IR35 – what problem is HMRC trying to fix?

It has had a lot of press over the last year or so, culminating now with it being delayed until next year (2021). However, was that really a consequence of COVID-19, or was it an ‘opportunity’ to have another think? Afterall, the House of Lords has been pushing for a review this year, before pushing forwards…

 

We have a second article about the delay, but in the first instance, from a ‘lay’ perspective, we believe that the key point to understand is the objective of IR35. What problem is HMRC trying to ‘fix’?

 

One view, that we support, is that IR35 should be used to ensure the correct amount of tax is being recovered from people in operational BAU roles that simply want to not be an employee or have an alternative lifestyle. This ordinarily does not include specialists or roles that are objective-based or time-bound. It should be accepted that it is a choice for the individual and also for the employer, and regardless of ‘headcount’ issues, a similar fee should be paid for the service as if they were BAU staff members.

 

Under these circumstances, the individual should have full access to all of the benefits of being an employee: pension, holiday pay, sick leave, notice period, expenses etc.  Notwithstanding this, the individual will still likely have all the on costs of running a business: accountants, insurance, technology etc. Therefore, the ‘charge’ will remain higher than employing the individual, but not significantly.

After that, there are a number of things that need to be considered in terms of parity. 

 

  1. When an individual decides to set up a professional services company, there is a degree of risk associated with it. While freedom and control are gained when working for oneself, there is no guarantee of continued work, customers change their minds regularly, and (there should be) no or a very short notice period.
  2. However, the individual should legitimately run the company professionally: documentation, boards etc, but also NOT get paid on a weekly basis, rather invoice and receive payment for services in accordance with standard payment terms. All too often agencies pay people earning >£100k on a weekly basis putting a huge cash flow burden on the agency, while not pushing any responsibility onto the so-called professional services contract. When individual ‘temps’ are paid £10/hour, things would be different, but largely, we’re talking high earners.
  3. Professional interim managers should all be held accountable for delivering something. 
  4. They should be ‘managed’ in terms of contract managed against agreed objectives, quality measures and deliverables. 
  5. These do not need to be cast into the contract per se, and can be developed in delivery, however, they will need overseeing to ensure they deliver. This isn’t ‘management’, this is simply good practice.
  6. The employer must step up and manage bad service delivery. When paying top-rate, they should get top service. Again, this will differentiate between a BAU more junior role and those more specialist.
  7. If the employer is concerned around contractors, they should simply recruit permanent employees. If they can’t, they must adjust their recruitment strategies and approaches, offering a competitive package. After all, if large tech firms can get people on salary, why can’t government departments.
  8. On that point, government created this problem. Through falsely reducing ‘headcount’ and salaried budgets (political), they by proxy established the interim market. Then, when realising many interims are ‘acting like employees (ie don’t do any of 2-4), the onus should be on the employer to manage out the wrong people. Or simply employ better.

 

In a nutshell, the HMRC can’t have it all – cake and eat it. If they can’t employ people, they should reward the risks taken by the interim – if there is no risk, they should employ them and pay accordingly or pay a premium for a contractor but manage them better.

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