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

In part 1 of my latest IR35 blog on Friday I covered some analysis of questions in the new IR35 test and also discussed how clients have reacted defensively to their new assessment responsibilities, as they scramble to properly understand IR35.

I suspect post April we will see 2 different ways clients will come to market – with a pre assessed requirement, and with an assessment yet to be carried out. Over the coming months organizations will become better informed about IR35 and they will start to realize that the IR35 status is one of the key questions an agent will ask about when they try to brief them on a new requirement. By having the internal conversation first to have the piece of work assessed the client saves time in the recruitment process, as the in / out of scope result will define the agents search parameters, and tell them which pools to fish in.

Where the client has not pre assessed a requirement before coming to market there is a greater opportunity to educate and influence. I think the market will see an emergence of new contractual templates, which will have contractual clauses which directly address questions in the ESS tool and to further mitigate the IR35 risk to the candidate. For example contracts will have clauses stating the worker is responsible for setting their own work schedule, with input from the client, clauses re specific payment on outputs, or a clause to state that the worker would put right their mistakes in their own time at their own cost. These changes to previously accepted norms have to be made clear to clients, but if they are happy signing the new breed of IR35 contracts, then by default they will be engaging interims on an off payroll basis.

Even contracts aside, there are strong commercial reasons why a client should position pieces of work out of scope, where there is a legitimate scope to do so. Firstly it increases their access to talent because out of scope roles are more attractive to interims than in scope roles. Out of scope roles also allow interims to claim tax relief on expenses, which means than your average interim is much more likely to travel and stay away for an out of scope role. Secondly you’ve got a greater chance of retaining the interim for the full duration of the contract, whilst most interims would fully commit to any role they undertake, I suspect those feeling trapped in in scope roles from April will half an eye on the market for alternative out of scope roles, in they way they wouldn’t ordinarily.

Finally out of scope interims are generally going to cost less than in scope interims. Why? As everyone predicted some interims are putting up their prices to compensate for the extra taxation they have to pay. The agency rules team at NHSI emailed trusts on 9th March and warned against this, stating:

We have received reports of trusts being asked to pay higher rates to agency workers to offset their tax losses. There should be no increase in rates paid by trusts for agency staff as part of this change in legislation. Trusts are encouraged to actively resist any proposed increases to rates charged by agencies

But the reality is that it is happening and in some cases trusts will be prepared to pay the extra to retain the interim, who may be at a crucial stage in an assignment. Over time, higher candidate rate expectations may not be immediately visible to the client if they have come to market with a pre assessed in scope role, and receive CVs with rates that look a bit higher than normal. Additionally the fee payer also has to factor in employer’s national insurance contributions at 13.8%, so even without a rate increase for a candidate, the cost of retaining someone who was out of scope, and becomes in scope from April 6th, is going to be 13.8% more. If the fee payer is an agent, they are likely to be passing on that full cost to the end client. So we may well have a market where both factors combine to make the cost of in scope interim is 25-30% more than the same interim in scope.

Finally, its probably just a safer way to do business, with more risk in the contractual relationship shifted over to the candidate. Why wouldn’t a client want to engage an interim who they only have to pay if they deliver against pre agreed outputs, and who will put right mistakes in their own time at their own cost, and at a price potentially 25% cheaper than the same candidate engaged in an in scope way.

At the moment, Ive only seen a handful of candidates being found out of scope, and in all those cases the tests were done by the line manager and presumably sent internally to be ratified by HR. Line managers needing to retain crucial interims will of course be more flexible on continuing terms, and they may put themselves in a position of risk within their organisation for having administered the test and standing by an out of scope result, but if you were to ask them they may say that risk is more than offset by the benefits given to them by their interim. For now unfortunately most decisions are going the other way, with interims being caught by blanket all in scope decisions, or finding that a HR representative administers the test in a defensive way to find them in scope. In time we’ll see a gradual change of behaviour as agents and candidates alike try to quell the fears of clients, educate them on IR35, and persuade them of the benefits of positioning requirements and interims as out of scope. By April 2018, I think we will see a much better proportion of out vs in scope roles in the market, but for now, whilst IR35 change is new, fresh and confusing, the majority of candidates will have be amenable to the prospect of in scope work.