Navigating the IR35 Ice Field with Special Guest Mark Coulson

[00:00:09] Welcome everyone to another episode of HR and Payroll 2.0. I'm Pete Tiliakis and as always, I'm joined by the legendary Julie Fernandez. Welcome Julie.

[00:00:17] Julie Fernandez Thanks Pete. How are you today?

[00:00:19] I'm good. I'm good.

[00:00:20] Julie Fernandez I have a special guest. I'm really excited to bring on to the show today. It's someone that I admire greatly, Mark Coulson, who is a senior procurement consultant and an IR35 expert. So that's a UK taxation law that affects how employees are categorized.

[00:00:36] Oh yeah.

[00:00:37] And he's co-founder of Smart Buyer, which is a procurement organization. And Mark, welcome to the show.

[00:00:44] Yeah. Welcome, Mark.

[00:00:45] Thank you very much. Yeah. Good to be here. Yeah. Good to have you. This is a juicy subject, Julie. Contractors come up all the time. I feel like we bat this around a lot. So I'm excited to learn.

[00:00:56] That's right. For sure. So Mark, tell us a little bit about yourself.

[00:00:59] Yeah. So 27 years in procurement. So I'm glad the camera's off now, Julie.

[00:01:05] And the last 20 years has been bent as a contractor or consultant, but the lines are quite blurry in between. Most of the time, in fact, I've worked across all industry sectors.

[00:01:16] Yeah. Pharmaceuticals for Merck, a lot of banks for Lloyds, Barclays, RBS in the UK. I mean, predominantly UK-based clients. Lots of retail, Burberry, Estee Lauder Group. So, you know, really varied.

[00:01:29] And you tend to focus on, procurement people would tend to focus on sort of one or two main categories.

[00:01:37] You know, ultimately, your effectiveness as a procurement person is determined by the knowledge that you have on your particular product and service that you're responsible for.

[00:01:45] So much in the same way that yourself and Pete are experts at global payroll.

[00:01:48] And if someone doesn't have the depth of knowledge that you have, it will be more challenging for them to secure the right deal.

[00:01:54] It's the same in every other aspect of purchasing spend.

[00:01:57] So you tend to focus. In my case, my focus areas have been marketing and HR professional services.

[00:02:04] And I've always enjoyed it, you know, broadly speaking.

[00:02:07] I think the traits, the personality traits of the kind of internal stakeholders are quite similar in both of those areas.

[00:02:14] And it's, you know, quite a sociable area, I think.

[00:02:17] Yeah, I feel like it's one of those areas that a lot of folks will really stay clear of, just like many will stay clear of HR or payroll in general.

[00:02:24] All right. But so we even have, we have a question we ask all our guests.

[00:02:29] And I think the nuance applies to you since you have this HR bent in your procurement world and all of your experience.

[00:02:37] How did you end up getting into the HR angle of procurement and why do you stay?

[00:02:42] There's almost two different types of kind of product and service you buy in procurement.

[00:02:47] There's kind of tangible and intangible, you know, tangible being very much things like IT laptops, hardware.

[00:02:55] So, you know, you get a specification, you can go out to half a dozen suppliers and they quote the delivery of that specification.

[00:03:01] It's quite tangible. And then intangible being things like, you know, in marketing, for example, you know, kind of creative agencies.

[00:03:07] You're buying, you're buying ideas in much the same way even in HR, you know, you know, recruitment, for example.

[00:03:13] You are, you're reliant on that recruiter being effective in sort of championing the kind of underlying cultural ethos of your company to persuade candidates to apply.

[00:03:25] So there's a real subtlety to it.

[00:03:28] And I think some procurement people find transitioning between tangible and intangible categories quite challenging.

[00:03:35] So you have a tendency to fall one side of the fence.

[00:03:38] And I've always enjoyed that sort of, some people would describe it, slightly fluffier parts of procurement in terms of, say, a bit more kind of creative and a bit more innovative, a bit more people-based as well.

[00:03:53] Buying a lot of people-based services.

