Do you risk getting stuck in the IR35 trap?

IR35 has increased the costs of engaging an interim, but firms need to stay focused on the benefits

By Tom Forrest, Managing Director, Sheffield Haworth

As the need for skilled interim talent increases in the year ahead, some firms risk jeopardising their transformation plans and their ability to fill business-critical roles owing to the unintended consequences of IR35.

 

IR35 is already having an impact

It’s been three months since IR35 came into force and we’re already seeing its effects. Now interims are asking us questions about their tax and their pension contributions, just as if they were permanent employees.

At the same time, we’re seeing some firms take a blanket approach to applying IR35. Owing to the time and effort involved – and the perceived risk of getting it wrong – these firms are no longer judging interim engagements on a case-by-case basis. Instead, they’ve decided that all previously off-payroll work – whether perceived as consultant, interim, contractor, or temporary – will be taxed at source, and are classifying all such work as falling within IR35.

This reaction is understandable. The tax costs and bureaucracy of IR35 have increased the burden on firms to the point where taking a blanket approach seems to make sense on the surface. However, there are significant risks to this approach that could stymie a firm’s competitiveness in the months and years ahead as the country moves out of Covid and the economy returns to growth.

 

The unintended consequences of IR35

From conversations with the market, I’m seeing a worrying trend. Because in many cases IR35 means taking on an interim as a temporary employee on a fixed term contract, some firms are beginning to compare the cost of interims with that of permanent employees. There’s a sort of false benchmarking going on where companies start to see interims as employees and then balk at the expense.

At the same time, the need to pay employers’ national insurance contributions, pension contributions, and other employment costs has added significant cost to the engagement  of an interim on a PAYE day rate. Some firms are responding by paying lower day rates, or by cutting back on interims altogether.

The knock-on effect of this in the short term is twofold. Firstly, firms risk slowing their transformation programmes by not bringing in the external expertise they need. Alternatively, they are lowering their day rates to the point of only being able to attract second (or even third) tier talent.

This in turn jeopardises the success of their transformation programmes. In the case of filling a business-critical role, it also increases the likelihood of bringing in a cheaper interim who doesn’t have the necessary skills or experience to hit the ground running.

The risk here is that firms get stuck in a kind of IR35 trap, becoming less willing to invest in interim talent because they suddenly perceive the cost as being too great. But comparing interims to permanent employees is misguided.

 

Stay focused on the problem you need to fix

Interim talent is more expensive than a permanent employee because the skills and experience needed to be able to fill a business-critical role or manage a digital transformation project are relatively scarce. If they weren’t, firms wouldn’t need to consider engaging an interim in the first place!

But this is where it’s important for everyone – from CEOs and CFOs to HR Directors – to keep the concept of interim front of mind. An interim is not the equivalent of a permanent hire. An interim is not an employee, even though firms now often have to pay them like an employee.

They are the solution to fixing a specific problem for a fixed period of time. Whatever the short-term challenges of implementing IR35, the key is to avoid focusing on the regulation and instead to focus on the problem that needs to be fixed, the value created by fixing it, and the potential value lost by not fixing it.

The value drivers for interim remain as they always were. Firms would be wise to avoid letting IR35 distract them from this fundamental truth.

 

How the IR35 situation will likely evolve over time

While the challenges of IR35 implementation have given rise to these risks, we’re also seeing a positive trend in response. Some firms are starting to adopt tools that carry out the status assessment of payroll work.

In the months ahead we are likely to see the market become more comfortable with assessing payroll work using these tools. This is because, not only do these tools make IR35 assessment easier, they also come with specialist insurance that indemnifies the supply chain against HMRC claims.

In other words, if an organisation assesses a piece of work as falling outside IR35 using one of these tools, only for HMRC to come along later and say the work should have been classed as falling within IR35, the firm is insured against that.

At Sheffield Haworth, we work alongside a specialist insurance firm in this area called Kingsbridge Insurance. So we’re confident that those firms who have adopted a blanket approach to IR35 will start to soften that stance as such tools become more widespread.

This part of the market is almost certain to grow, not least because of the likelihood that demand for interims will increase.

 

How demand for experience and flexibility will increase in the months ahead

There’s no doubt that demand for interim talent is going to increase as the UK economy recovers post-Covid. As the economy grows, it will need more flexibility, not less.

We’re already seeing an increasing number of senior moves in the permanent market, creating more gaps in business-critical roles. At the same time, Covid has accelerated organisations’ appetite for change, having laid bare the need for many to change their operational models, to adopt a digital strategy, to become more resilient.

The Covid challenge exacerbates what was already there. The world becoming increasingly digital, loss of traditional jobs, disintermediation of industries, disruption – these challenges existed before Covid, and are returning now.

Just as firms needed experienced, skilled, and solution-focused interim talent to solve these challenges before Covid, so they will again. The focus is swinging back to focusing on digital transformation, operational efficiency and managing risk, just as it was before the pandemic hit.

The need for interim talent to drive the coming demand for growth and transformation is going to make skilled interims even more scarce. Firms who can stay focused on the value of interims are likely be the ones to benefit most, as others allow IR35 to distract them.

 

Conclusion

Firms need to avoid falling into the IR35 trap. Don’t equate interims with employees, because then you won’t get the right person to fix the problem. If you don’t fix the problem, it’s going to become a bigger and more costly problem. Keeping the mindset that interim solutions are expensive but effective at fixing problems will be better value in the longer term.

By the same token, interims shouldn’t lose their interim mindset just because they’re now getting paid on a fixed-term contract. They need to keep that focus on execution.

Interim is a pragmatic approach to fixing business critical gaps or transformation problems. Don’t lose sight of this and the value it can bring just because the process has changed.

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