Related posts:No related photos. The tax man comethOn 1 Mar 2001 in Personnel Today Previous Article Next Article A new ruling from the InlandRevenue, IR35, will have far-reaching implications for interim managementprofessionals and their clients, By Caroline HornThere are many reasonswhy a person should decide to become an interim manager, just as there are manyways in which they can go about doing so. How they operate – whether as anemployee, a self-employed person or through a limited company – can depend onseveral factors.Today, most interimmanagers choose to work through a limited company because of the tax advantagesit gives and because, more often than not, their clients will demand it.Andy Whally,commercial manager for Headwhay marketing consultancy and on the steeringcommitte of the Institute of Interim Management, says, “Most of the largersuppliers of interim managers will insist that managers operate through alimited company. Certainly in the past couple of years, that has been the case.Interims are requiredto have limited company status, a company registration document and VAT numbers.Increasingly, they are also having to provide professional indemnity insurance.They are also having to consider the implications of the new tax ruling, IR35,which came into force in April 2000. The implications ofthe ruling are far-reaching, both for interims and for their clients. So greatis the concern it has raised among the IT and contract services industry thatthe Professional Contractors Group has challenged IR35 in the High Court and ajudicial review is underway, with a hearing due in mid-March.IR35 investigates thestatus of “contract workers” to evaluate whether they are genuinelyworking under contract or whether in effect they should be considered to beemployed. Because it is still so new, no one is clear about how stringently theInland Revenue will apply the new rules.Interim managerstherefore need to pay close attention not only to the wording of theircontracts but to how the work itself is structured. There is, of course, nosuch thing as a typical contract. An interim might be brought in to help theclient company through a period of change such as a merger or acquisition or toreplace an absent director. Or a group of individual interim managers might beemployed as a team to work on a particular project.Alyson Gilbert-Smith,managing director of Interim Human Resources, says agencies do not generallybecome closely involved in developing interim contracts – nor in helpingclients to avoid the implications of IR35. “We are steadfast concerningthe rulings of IR35. We can’t advise everyone from a legal aspect because weare not in a position to do that. They need to get their own expert help fromsolicitors or accountants,” she explains but adds, “We have noticedno difference in how contracts are drawn up since the introduction of IR35.”This, however, couldbe a mistake, warns Ian Milroy, tax partner at Robertson Milroy. “BecauseIR35 hasn’t yet been tested, we are not totally sure what it will mean. Ifagencies and clients can adopt a position which they feel covers IR35, wherethe interim is self-employed in nature, then fine. But the ruling has not yetbeen tested by the Inland Revenue so no one knows what type of contracts willbe challenged.”He adds, “My viewis that people are window-dressing contracts to try to overcome IR35. Therewere lots of contracts in place before IR35 which would not have beenIR35-compliant. Simply by going into the workplace, interims are becoming partof the organisation so it automatically becomes a grey area in terms of the newruling.”Milroy says IR35 isgoing to become a major negotiating matter in any contract and is somethingagencies will have to start working with more closely. It is likely that anumber of changes will follow in the wake of IR35, not just in terms of whatinterims need to charge to cover the new costs, but also for clients. There aremany large blue-chip companies which regularly employ banks of contractworkers. They, too, will need to start taking a much closer look at just howthose people are employed.Legal status ofinterim managerWhile most interimmanagers choose to operate through their own limited company, they also havethe options of working as an employee or to be self-employed. Each option hasdifferent tax implications for the interim as well as the client.EmployeeMost peopleconsidering working as an interim will have spent several years as an employee,where they fulfil an open-ended contract for an employer with agreed rates ofpay and benefits such as holiday pay, and statutory benefits such as redundancy.But working as an interim manager to fulfil short-term contracts reduces thebenefits of working as an employee, while the interim also loses tax advantages.Self-employedA self-employed personwill provide a service under contract for a fixed fee. One of the main issuesof being self-employed is that the person does not become part of theorganisation and has some control over when and how the service is provided. The advantage