[00:03:55] So, you know, I find it less exciting and I have done a lot of it, you know, presented with, you know, a six-page technical document that I have to go out to market for in a network or an IT space.

[00:04:06] I find it a little less motivating.

[00:04:08] So I find the nuances of HR and consultancy and marketing fascinating.

[00:04:15] And that's why I've always sort of remained there.

[00:04:18] Mark, how did you, I was curious about that arc between marketing and HR.

[00:04:22] How did you, how did those two worlds in your background come together?

[00:04:25] Yeah, sometimes it's not deliberate, actually.

[00:04:28] Sometimes, you know, it's a case of, probably the best way to describe it would be to say that because people are more comfortable typically with buying tangible items, there is always a natural focus on procurement.

[00:04:41] Who is all, they're always judged upon savings delivery to always lean in towards, let's put the vast majority of the resources on the tangible categories.

[00:04:53] The categories where it's kind of easy for us to go, well, you know, last year we paid this and next year or this year we're paying this minus 5%.

[00:05:02] You know, it's quite easy to evidence the savings.

[00:05:06] So the intangible categories like marketing, like HR, are often the ones that are given less of a focus.

[00:05:13] And so you almost arrive at starting to look at it further down the roadmap for that particular, you know, head of procurement, chief procurement officer.

[00:05:22] So, and so yeah, that's kind of almost how it's grouped.

[00:05:26] If it feels a little bit less defined, let's say, I used the word fluffier earlier, then very often procurement go, oh, you know what, we can end up investing a lot of time and resources in this particular support area and then not necessarily be able to evidence the value add.

[00:05:42] So again, if I lean into marketing as a good example, we'll find some parallels in HR in a second, but, you know, you could absolutely go to a cheaper creative agency to provide you, you know, your creative campaigns.

[00:05:57] But, you know, the reality of it is you might save 5% on the cost and the fees, but you might lose 20% on the effectiveness of that campaign with it resonating or not with the audience.

[00:06:09] So it becomes a bit of a false economy and you'll know the same thing to be true in payroll.

[00:06:14] You could absolutely go to a cheaper payroll provider, but just be aware that that's going to come with, you know, a whole bunch of limitations and headaches that you might not want to invite.

[00:06:27] So that's where procurement has a tendency to go, oh, well, we like buying laptops or catering or facilities, whatever, because it feels quite tangible, comparable, whereas HR doesn't feel quite the same.

[00:06:40] You know, so that's, so yeah, that's so, so I've always jumped, jumped between the two.

[00:06:43] Did you have some marketing background that brought you over to this side or?

[00:06:47] No, not really.

[00:06:48] No.

[00:06:48] Other than I was, I was one of the, just before I went into contracting 20 years ago, my last, my last gig was a, was a permanent member of staff looking after marketing procurement for Vodafone.

[00:07:04] Ah, marketing.

[00:07:05] Okay.

[00:07:05] I got you.

[00:07:06] So, so there was, you know, again, that was, again, that was an example of, I put my hand up and said, I'll do it.

[00:07:12] And they put me in there and realized I hit a glass ceiling and then decided that I could actually earn more money than one is becoming a contractor delivering the same service for a whole bunch of clients.

[00:07:21] So, so, so no, never, never really interesting, never been in marketing.

[00:07:26] But one of the, one of the interesting elements of procurement, because people often focus on cost saving, is that, you know, if you're, you know, ultimately we're kind of commercial guardians.

[00:07:37] So, so one of the things I have done a lot of is go in and be part of a marketing department, but responsible with, for looking at the ROI that their spend is delivering.

[00:07:49] So it's not about, oh, can you say 5% on the cost of this particular supplier?

[00:07:53] It becomes, is this actually a good use of the company money at all?

[00:07:58] You know, is it, is it really, is it really delivering any tangible, measurable benefit?

[00:08:04] So, so often you end up straying into, to becoming almost like commercial people within the marketing space.

[00:08:10] Yeah.

[00:08:11] Interesting.

