Last year I was very vocal about the potentially damaging consequences for local government of the Government’s rushed introduction of ill-considered changes to IR35 legislation.
At Penna we did our best to help councils navigate through the fog of confusion created by HMRC and demanded they publish guidance and release a promised official online tool.
HMRC ignored our calls for less haste so councils, interims and recruiters could prepare properly. No one – even within HMRC – could, for example, define an office holder for the purpose of IR35.
Given the lack of clarity, some public sector organisations proposed to treat all assignments as ‘inside IR35’ to minimise the risk of HMRC fines.
Some talented interim managers threatened to take their skills to the private sector instead where the new rules have not – bizarrely – been enforced.
Worst of all, we warned that the Government’s badly targeted attempt to tighten tax rules would have one guaranteed consequence – it would drive up costs for the public sector.
Twelve months on from the IR35 changes, was I right to be so concerned about the consequences for councils? And what lessons can be learned as talk begins of the legislation moving to the private sector?
In or out?
Then: Some councils had a working assumption that all assignments would fall ‘inside IR35’ to reduce their risk. Others were predicting that 90% of roles would fall ‘inside’.
Now: HMRC advises in published guidance that ‘due care’ needs to be taken when determining status and that they would stand by the result of the online tool that had been built to determine status. There is still confusion about what is an ‘office holder’. Councils are, in the main, using the online tool and most have taken a pragmatic view on each role individually rather than using a blanket approach. Our experience has been that 65% of roles have been determined ‘inside IR35’.
Then: The online tool was made available only a couple of weeks before the new rules came into force and there were questions from many perspectives about its effectiveness in correctly determining IR35 status. It wasn’t producing consistent results when tested against previous IR35 legal judgments. The tool contained ambiguous questions and there was confusion around the term ‘office holder’.
Now: The online tool has been updated regularly over the year. It now looks very different to the first incarnation. There is still confusion over the term ‘office holder’. There is a lack of clarity about how to interpret ‘significant expenses’. Many of the questions are still open to wide interpretation. Worryingly, we have found applying the same answers in today’s version of the software as we did in the first iteration produces different results. But IR35 law hasn’t changed which means the launch version wasn’t ready to support important business decisions. The tool still omits to consider some key determinants of IR35 status like, for example, ‘mutuality of obligation’.
Supply of interim managers
Then: There were concerns that those with cross transferable skills like ICT, HR, and digital would desert the public sector altogether in favour of assignments in the private sector where the rules were not changing. There were also concerns that a number of seasoned, very experienced and senior interims would hang up their hats, or only accept consultancy type roles.
Now: A number of interim managers have opted not to do any more work in the public sector. There has been a definite shift away from public sector roles unless they are deemed ‘outside IR35’. This was always going to happen for those cross transferable roles, and only creating a level playing field with the private sector will we see the shift reversed. More concerning for the public sector is how many senior interim managers have quit. These are the interims that were filling statutory roles critical to effective public service delivery. There is now a severe shortage of interim directors of children’s and adult services. A year ago we had a relatively small pool of suitably skilled interim managers for these crucial roles. It’s now shrunk to a puddle.
Then: HMRC insisted there would be no knock-on effect on costs to the public sector as a result of the new rules. They argued the new legislation would create parity between those doing similar jobs. Beyond HMRC, there was much debate about interim managers ‘inside IR35’ being required to pay the same taxes as employees but without any of the safety, security or statutory benefits employment brings.
Now: There is clear evidence that rates for ‘inside IR35’ roles have increased by as much as 30%. These rate uplifts are not about covering increased tax liabilities for the interim managers. In the main, it’s because interim managers deemed to be ‘inside IR35’ can no longer claim subsistence expenses for hotels and for travelling long distances which has always been a feature of interims’ lives. The rule of thumb is that if an employee couldn’t claim it nor can an interim working ‘inside IR35’. In fact, they are taxed on those expenses if they try to claim them incorrectly as HMRC treat them as earnings. Specialist interim managers tend to work hundreds of miles away from home and have to live in hotels during the week – yet are no longer able to claim those costs as business expenses. Hence the rate increases. Supply and demand pressures have also pushed rates up.
I love working with councils. They are the most adaptable and responsive of all public service organisations. At Penna we’re proud to work with councils to provide interim management solutions. Together we’ve adapted to accommodate HMRC’s early ineptitude and adjusted to the new circumstances and the reduced pool of interims.
But my worst fear was that hard-pressed councils would face a hike in the cost of hiring specialists to help reshape and transform vital local services. Sadly, all the evidence proves this has been the case.
I’d be intrigued to know whether the Government’s tax yield has grown as they hoped. I think I’ll be waiting a very long time for any increase to be used to offset the cost burden councils are now shouldering as a result of HMRC’s IR35 changes.
Toni Hall is director – local government executive interim, at Penna