IR35: A lesson from history
With apologies to those born or married in April 2000, it was a fairly dull month. A fairly rigorous search of the annals – i.e. Wikipedia - finds little of note, save for Scotland beating England in the Calcutta Cup.
However, for many independent contractors, consultants and interim managers - and the clients who engaged them - April 2000 was a very significant month: the month when IR35 came into force.
I am guessing, by the fact you’ve chosen to read this article, that I don’t need to explain what it is. What I will do is relay what happened next.
The impact of IR35 in 2000
The introduction of IR35 was greeted by some like the fall of western civilisation. In particular, many large businesses made rapid changes to their contracts. Large banks and several of the 'Big Four' firms outlawed Personal Service Companies (PSCs) overnight. The decisions they made were blanket - made without having got to grips with the legislation and in the belief they were doing the 'right thing'.
However, as time passed an interesting thing began to happen. Many of these organisations started to realise that their access to the 'flexible workforce' was diminishing, entirely because they were placing themselves at a significant disadvantage against businesses who realised that, with a better understanding of the legislation, they could engage PSCs without significant risk. Even more unpalatable to business was the cost of supply increasing markedly as candidate rate inflation and NICs were rolled into charge out rates.
Here and now
Wind forward seventeen years, and many public sector organisations are about to make the identical mistake, albeit for the understandable reason that the perceived responsibility and risk for IR35 no longer sits with the PSC.
There's no doubt that there is complexity in determining whether a role - and the interim manager carrying it out - sits inside or outside of IR35, but the truth is that market forces will lead to organisations with a need for change to try work it out. This is simply market forces applying again, in that a skilled interim manager operating through a PSC will represent much better value than engaging a consulting firm.
Some things change, some stay the same
I am not however saying that, after an inevitable period of hiatus, the world will continue to spin for everyone. It won't. Those individuals who have generally undertaken BAU jobs to cover a vacant post will undoubtedly continue to fall within IR35, and will have little alternative but to go PAYE or via an umbrella company.
I have recently heard a certain amount of rhetoric to the effect that 'if I can't use my PSC, I won't do the job'. To me, candidly, this sounds like taking one's trainset home. For those currently on assignment through PSCs, who might be tempted to throw themselves onto the market in the hope of escaping IR35, I would ask them to also think back to the turn of the Millennium.
Most people remember dotcom bust, but the other bubble which burst spectacularly, albeit entirely predictably, at the start of 2000 was the Y2K bubble.
It seems extraordinary now how many financial and IT contractors were engaged in the late 90's just to ensure your television (or life support, international flight, etc.) carried on working when the clock ticked past midnight on 31st December 1999. The truth is, they did a brilliant job/were never needed in the first place (delete as applicable).
The world continued to spin and Y2K issues were, with a few significant exceptions, minimal. A large number of people had made a good deal of money mitigating a risk which wasn't going to happen again for at least another 1000 years... and they all poured on to the market at the same time in early 2000, with a predictable outcome.
In IT consulting the effects were most marked. With a huge over supply of candidates on the market, the first thing to go was high pay, and daily rates duly tanked. This was swiftly followed by the supply of IT contract roles diminishing – as employers felt that with so much talent available, it might be a good time to fill all the vacant permanent roles they had.
For many IT consultants, even those with great CVs and unbroken records of delivery, 2000 and 2001 were very lean years. The dotcom bubble bursting shortly afterwards merely compounded matters.
So, whilst the changes of IR35 might seem to have little to do with the 'Millennium Bug', I would suggest there are parallels for those people who are thinking of ditching their current role in the public sector if they are required to move to PAYE from April.
It might be a long wait.
Will history repeat itself?
One of history's primary benefits is to help people avoid the mistakes of the past, and we will find out in the next few months whether this is the case. My prediction is that, after a period of time, public sector organisations will get to grips with the inside/outside quandary and the market will stabilise, as there is a manifest requirement for change across the public sector.
Whether pay and charge rates increase (due to on charging of NICs and candidate expectations) or decrease (due to oversupply) is more difficult to predict as it depends on thousands of individual choices by those currently running PSCs. I suspect that most will opt to move to PAYE/umbrella as they will have little option other than time spent on a bench of their own creation.
To read the follow up article please go to the page IR35: one month on.
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If you are currently concerned about the IR35 status of your interim estate, or would like to hear our thoughts on how interim executives are likely to be engaged by public sector organisations going forward, please call me on 0207 842 5881 or email email@example.com.