[00:08:11] Fascinating connection.

[00:08:12] Yeah, for sure.

[00:08:13] And you know what, Mark, you're, you are, I believe our very first procurement professional guest to the show.

[00:08:20] So, so right, that you have to kind of, you have to kind of set, set us into the right frame of mind here.

[00:08:27] What I was super excited about talking to you about today is an area I know you to be extremely expert on.

[00:08:33] And we have an intersection or a similarity in the U.S. that I think many of our listeners will recognize.

[00:08:40] And in fact, in all countries, I believe.

[00:08:42] And that is some of the nuances of off-payroll workers, whether you call them contingents or contractors or, or whatever it is, there's often legislation and compliance that, you know, that, that helps organizations or requires organizations to determine whether they are indeed legitimate kind of contract resources or whether they're employees in disguise, if you will.

[00:09:06] Right.

[00:09:07] And for our U.S.-based listeners, that's the IRS.

[00:09:10] And we, you know, we're familiar maybe with the types of criteria that you have to apply in order to make that determination.

[00:09:18] And, and I know you to be a super expert on, on that with the employment law in the UK and the tax regulating body there.

[00:09:26] And I love for you to kind of bring us up to speed or set stage with what we're talking about here in the UK equivalent.

[00:09:34] Yeah.

[00:09:34] So the UK equivalent is, is IR35 or Inland Revenue 35.

[00:09:39] And, and yeah, it is, it is basically a tax law that determines whether the, the, let's call them the external worker.

[00:09:47] I don't like to call them contractor or consultant or, yeah, let's just call them external worker.

[00:09:51] Whether that resource is in effect an employee of the client to all intents and purposes or is, is genuinely self-employed.

[00:10:00] And the difference between the two is quite material in terms of both the tax that the, the individual pays as well as the taxes that the client pays in the UK.

[00:10:09] Certainly if you, if you are put it this way, if the cost difference in the UK at the moment of engaging a contractor, what's called inside IR35, which essentially is on an employed basis, inverted commas versus self-employed.

[00:10:24] The cost uplift to a client is about 25%.

[00:10:28] So it's expensive.

[00:10:29] If, you know, you times that by a typical annual, you know, you could be looking at sort of 25, 30,000 UK pounds.

[00:10:36] So probably $40,000 a year per contractor.

[00:10:39] If you get that classification wrong.

[00:10:43] And also you end up also restricting access to a, a higher caliber of contractor who would view themselves very much as being self-employed.

[00:10:51] So it's, it's a law in the UK that's been around since year 2000, so 24 years.

[00:10:57] And the reason why it's been talked about so much over the last few years is because up until 2021, it was, it was the contractor's problem.

[00:11:07] So essentially the contractor was responsible for determining whether they should be classed as employed or self-employed for the client that they were, that were working for.

[00:11:16] And then in the event that let's say they declare themselves self-employed and took some of the tax advantages and the, in that revenue was to review and disagree with that decision.

[00:11:28] Then in theory, the contractor would be on the, on the hook for any sort of underpaid tax liability.

[00:11:34] Now that all changed in 2021 because the government realized that actually policing that was impossible on a, on an individual basis.

[00:11:43] They weren't, you know, 20, 21 years and hardly any successes.

[00:11:48] So they flipped the problem and said, you know what, actually we're going to remove the responsibility of the contractor to decide whether it's a self-employed or employed and make that the responsibility of the end hiring client.

[00:12:03] And, and, and that caused paralysis in the market because it didn't help that actually COVID was, was still upon us.

[00:12:13] So, you know, lockdowns and, you know, in the UK, you know, furlough payments, I'm, I'm guessing there's probably an equivalent in the US.

[00:12:19] So there's a whole bunch of complexities HR were dealing with.

[00:12:22] And suddenly they were given this problem at their doorstep because inverted commas, it was seen to be a people problem and therefore, you know, HR should own it.

[00:12:30] And they were going, well, you know, we don't have any idea how to apply the criteria, 23 years of case law history.

