied locum lawyers out there right now in the public sector doing remarkable work every day.
For all its faults and drawbacks, IR35 changes haven’t taken away what I wholeheartedly believe is the attractive core of being an interim lawyer in the public sector….the stuff that keeps legal professionals coming back to it time and time again.
You see, IR35 legislation has NOT made any less the quality of work that these organisations give to their interim lawyers. Nor has it stopped interims joining teams of some of the best legal minds and personalities you would hope to meet – people who have the community at the heart of what they do. Nor has IR35 stopped interims from wanting to help the public sector continue to transform lives and communities.
However, the rules of the game have changed significantly. The terms on which contractors take up this work have changed radically and here from my seat as a legal recruiter, I can sense quite clearly that the market has a very different feel to it since April 2017. Not necessarily a bad thing but certainly something worth exploring in more detail.
For further discussion on the public sector interim market and/or IR35 legislation please do not hesitate to get in touch with me. It is the aim of my next blog to evaluate fully how this market has changed over the last 12 months as a direct response to IR35.