Disruptive and damaging ‘controlling persons’ proposals almost a re-run of IR35
Fri, 3 Aug 2012
As the 16 August deadline approaches for consultation on government proposals to ensure that ‘controlling persons’ working for an organisation have PAYE income tax and National Insurance Contributions deducted at source, interim manager providers are warning of potential disruption and damage to the sector.
HMRC says: “The government’s intention is to ensure that where an organisation engages a controlling person, the engaging organisation will be required to deduct the income tax and NICs at source, as they would for their employees.”
In the consultation document, the government has defined ‘a controlling person’ as someone “who is able to shape the direction of the organisation having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year.
“This would be someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation.”
The consultation followed a review of government departments in May that found that more than 2,400 key public sector employees were engaged “off payroll, in some cases for more than 10 years”.
In 85% of cases government departments paid employment agencies, 10% involved personal service companies, while around 5% were self-employed.
Simon Drake, director of recruitment solutions, executive interim, at Penna and on the executive committee of the Interim Management Association (IMA), says: “This initiative has the potential to at best significantly disrupt, and at worse seriously damage a highly valued service that many organisations benefit from today.”
Drake continues: “Currently, interims are provided through a simple ‘business to business’ commercial relationship without employment rights, which allows their services to be engaged very quickly - typically within 2-10 days … and without constraints of employment legislation or any other employee entitlements that would otherwise delay and complicate the process.”
Drake predicts that, based on an IIM survey, if the taxation measures do go ahead as proposed, “thousands of interim managers will choose not to remain self-employed”. This would mean buying organisations having to increase their rates to accommodate the increased tax, he says.
Charles Russam, chairman of interim manager provider Russam GMS, tells Recruiter that the government’s proposals are “a knee jerk reaction to occasional abuse”. He continues: “It is nearly a re-run of IR35, which did reflect a small amount of abuse,” he says.
However, Russam says it is sensible for the government to introduce measures to deal with cases where interims are in the same post for two or three years, and are clearly carrying out a role that would normally be carried out by an employee on the payroll.
Russam says it is unlikely that interims who are forced on to the payroll by the legislation will be able to increase their day rates simply because their net pay falls. “The employer is not going to do that,” he says.
And while it will come down to negotiation between interim and employer, he says it is unlikely that many interims will turn down assignments.
“I am not sure they are going to do that as the market at the moment is more supply than demand.” This is especially the case in the public sector, he says, where government has cut back on the use of interims.
The impact of any legislation will also depend on the definition of terms, such as ‘controlling person’ used in the legislation, as well as the length of the assignment before the legislation applies.
Drake argues that if the legislation is applied, it should only apply for assignments where the personal service company is assigned for over 12 months.