‘Deadweight loss’ is the economic harm society suffers because of a tax burden: “the loss of economic welfare above and beyond tax revenues collected” (Leach, 2009). When the UK economy needs as much flexibility as possible to grow again, IR35 is creating drag.
In April 2021 IR35, the Government’s uncompromising tax on freelancers hit the private sector economy. There were probably good intentions when the government originally launched it. However, because it is so nebulous, instead of just catching contractors who’ve been in the same ‘temporary’ role for years, interim executives have been caught in the dragnet of IR35. Invaluable and ‘on tap’ to the UK economy since the early 1990s, interims have vast career-long experience of accelerating and delivering change. The update to IR35 this year means that companies are now responsible for assessing the employment status of interim executives they hire – an oxymoron if you ask me. They are now responsible for paying employment taxes if the interim is deemed an ‘employee’. This increases the cost by up to a third for taking on a skilled temporary resource. Risk-averse when dealing with HMRC, they are declaring many interims as employees.
Companies should be able to take on temporary management expertise when they need it, without an unnecessarily complex and arbitrary process of deciding employment status. Just as many of the decisions to hire interims need to be quick and clear cut, the definition of a temporary assignment should be so:
Interim assignments range from 6 to 18 months or so, but typically average out at 9 months – definitely not years. These are temporary executive services. IR35 complicates this by determining employment status with a series of abstract definitions. I remain to be convinced that managing, guiding or mentoring people is a definition of employment, but it has been tangled up in the netting with other spurious hooks. This turgid legislation is turning companies away from the operational expertise they need right now.
A case in point is a multinational employer in the UK’s Thames Valley, which had engaged a number of interims to help deliver growth and transformation. The programme was going extremely well: on target and on budget. Then IR35 hit on April 1st, 2021. Overnight the company lost all its change expertise on the advice of a ‘Big Four’ management consultant using its own version of IR35’s ‘employment assessment’ tool. This set the programme back months, if not a year because the consultant determined all interims as employees which increased their hiring cost. Refusing to be taxed as employees, most of the interims voted with their feet. Guess which consulting firm has replaced them? There is clearly a conflict of interest here, but IR35 is also distorting the professional services market.
Interims take a risk, back themselves and their lifelong experience to help organisations manage change. By turning them into employees and making them more expensive to hire, IR35 harms their careers. When a company has a change programme to implement and knows what it wants to do, management consultants are not always the right option. In a nutshell, interims tend to be change-delivery focused, and management consultants focused on making recommendations and providing advice. IR35 is making the former more expensive while enabling the latter to extend their stay in organisations – the long-term cost of which is far greater. Other freelancers are being rehired by ‘umbrella’ firms. The net result is that any income tax revenue increase for HM Treasury will be negligible as ‘deadweight loss’ bites.
One of the main reasons organisations feel they need to hang on to management consultants is the impact of IR35. In turn, the risk is consultants then outstay their welcome and overstretch into expensive delivery, not their skill set. Their commercial model does not coach or mentor employees, leaving capability in place and departing as soon as possible. In other words, for a huge, long-term investment, there can be little to show for it in the end – just dependency.
In a letter to MPs in February 2021, Baroness Dido Harding, as head of Test and Trace, confirmed some consultants had been paid as much as £6,624 a day. For this sum per day, you could hire at least three ‘partner-level’ interim executives with years of experience taking strategy from management consultants and implementing it. While they do that, they’ll coach and mentor employees so that there’s no long-term dependency on them. They’ll even smooth the exit of management consultants off the premises.
The lack of joined-up thinking around IR35 has even set Government departments against each other. Recently the Department of Work and Pensions (DWP) received an £88 million tax bill from the Treasury for allegedly misinterpreting IR35. Despite many failed challenges and lost cases, the Treasury seems determined to push on in the private sector too.
The UK leads the world in workforce flexibility. Combined with motivations of entrepreneurship, risk-taking and the desire to help others we have a resource available at any time it is needed. So rich is the UK’s supply of high-quality interim management that we ‘export’ many hundreds each year to work for overseas companies. We should be proud of these executives. We should not look for ways to technically trip them up with doubtful employment status assessments, ending their careers as freelancing, pro-social entrepreneurs.
The other side of the coin are the companies wanting to hire this experience quickly and temporarily. European companies are unwillingly caught up in the UK’s IR35 tax mess. Although these UK interims are working internationally, overseas companies now have to provide an ‘Employment Status Assessment’ of work carried out. They aren’t remotely interested in doing this and are taking the work elsewhere. The result is lost tax income to the Treasury, and lost employment in the UK.
Organisations need to bring in external expertise to help manage specific situations. The business of change is not going away. To restrict the ability to hire the right expertise with random employment assessments is wrong and against the freedoms this Government claims it is promoting.
There is a choice of professional services available to organisations, and they must all be equally available. Companies do not have the time to go through employment assessments that hang on a technical thread of poorly determined and abstract terminology such as ‘mutuality of obligation’ when they need to plan and run change programmes quickly. Taking on a large consulting firm to have change ‘done to you’ is a vastly different proposition to being able to hand-pick your own interim executives who will deliver the change you want, with you.
IR35 forces organisations into making false choices when they just want to get on with their change programmes. Companies and the Government are using expensive consultants when they do not need them. We are seeing the pool of experienced change delivery experts reduce dramatically because of a clunky, inflexible IR35. The legislation is making the UK economy less agile as a result, just when it most needs experienced change leadership.
It is still not clear why a government committed to free markets would think that attaching lead weights to entrepreneurship is conducive to economic productivity.
It should be clear-cut and obvious that you are working on a temporary basis delivering a specific task or set of tasks that cannot be delivered by existing employees. If an organisation cannot manage itself in the medium to long term without retaining the same external help performing the same role or has not learned from using this external help, then it might need to review its human resource strategy. But do not penalise those who have come to help.
IR35 was intended to make sure that people who offer their services to organisations off-payroll pay the right tax. Interims are not tax-avoiders, they have decided to benefit others with their experience, with no ongoing guarantee of work or any employment benefits.
But if IR35 is an attempt to simplify a tax system, its application has achieved the opposite. Adam Smith (1776) said that tax should be easy to understand, easy to determine. IR35 is not. It is wide open to misinterpretation and it prevents the UK economy benefit from its globally-recognised resourcing flexibility. IR35 creates unnecessary ‘deadweight costs’ for companies, freelancers and the UK economy at a time when change and flexibility are key to economic growth and prosperity.
“Our life is frittered away by detail. Simplify, simplify.” (Thoreau, 1854)
Leach, G. (2009) ‘The negative impact of taxation on economic growth’ Institute of Directors.
Smith, A. (1776) ‘The Wealth of Nations’.
Thoreau, H. D. (1854) ‘Walden – Life in the Woods’.