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IR35: Status is in the eye of the beholder (1/2)

No sooner had HMRC published the long awaited IR35 assessment tool, called the Employment Status Service on 2nd March, I was inundated with texts and emails from interims who were testing themselves and joyfully declaring out of scope results. Certainly my initials thoughts were ones of relief, as the test seemed to be far more lenient that the initial test version I had seen in December, which had 55 questions, and the worrying initial 12 question section which seemed to be trying to catch anyone with a greater than 5% share in their limited company – i.e. everyone.

I spent the following weekend running my own tests and I tried to process map the tool, as you can take different paths through the questions depending on your answers. I had heard rumours that HMRC would publish underlying weightings, but this was surely too much to hope for – HMRC would know the test would be far more “beatable” if the underlying weightings were transparent.

Early on there is one question which is an automatic fail – “is this worker an office holder?”. It makes logical sense to put this question in early. If it’s a binary in / out question, there’s no point in getting the user to progress through the 20 other questions, if the answers to those are incidental to whether they are an office holder.

So this question essentially precludes interims working on statutory board position on an out of scope basis. This, coupled with NHSi December 2016 guidance which instructs trusts not to appoint any off payroll interims in office holder posts, produces a double whammy effect for executive level interims. Their alternative options will all be inferior to the heady days of 4 figure PSC days, and I suspect we will see an increase in spurious Board Advisor roles, with interims siting adjacent to board positions, covering many of their duties, but not technically holding office. These new rules clearly impact trusts aswell, choking their ability to source experienced board level resource to cover gaps or lead improvement. NHSi and the Leadership Academy are actively promoting secondment and developmental opportunities to substantive employees in the system which is laudable, but in many instances, such an arrangement would be fragile and less impactful compared to the intervention of an experienced interim manager.

The silver bullet of the test is substitution. The question is a two parter, and worded slightly differently depending on whether the worker has started the piece of work yet.

If the worker has already started the question is: “During this engagement has the worker’s business arranged for someone else to do the work instead?” If the worker has not yet started, the question is: “Would the end client accept the worker’s business sending someone else to do this work instead?!” Note there is no option for the tester to take into account whether a worker has proposed a substitute at any given point in the past, it relates only to the piece of work in question.

The second substitution question asks would the end client accept the worker’s business sending someone else to do this work instead? If the answer is yes, you’re automatically out of scope. Its been cleverly done. Often interims say to me “but I have the right to substitute?” and of course any interim management contract will have the substitution clause, but never in 7 years of interim management recruitment have I seen an interim manager substitute themselves. HMRC realise that many interims provide a defence of having that contractual clause, but in reality they wouldn’t or couldn’t propose a substitute, and even if they did, the client wouldn’t accept it, so a contractual clause carries no weight. Under the new rules, HMRC get to test the notion of substitution in a real life way, by directly asking the client whether they would accept the substitute. I suspect most clients won’t, because they generally hire a specific person and want their skills experience, and crucially – their character and personality. If you’re the type of interim who often wins roles on chemistry or fit, then it follows that you’re far less likely to be able to substitute yourself. If you provide a homogenized, replicable service then substitution should be more realistic, but even then you’re reliant on the client understanding the concept and being re assured about the risks.

Its possible to get the ‘wrong’ answers on substitution and still finish with an out of scope result, but many of the remaining questions have only subtle differences between the multiple choice answers. This means the final result is put in the balance, depending principally on the tester and their understanding of IR35, interim working practices, and the piece of work they are assessing. Its too easy for interims to run the test for themselves, or for agents to run the test on their interims and despite their attempts to be objective, a sub conscious confirmation bias will kick in and give a higher chance of them generating an out of scope result. The crucial thing we must all bear in mind is that none of these test results matter, the only one that matters is the one administered by the end client.

In most cases, the task of assessing the worker will fall to someone in the HR function of a client, and typically the questions will be answered in a defensive or ignorant way. Consider that most trusts may pass details of their interim workers to a colleague in HR, who will assess the worker with only their name, limited company name, and a perhaps a copy of their contract to work with. They may be tasked with assessing dozens, if not hundreds of off payroll workers, within only a limited amount of time to review each person. Lucky interims may have a line manager trying to influence HR and advise them on the nature of the interim’s activities and contract, but if you’re one of many interims in an organization, its less likely that your line manager can lobby individually on your behalf.

Ive had an example of exactly that situation over the last couple of weeks, as I have been trying to place an interim into a trust to do some change work. Me, the line manager, and the interim all tested the brief and found it out of scope (even allowing for “no” answers on substitution), but having reached offer stage, we were at the mercy of the HR function, who were asked to assess the piece of work. The result came back in scope, and interestingly I was able to see their test result which showed the answers to the questions. There were some obvious mistakes:

They inputted that the worker was a sole trader (he is a limited company) Q6: They responded to say the worker could not be moved to a different task or project, this would require a new contract (Correct answer should have been: Yes – but only with the worker’s agreement) Q10. That there were no items that the worker would buy for this contract that they couldn’t claim back from the end client or agency (Correct answer should have been: Other expenses – including significant travel and subsistence expenses (not including commuting) or the cost of a business premises outside of the home) Q12. That the worker wouldn’t be able to put something right, because it was time specific or for a single event. (Correct answer should have been: Outside of their usual working hours at additional cost to the worker)

Had the answers to these four questions been answered correctly, and assuming the answers to all other questions remained the same – the result would have been out of scope. Nevertheless this particular HR function was immovable on their answer, and I fear many interims will be caught in similar circumstances, victims of blanket organization wide decisions, or subject to decisions made by a distant HR employee who up til a few weeks ago, probably hadn’t even heard of IR35.

In the second part of this blog, to be published on Monday, I will cover how clients will come to market post April, my predictions for the next 6-12 months, and what we can do on the supply side of the market to better inform clients on how to manage their IR35 risk.