of beingself-employed is that the interim can deduct certain expenses incurred duringthe course of fulfilling the contract. These can include travel costs –providing the interim’s business base is their home – equipment used for thebusiness including computers and mobile telephones, and administration costssuch as telephones and stationery. A self-employed status therefore offers taxadvantages to the interim, as well as to the client, who does not have to payNI contributions for the self-employed contractor.Limitedcompany statusOperating through alimited company means the limited company – rather than an individual, whobecomes the employee and worker of the limited company – is responsible forfulfilling the contracted services. The advantage for the client is that theinterim manager’s limited company pays the salary, deducts PAYE, NationalInsurance and so on. These advantages are similar to those when hiring aself-employed interim. But the new IR35 ruling means it has become much harderto work through a limited company (see below).InlandRevenue requirementsWhile working in aself-employed capacity carries obvious benefits for both the client and theinterim, it is unusual for an interim manager to be contracted on this basis.Clients will often refuse to employ an interim on a self-employed basisbecause, should the Inland Revenue decide that the self-employed person is toall intents and purposes an employee, then it can claim the PAYE and NI duefrom the client organisation. The client is unlikely to be able to recover theamount from the interim, who by then is quite likely to have moved to adifferent company.This is why manyclient organisations have preferred to hire an interim working through alimited company. While the administrative and financial advantages are similarto those of hiring a self-employed worker, the client is not responsible forthe real employment status of the interim.Mark Watson,employment law partner at Fox Williams, says in the CBI’s title, InterimManagement (AshtonPenney Partnership): “The essential point is that it isnot the responsibility of the client company to assess the tax status of theinterim management company to which it is paying fees, nor to make taxdeductions. That is the responsibility of the interim management company. Noliability for failing to make deductions will fall on the client company.”But as Watson adds,”Engaging an individual interim manager direct can, on the other hand,result in problems if payments are made to them gross, without a fullassessment of their employment and tax status.”IR35Falling foul of theInland Revenue can be a costly mistake for interims, too, where they have setup limited companies. Until the introduction of IR35 in April 2000, working asa limited company was a popular option for interims. Limited company status gaveinterims tax advantages and provided clients with a cost-effective means ofhiring a person with particular skills for a limited period.Nicholas Boothroyd,director of human resources consultancy Project IT Resource, says, “IR35is a new piece of legislation that directly affects the freelance industry. Insummary, IR35 investigates the ‘status’ of ‘contract workers’ by applyingcriteria to their contract that are designed to evaluate whether the contractengagement on which they are employed is of a genuine ‘contract’ nature, orshould be regarded as ‘akin to employed’”.He says, “Whilethe Revenue will not apply these criteria retrospectively to contracts writtenprior to the new legislation becoming law, it is important to recognise that ifa contractor has ‘looked, felt and smelt like an employee’ in the past then asignificant number of factors will have to change for them to be able to showthat they are in fact ‘genuine contractors’ under the new laws. A cosmeticchange to a contract of employment will not be sufficient to demonstrate anengagement being of a ‘genuine’ contract nature.”The Inland Revenuewill assess engagements undertaken by the limited company, and check the termsto clarify whether “if the interim was working for the client direct,he/she would be employed or self-employed”. If the IR decides that theinterim was, in effect, employed by the client, then the interim has to pay duePAYE and NI contributions on the contract, after deducting certain expenses.Deductible expensesinclude the employer’s NI contributions, pension contributions, 5 per cent ofthe gross value of the contract to cover administrative expenses and limitedexpenses which would be allowed if the interim was an employee.The client, meanwhile,continues to enjoy the benefits without taking on the tax risk that comes withhiring self-employed individuals. Even if it is found that the interim wasworking as an employee, the client is not penalised by the tax office and cancontinue to pay the interim’s limited company gross without deducting PAYE orNI. Obviously for the interim, incorrect classification can become a verycostly mistake.It is hard to knowexactly how the Revenue will interpret the new ruling and whether certaincontracts