[00:12:39] And, and so they quickly came to a fairly ignorant decision of, we know what, let's just not use any self-employed contractors.

[00:12:47] It's everybody, we should consider them to be employed from now on.

[00:12:50] Job done, let's, let's move on.

[00:12:51] And what they didn't realize was that wasn't going to work for them.

[00:12:55] It wasn't going to be sustainable because it becomes too expensive, as I've already just mentioned.

[00:13:01] Suddenly the, the pool of people that you can use who are prepared to work on an employed basis is, is, is massively restricted.

[00:13:09] Um, and, uh, and you end up almost the worst, the worst of all worlds happens, which is you end up having to engage consultancies to provide support that, you know, contractors would be able to provide typically, uh, you know, probably 50% of the cost.

[00:13:24] So, um, so the whole thing has, has become a massive problem.

[00:13:28] And the, the VMS platforms, the likes of the field glass and the B line and the Bentley don't go anywhere near it.

[00:13:36] And that's the problem.

[00:13:37] Yeah.

[00:13:37] Yeah.

[00:13:38] Does, does the law apply to, is it a certain size of company and above, or is it really quite universal?

[00:13:45] No, it is, it is, uh, albeit that threshold is quite low.

[00:13:48] So, um, any company with revenues over 10 million a year would be, uh, would be affected and liable and responsible for this.

[00:13:57] Um, now it doesn't mean that if you are a contractor working for a company that has a revenue of less than that, that it doesn't apply.

[00:14:04] It just means actually the responsibility remains with the contractor, uh, like it was before he, uh, the new law was introduced.

[00:14:13] Isn't it interesting, Mark, how you were kind of, I feel like some of what you were saying is like, and Juliet sort of reminds me of the, the CFPB ruling, right?

[00:14:22] It's like, instead of taking these new dynamic, you know, changing ways of work or changing ways of pay and saying, well, let's create laws that make sense for that thing.

[00:14:32] And it's like, it's like, we're saying, no, let's just take it and try to cram it into a law that was made 50 years before this thing even existed.

[00:14:39] And it's almost like we're suppressing, you know, cause I've heard that some of the criticisms of IO 35 is that it's sort of suppressing, you know, opportunity in the labor market.

[00:14:48] Maybe it's, um, you know, it's harming people's ability to, um, maybe get work or, or again, you know, creating situations where people are becoming employees, where maybe in most cases they wouldn't have been.

[00:15:00] Um, there's a lot of ins and outs on both sides.

[00:15:02] It just almost feels like this is an, an uninformed legislation, right.

[00:15:08] Being applied to something, uh, again, where it's like, maybe there's a different way we could go on about this and preserve both, both opportunities.

[00:15:16] Hey, it's Bob Pulver host Q podcast, human centric AI, AI driven transformation, hiring for skills and potential dynamic workforce ecosystems, responsible innovation.

[00:15:28] These are some of the themes my expert guests and I chat about, and we certainly geek out on the details.

[00:15:33] Nothing too technical.

[00:15:34] I hope you check it out.

[00:15:36] A hundred percent.

[00:15:37] Yeah.

[00:15:37] I mean, it, it, it sort of ignores the future of work really.

[00:15:40] Yeah.

[00:15:41] Um, you know, the reality is any, you know, um, aspiring company has a heavy reliance on this flexible workforce.

[00:15:48] If you, if you had to hire in permanent people to do every, every project with every skillset, then nothing would ever get done.

[00:15:55] Um, so, you know, it's a, it's an incredibly important part of the workforce.

[00:15:59] It's also a vulnerable part.

[00:16:01] You know, the reality for contractors and, you know, I know this to be true myself.

[00:16:04] I haven't done it for 20 years is that, you know, uh, you don't, you have a, you still have a mortgage to pay and mouths to feed, but you don't have any guarantee on where your next client's going to come from when the, when the, when the, when the current one ends.

[00:16:16] So there's a vulnerability for that.

