Hiring interims within the off-payroll working rules
Ilana Samuels, our Operations Manager, discusses how the impending off-payroll legislation within the private sector will affect clients hiring interim managers and explains the options for doing so
The Intermediaries Legislation (commonly known as IR35) was first introduced in 2000 to counter alleged tax avoidance via the use of ‘personal service companies’. Over the years since, HMRC has made a number of small amendments with one significant change; in 2017 the off-payroll working legislation within the public sector was added making it so the responsibility for determining the status of an interim role (this being whether the taxation is to be applied or not) no longer fell on the interim but rather the determination had to be made by the end hirer – this being the client, with the recruitment agency carrying the liability of ensuring the correct deductions were taken. In April of this year, these rules will be applied to the private sector. Critically, HMRC have changed the legislation so that in addition to companies classified under the freedom of information act being affected, the rules will apply to all medium to large organisations with small companies being measured by the criteria of the Companies Act of 2006.
Clients must now take reasonable care and have a transparent justification for why the role is either inside or outside the legislation; HMRC can investigate and will ask for a clear explanation of the determination. This determination process is facilitated by producing a clear role description outlining the main tasks of the interim assignment. Clients need to consider whether they require an interim manager to undertake a pre-existing role as a replacement, for example a statutory c-suite role such as a CEO, CFO or COO, as these are most likely to fall inside the legislation, or if the talent need is for a project director to work on one specific business development or transformation programme, this would – largely – be determined as outside.
Following the Check Employment Status for Tax tool (CEST) and the recently published guidelines provided by HMRC can help guide through the process and deepen understanding of the factors that make up the determination. Another way of taking caution to this new legislation is using an insurance provider, such as Qdos, who will put the role through their own tests and underwrite the decision made on an interim assignment’s IR35 status, which can be used in the case of an HMRC investigation.
There are three primary options for hiring interims, and after the legislation is in place each will alter the way in which the newly defined taxation needs to be adhered to and paid. When choosing the method, it is important to have a conversation about what works for both the organisation and the candidate.
On the agency’s payroll
Many interim managers have their own limited company that processes the full payment for the interim assignment with reliance on a partnering accountant to pay out the necessary tax deductions based on the income of the company. Odgers Interim are, however, offering candidates that fall inside the legislation, and are therefore deemed an employee for tax purposes, the option to join our payroll. By putting the interim on our payroll for the duration of the assignment, we pay HMRC employer’s NI and the apprenticeship levy on behalf of the client. To emphasise, this is not a cost that the firm swallows but will be charged on top of the standard agency fee charged to the client.
Some interim managers opt to be employed by an umbrella company, which on the face of it comes at a comparably reduced cost for the client. This option does mean that the interim falls outside the off-payroll working legislation as they are a permanent employee of the umbrella company. It does not, however, by-pass the taxation as the umbrella company is responsible for paying the relevant taxes for their employees. Interims pay a fee to the companies to take on the accountancy involved in being a contract worker and comes at a cost to them, rather than the client. I would like to highlight the importance of engaging with an FCSA approved umbrella company when hiring an interim to have the security of this accreditation that has been granted for following a set of standards for compliancy and transparency. We ourselves only work with FCSA approved umbrella companies.
Something that must be considered is that we have been seeing interims affected by the legislation in the public sector increasing their day rates. With PAYE and NI deductions made to their earnings, propositioning themselves with higher pay has been a critical way to off-set the taxes now being applied.
One-off fixed fee
Rather than paying a day rate to the hired interim manager, clients may opt to pay them a salary and in turn pay a one-off fixed fee to the agency for the recruitment process. This option takes the agency out of the equation and employs the interim manager as any other employee on their payroll, including paying the NI and apprenticeship levy on each payslip. Another change to the employment is that the interim has the rights of being the client’s employee – including sick pay, holiday allowance and pension.
The off-payroll working legislation was reformed for the public sector nearly three years ago which has given the interim market ample time to understand the changes and how it affects business. I would like to stress that although many large financial organisations have announced a blanket approach to the hiring of interims as a way of deflecting the need for an individual approach to determining the status of a role, this does not comply with the off-payroll working rules. Organisations need to understand the technicalities of the legislation, use the recommended CEST tool and consider the best approach of hiring for each role and each interim senior leader.
On a final note, the off-payroll working legislation is currently under review which is planned to be concluded in mid-February. However, we feel this is the government simply upholding a promise they made in the December election and it will most likely proceed on schedule to be in place in April.
For more information please contact Ilana Samuels.