Should interim executives prepare for IR35?
THURSDAY 19TH SEPTEMBER, 2019
“…(but) in this world nothing can be said to be certain, except death and taxes.” (Benjamin Franklin)
There are few certainties in life – this is why we have interim executives.
This band of skilled self-employed executives are the proven expert game-changers of the UK economy. Few executives are capable of being ready to help businesses accelerate change, manage transition, deal with uncertainty and sometimes crisis at the drop of a hat – this is what sets interim executives apart from permanent executives.
With questionable reason, Her Majesty’s government has plans to throw an indiscriminate dragnet over this essential executive resource by April 2020.
What is the value of interim executives to the UK economy?
In three words: experience, immediacy and agility.
According to the Centre for Research on Self-Employment (CRSE), the skilled self-employed – managers, directors and senior officials – offer a combination of benefits “core to the performance of an innovation-driven economy such as the UK.” This agile, flexible workforce “provides access to expertise beyond the confines of core employees; provides a variable cost model that enables risk management and lowers financial requirements.”
There’s no doubting the benefit the self-employed contribute to the UK economy. According to the Association of Independent Professionals and the Self-Employed (IPSE) they contribute almost £300bn to the UK economy, of which interim executives are a significant subset.
However, this important sector of the economy must now prepare for changes to employment tax which the Government says it wants to introduce in the spring of 2020.
Already introduced in the public sector, the ‘intermediaries legislation’ (IR35) is being introduced to gather tax additional tax revenues from what are termed ‘disguised employees’ – those self-employed the Governments views as employees although they are working through their personal service companies. Those employees who fail the Government’s employment status test are considered ‘inside’ IR35.
Interim executives, operating at the highly-skilled end of the self-employed economy, are an essential part of organisations’ ability to manage change, transition, crisis and uncertainty. Without them the UK’s businesses would struggle to respond to change, whether planned or unplanned. At a time of uncertainty created by Brexit – arguably inflicted on us by the Government – the UK economy needs interims more than ever.
IPSE’s recent quarterly Freelancer Confidence Index, as in Q1 2019, finds that whilst Brexit is the biggest factor holding back their business performance, it is closely followed by the Government’s fiscal policy on self-employment – IR35.
This underlines the need for the Government to consider adopting a more nuanced approach to the self-employed sector, and particularly to the highly-skilled interim executive sector.
As all good interim executives know, change always represents an opportunity and IR35 is no exception. Regardless of the rights and wrongs of Her Majesty’s Government imposing a new tax framework over the UK’s economic success story – its flexible, experienced workforce – interim executives should prepare now.
The Government’s determination of employment types is flawed
The current determination of employment status for IR35 purposes is flawed because its foundation – crucial definitions of employment – lacks legal clarity. The Department of Business & Innovation, in its 2015 Employment Status Review, confirms there is a lack of a formal definition of self-employment.
As an example of the Government’s ‘muddy thinking’ on employment, it determines employment status for tax purposes with a series of questions on its Gov.uk website.
The self-employed are asked if they are an ‘office holder’. There is no legal terminology for office holder. The Government website describes an ‘office holder’ as someone ‘(who has) a position of responsibility for the end client’. This could bring the entire interim executive workforce within IR35. It needs thinking through by the Government rather than a blanket assessment.
What steps should interim executives take to be ready for IR35 in 2020?
Whilst important lobbying is being led by IPSE and the Institute of Interim Management (IIM), interim executives and their clients should prepare.
The simplest advice I have to offer interim executives and their clients is focus on the assignment. Does the engagement look and feel like employment? If it does, it is more likely IR35 will apply.
The (written) contract will be one of the first things the Government’s tax and revenue department HMRC will look at in any enquiry. Contracts should consider three main factors and a few supplementary ones.
Personal service and right of substitution
Interims should have a clause in the contract with their client stating that the limited company can send a replacement should the need arise. What is important to remember is that the provision of interim executive services to an end client is a business-to-business transaction.
Are you required to carry out the assignment yourself, or you can you send a substitute executive? Employees cannot send a substitute, so offering services solely linked to you points towards IR35. The reality is that clients will not accept this. They hire an interim executive for their experience and the way they deliver it – you cannot easily separate the human from the experience! Put the clause in the contract but have a word with the client. Reassure them that you will deliver. In the event you are unable to deliver, a replacement will be found.
Supervision, direction and control
Ideally contracts should contain a clause stating that the interim’s limited company has autonomy over how interim services are carried out. Avoid the following:
- suggestions that the interim is being supervised
- clients determining hours of work without agreement with the interim
- fixed working hours for the interim
- the interim having a ‘line manager’
Employees are controlled in this way by their employer – existence of control suggests IR35 applies.
Mutuality of obligation
Is your client obliged to offer you work beyond the agreed project, and are you obliged to accept it?
There should be no obligation between limited company and end client to either offer or provide ongoing work, past the term of the contract. Ensure the following:
- clearly define the assignment with a written and agreed ‘schedule of work’
- any new work should be defined and agreed in a new schedule
- the contract should have a clear end-date
- notice periods should be short and mutual – no longer than 30 days, ideally 1 day
Employees and employers have mutual obligations, so the presence of MOO points to IR35.
Sometimes it’s not clear whether these key factors above apply or not. If that’s the case, a tribunal may consider the following:
Part and parcel How integrated into the client business are you? Are you ‘one of the team’ or is it clear to everyone that you work separately? Separation from the client business is a good indicator that IR35 doesn’t apply.
Use of your own equipment Interim executives should use their own equipment. This test doesn’t always work in practice. There are often good reasons – such as safety and security. But general speaking, employees use equipment supplied by their employer.
Financial risk and insurance: If you make a mistake, do you fix it on your own time, or the client’s? Interim executives might be expected to fix it on their own time. Interims should be professionally insured with professional indemnity insurance (PI).
Do you attend social events or the even the Christmas Party? One of my interim executives agreed with his sponsoring CEO that he wouldn’t attend the team socials or Christmas party. Attending events paid for by the client is another potential flag that you are an employee. The additional benefit of an interim not attending these socials is that if distance is kept then it’s a little easier to deliver a tough assignment!
In conclusion: IR35 is an opportunity
IR35 is an opportunity for the interim executive market to be re-defined. There are thousands of self-employed, but only tens of hundreds of genuine interim executives.
Interim executives should see IR35 as an invitation to demonstrate their identity as independent experts who help businesses manage change, transition and uncertainty.
Executives who genuinely operate this way, and are in control their own destiny, should have little to fear from IR35.
If you are an interim serious about your career, then here are my tips for covering the bases and remaining outside IR35:
- Make sure you have a clear work schedule, not simply a job description which could be misconstrued as the duties of an employee.
- Always have an end date for the assignment. You can agree a new assignment with new deliverables, but each assignment must have a clear end date.
- Notice periods should be brief, ideally one day, but reasonably up to 30 days – but no more.
- Have professional indemnity insurance (PI) as you are operating as an independent business.
- Get your contract checked by a specialist accounting or legal firm.
- Get advice and keep informed. I’d recommend interims become members of IPSE.
A final word on the assignment cycle. Make sure there is a clear beginning and an end. Interims will then be dealing with the overriding issue here – to not look or act like an employee. Holdsway and Surrey Business School recently presented a paper on interim management at the British Academy of Management (BAM) – a key part of which was the assignment cycle. If interim executives can demonstrate there is a clear brief, a delivery and an exit stage, as per this model, they will have a firm basis to argue they are working ‘outside’ IR35.
Leaving the final words to the French writer Alphonse Karr, let’s hope IR35 is not a case of “plus ça change, plus c’est la même chose”!