[00:16:18] And if you, if you suddenly discourage these people by actually making it no more tax efficient to be a self-employed, uh, contractor versus being a permanent member of staff, then people are just going to stop becoming contractors.

[00:16:31] Cause they'll think, well, all of the vulnerability and the lack of employment rights.

[00:16:35] And actually there's no, there's no, uh, you know, there's no tax advantage to, to be, why would I bother?

[00:16:42] Which then creates the problem of, you know, the, the, the, the workforce, uh, shrinks.

[00:16:46] Um, and therefore the costs of contractors goes up because those that remain recognize that they're probably good enough to start charging more because it's a supply and demand.

[00:16:57] And then the clients start to struggle and that's what happens.

[00:17:01] Um, so to me, it absolutely is, is sort of suppressing kind of economic growth.

[00:17:06] Um, uh, is ignoring the future of work, which is, uh, you know, the reality is we, we, I mean, I think there was a stat, um, given to me about the U S audience where it, again, this may well be not entirely accurate, but sort of 35, 40% of people in the U S have got a side hustle now.

[00:17:21] Um, which is, which is great.

[00:17:23] And that's, you know, that's, that's the way that, that the work is going.

[00:17:26] So we have to acknowledge that these people, when they are performing those roles are self-employed.

[00:17:32] Um, uh, and then what's happening in the UK as well, particularly with the change of government is that they're going to start to, um, to tighten up the, um, the employment rights that you, that you, uh, that you receive if you are deemed to be an employed contractor.

[00:17:47] So suddenly, um, you know, as I made HR two, three years ago, made that decision of, you know, it's just not used self-employed anymore thinking that was the easy solution.

[00:17:57] Apart from the cost uplift, what they're going to get hit within probably 12, 18 months time is the fact that our labor government will say, right.

[00:18:03] Okay.

[00:18:03] Well, if you are deemed to be an employed worker, then you should accrue paternity rights and sick pay and disability, right.

[00:18:13] All the things that the contractors don't get at the moment.

[00:18:15] So suddenly you're going to find, uh, companies sitting there going, um, oh, this feels really uncomfortable.

[00:18:22] Um, actually bringing contractors in on a deemed employed basis.

[00:18:26] Um, how do we change dramatically enough for it to be self-employed?

[00:18:30] So it will, it will turn, um, uh, it will take time, but it will turn.

[00:18:35] Um, how clear cut is the distinction or the delineation and the rules, uh, between an external worker and an employee?

[00:18:45] I know in the U S it feels very squishy to me, right.

[00:18:49] Um, you know, you have some criteria around behavior, like do you take instruction or do you kind of bring your own knowledge or training?

[00:18:56] And then there's, you know, are you covering your own expenses or do you have profit and loss risk?

[00:19:01] And, and mostly that relationship stuff around, is there a written contract or do you get those types of benefits?

[00:19:07] Is it, but it's still very, I feel like from my vantage point, it's very squishy.

[00:19:12] Um, you know, how you, how you check the boxes to make sure that you fit one, one side of the house or the other.

[00:19:18] What is the situation in the UK?

[00:19:21] Yes. Yes. It is. It's very squishy. Um, though it's really very squishy because of, of ignorance, not because it necessarily needs to be.

[00:19:29] It's just, there is so much misinformation out there that people, um, listen to all of this different criteria that you can apply and they just get themselves confused.

[00:19:37] Um, it really, it boils down to, to two simple, well, yeah, two, two simple options.

[00:19:43] One is, does it look like a contract of employment or does it look like a contract of service?

[00:19:48] And the main difference between the two is that a contract for service would, would be output based.

[00:19:55] Um, it would have deliverables, tangible things that that particular, um, what company or individual is providing.

[00:20:02] Whereas, you know, option one employed would read like a job description.

[00:20:06] You know, the client could essentially get them to do whatever they want them to do, um, when they're employed by the organization.