will comply. Milroy says, “We have a self-assessment basis forcompanies and anyone running their own company has to assess their liability.It is up to the Inland Revenue to decide where that will lie. IR35 ispotentially a lucrative area for them so anyone running their own company islikely to be checked.”Julia Meighan,managing director of Interim Performers, says, “The most important aspectof interim management and IR35 is the true concept of an interim manager. Toall intents and purposes, the interim manager integrates themself into theclient organisation.” With or without linemanagement responsibility, she adds, “their total focus is on achievingobjectives within a predefined period exclusively for that organisation.”There are generallytwo types of possible interim assignment – a project-based activity with abeginning and end and predefined objectives or the care-taking type of role foran unplanned vacancy in the organisation for a fixed period of time.”Both haveproblems with fitting the IR35 rule,” says Meighan, adding that the latterclearly does not fit in with the IR35 ruling as the interim is acting as anemployee of the organisation by fulfilling a role that would ordinarily befilled by a full-time manager or employee. She says, “Demand for interimmanagers is growing more rapidly at the senior end of the middle managementmarket and ‘filling the gap’ roles are growing as quickly as the project-basedones.”But Meighan is alsokeen to point out that it is still very possible for an interim’s contract andwork status to be IR35-compliant. There are a number of areas, however, thatfall outside the ruling. For example, the contract could allow for someoneother than the interim to complete the project, so the contract is for servicescompleted rather than focusing on the actual individual completing the work.But it is often the individual’s skills on which the client is relying.Other guidancesuggests using your own equipment rather than the client’s, not being paid afixed daily rate and certainly not a salary, and being paid on the achievementof work done or milestones reached. Again, however, some of these points couldprove difficult to set up for both client and interim.Gettingthe contract rightThe introduction ofIR35 means interim managers need to be clear about their working status, and becareful about their contractual arrangements.Some interims already working aslimited companies will, inevitably, have to change their classification whileothers will not be affected. There will also becontracts where it is hard to determine whether an interim is”employed” or “self-employed”. Standard contracts willgenerally be inadequate but by putting in place certain criteria that confirmthe “self-employed” nature of an interim, then interim managers couldcontinue to work through their own companies.It is still too earlyto know exactly how IR35 will be enforced. But the bottom line is that no onecan assume that existing contracts are IR35-compliant. If the nature of thework means a contract will not be IR35-compliant, then a number of interimmanagers will need to reconsider the value of working through a limitedcompany. Some might decide togo back onto a company’s payroll. Others will look again at their costs andraise their prices accordingly.”If there is amarket for interim management then that market will grow and develop, howeverit is managed,” says Ian Milroy. “But the tax rules will have aneffect. If IR35 is part and parcel of acting as an interim manager, then the marketrate will have to rise to cover that. That is when it becomes a market issue.”Howto comply with Ir35Defining the terms ofa contract IR35 will apply only to a contract where the interim manager would,but for the existence of his limited company, have been treated as an employee.To comply with IR35, the contract must show that, by nature, the interim isself-employed.In their brochure,Becoming an Interim – A Financial Perspective, Robertson Milroy and InterimPerformers provide a summary of factors which are helpful in agreeingself-employed status. These are as follows:– You can send areplacement rather than carry out the work yourself– You are at libertyto carry out the work without the client telling you what to do, when or how– Payment by way of aproject fee with instalments being subject to the achievement of certainmilestones instead of payment by the hour, week or month. The interim must notbe entitled to holiday pay or other benefits provided to the client’s staff– You can work forother clients during the term of your contract– You provide theequipment required to perform your work– You control thehours you work each week and whether the work is carried out a the client’spremises– The client has noobligation to offer work following completion of the contract and you have noobligation to accept further work– The contract is fora short duration– Adopt abusiness-like approach to obtaining a series of engagements for various clients– Issue invoices, nottimesheets, and register for VAT. Comments are closed.