Interim managers and how they are engaged. Justifiable taxation measure or nail in the coffin of an industry?

A sledge hammer to crack a nut?

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Is this a justifiable taxation measure or nail in the coffin of an industry?

There are estimated to be up to 10,000 Interim Managers providing services on a consultancy and freelance basis across the majority of industries and business functions within the private, public and not-for-profit sectors. *

This is an industry in which the UK demonstrates true leadership and a strong track record compared to its counterparts across the globe.

 
Could this be about to change? 

On 23rd May 2012 HMRC published a consultation ‘The Taxation of Controlling Persons’, a proposal to force “controlling persons” at an organisation to be on the payroll instead of acting through limited companies.

What are the reasons for the change?

This review was triggered by controversy over the way in which Student Loans Company Chief Executive, Ed Lester, was paid. Mr Lester was engaged as Interim Chief Executive in May 2010 to address issues at the SLC. The matter of controversy is that he was then additionally engaged for a further two years, but with the payment arrangements continuing through his Personal Service Company off payroll. **

Doesn’t IR35 already address this issue?

IR35 is intended to address the problem of ‘disguised employment’. HMRC believe it does not deal with the problem of “controlling persons” working at an organisation.
The simple way to address this problem would be simply to require all senior or controlling individuals with personal companies to subject themselves to IR35. However, rather than use this targeted solution to a specific problem, the Government have proposed new legislation, aimed wholesale at a defined group, namely controlling persons within public and private sectors alike, and forcing them onto the payroll.
 

Could this be a disproportionate ‘knee jerk’ reaction to address the Government’s embarrassment at certain ‘fat cat’ avoidance of fair taxation?

How will the new rules be implemented?

It will be interesting to see how the proposal will be implemented in practice. How will a controlling person be defined? If a senior interim manager, or a corporate recovery specialist, comes in on a short-term assignment to help a company in difficulties, would he or she be covered? Where would the line fall between IR35 and the newly proposed legislation?

The consultation fails to address non-executive directors, who supply consultancy services under separate contracts through their consultancy businesses. As directors, they will be on the payroll. Would they be covered in respect of all of their work, or only their directorial work, or none of their work? How many valuable non-executive directors, who help to steer their companies towards growth, will give up and deprive British business of their skills if they are caught in this way? ***

What will be the outcome?

Interims and agencies are already reporting that public sector bodies are cancelling interims mid assignment. This leads us to wonder where they are sourcing those all important skills to drive their organisations forward? Or, are they just not bothering to address it?

According to a recent survey published by the Institute of Interim Management, 61% of Interim Managers would not accept assignments if they were taxed as an employee. 12% would be happy to do so, and the remaining 27% would do so reluctantly.

Among those Interim Managers who said they would not accept being taxed as an ‘employee’, 34% stated they would leave Interim management and move to consultancy; 32% would move abroad and practise Interim management there; 21% would remain in Interim management, but only accept non-controlling person roles; and 13% said they would leave Interim management and return to permanent employment. *

Could this potential decision threaten decimation of an industry and drive valuable business leadership skills overseas?

The thinking from industry experts is that this is a very real possibility.

 

You can make your own comment about the proposed legislation by using the reply feature on the member’s blog.

A nail in the coffin?

              Proposed Government Legislation