[00:20:12] So probably the best way to describe it, if you can picture it in your mind,

[00:20:16] if you went into a children's playground and you had a seesaw and there was a, you know,

[00:20:20] it was a, a bucket position on each end of the seesaw and you had a whole bunch of pebbles in each,

[00:20:26] each and every, um, you know, uh, criteria for IR 35, whether it's helpful for being classed as self-employed or unhelpful,

[00:20:35] would, would then be placed in its kind of corresponding bucket.

[00:20:38] And where the UK has, has tied itself up in knots is it, it, it, it sort of assumes that all of the pebbles need to be in the self-employed bucket in order for it to be self-employed.

[00:20:50] Yeah.

[00:20:50] The reality is you just need enough pebbles so that it's tilting in favor of self-employment.

[00:20:57] And then in order to do that, what you need to do is just focus on the biggest, heaviest pebbles.

[00:21:02] All the other pebbles become irrelevant.

[00:21:05] Yeah.

[00:21:06] So, so, you know, using people get tired.

[00:21:08] Oh, I can't invite contractors to, you know, team meetings.

[00:21:12] Again, nonsense.

[00:21:14] I, you know, a contractor can't be self-employed because he was invited to our staff Christmas party.

[00:21:19] Again, you know, not helpful, but honestly, totally irrelevant.

[00:21:24] It comes down primarily to the contract.

[00:21:27] And this will be the case.

[00:21:29] I am told, I have less knowledge on W2 1099, but what I do know is that the criteria that we have for self-employment in the UK is considered to be arguably almost like the barometer, as tough as it gets.

[00:21:42] So if you can satisfy self-employment in the UK, you could satisfy self-employment in the US and Canada and everywhere else.

[00:21:49] So, so it is fluffy, but it doesn't need to be.

[00:21:52] Just need to have almost the key ingredients in place and everything else becomes noise.

[00:21:56] You know, you just said something that I've seen you post a number of times in it and you just brought it to life for me.

[00:22:02] And that was, you know, are you buying a service or services, something that's defined, or are you just buying talent?

[00:22:10] And, and I think I just heard that in what you said as being a really great delineator, one that we should use more ourselves.

[00:22:17] Yeah.

[00:22:18] I mean, in your particular space, Julie, you know, you provide consultancy advice support for, you know, for global payroll.

[00:22:25] That, that won't just be open-ended.

[00:22:28] The client will be engaging you with some specific outputs that they want you to take responsibility for or deliver.

[00:22:34] It may all be, you know, reviewing and constructing the specification, identifying, you know, the, the, the suppliers that need to be engaged.

[00:22:41] You may all be supporting or leading the negotiations with that particular, you know, payroll tender or RFP.

[00:22:48] But at the end of that process, once those deliverables are done, the contract would, would terminate.

[00:22:54] Right.

[00:22:55] And that's not the case.

[00:22:56] You know, you have people that come in on a permanent contract, of course, you know, certainly in the UK, you know, the, the, the notice period is quite long.

[00:23:04] It could be three months, even if you've got no work to give them.

[00:23:07] Um, uh, so that's, all those are very clear signs of permanent employment or employment versus, you know, a contract for services ends when the services are delivered.

[00:23:16] It's like steering the Titanic through a, through an ice field, isn't it?

[00:23:20] Yeah, it is a little bit.

[00:23:22] You know, Mark, I can't help but think of like the, the, the end employee or worker, like, are they getting kind of screwed here if they make the mistake of, of classifying themselves or being classified the wrong way?

[00:23:33] Uh, well, in theory, in theory, no, um, because it's no longer their responsibility.

[00:23:39] Okay.

[00:23:39] That's right.

[00:23:40] So it's out of their hands now.

[00:23:41] There is a catch that Pete where, where it becomes, I think a little bit, um, unfair is I have seen lots of examples where, you know, recruitment companies who are very often the intermediary in the supply chain.

[00:23:52] Yeah.

[00:23:53] You know, inserting clauses saying, you know, essentially that the contractor will indemnify the entire supply chain in the event that the in-land revenue decides that actually the classification was wrong.

[00:24:03] He's just sort of sitting there going, well, hold on a minute.

[00:24:06] He or she's got no influence over that decision.

[00:24:09] So how can they be expected to, but those things haven't, haven't been stress tested legally.

[00:24:14] It's, I think it's wishful thinking.

[00:24:15] So you think the, the workers themselves are pretty shielded.

[00:24:18] It's the, it's the businesses that are really dealing with this in terms of impact.

[00:24:21] But what, what are your thoughts on the EOR space?

[00:24:24] I'm, I'm sure you're probably familiar with that.

[00:24:25] Are you, do you feel that that's been a, you know, the rise in these contractor solutions, uh, compliance based solutions?

[00:24:32] Do you feel that's been a helpful thing for IR35 or helping companies deal with that?

[00:24:36] Right.

[00:24:36] No, um, I don't think, I don't think it's made that much difference.

[00:24:39] We, in the UK we have, um, uh, we call them umbrellas.

[00:24:43] If you're familiar with that term.

[00:24:44] Yeah.

[00:24:44] I mean, do you think people are maybe turning to that as a, as a, like, I don't want to deal with this.

[00:24:48] So I'll go get help that way.

[00:24:50] No, I mean, no, I mean, I mean, I'm not going to get help.

[00:24:51] Ultimately, um, you can only be outside IR35.

[00:24:55] You're going to be self-employed if, if you're being engaged by a limited company.

[00:24:58] So, um, using an umbrella.

[00:25:00] So in the UK, in the UK, uh, umbrellas are used.

[00:25:03] So what clients do is they, they assume that actually we're going to try and put, um, almost

[00:25:09] a barrier between us and the contractor.

[00:25:12] So that in the event of any potential employment rights, um, yeah, we are not the direct employer

[00:25:18] of, we, we use someone else.

[00:25:20] You know, the reality is that, you know, legally it would suggest that, uh, it's a bit of a

[00:25:25] vanity scheme.

[00:25:26] Um, that actually, if it was to be challenged, it would be difficult for, um, for the client

[00:25:31] to argue that they're not the direct employer of that particular contractor.

[00:25:35] Um, so there's no, there's no protection really then.

[00:25:38] And there's going to be some legislation change in the umbrella space that's going to

[00:25:41] make that very clear.

[00:25:43] Um, but of course the, the, the other reality is that the umbrellas don't work with self-employed

[00:25:50] contractors.

[00:25:50] They only work with employees.

[00:25:52] So they, they, they administer the PAYE on behalf of the client.

[00:25:56] Um, that, you know, if it's self-employed and you're paying a limited company, then umbrellas

[00:26:00] aren't, aren't really relevant.

[00:26:01] So the EOR hasn't really, um, entered into this space effectively, uh, with any form of

[00:26:07] solution.

[00:26:08] Yeah.

[00:26:08] Um, and the same, same with MSPs.

[00:26:10] I, I, I spoke recently to one of the world's largest.

[00:26:14] Um, it was interesting.

[00:26:15] They, uh, obviously named them, but they were saying because of the complexity of tax classification,

[00:26:21] not just in the UK, but Europe and globally, they're in, their interim revenues are down 25%

[00:26:27] now.

[00:26:28] Um, and they've got a problem because, um, they're all reliant on the technology and their

[00:26:34] technologies is usually one of, you know, field glass, beeline or Bentley as the VMS.

[00:26:40] The VMS is won't go anywhere near it because they're like, well, we're not tax classification

[00:26:44] specialists and we don't want to start building that into our workflow because we'll just invite

[00:26:49] liability for ourselves.

[00:26:50] And so the MSPs sit there going, well, we've got, you know, fairly inexpensive resources

[00:26:54] that are on the ground in the client, but essentially they're there just to facilitate a process using

[00:27:00] the technology.

[00:27:01] And if that technology doesn't, doesn't solve tax classification, then we can't really help

[00:27:06] the client either.

[00:27:07] So you get this, um, paralysis that occurs where all the people that in theory would have

[00:27:12] the resources to be able to invest in solving the problem.

[00:27:16] Um, can't solve the problem.

[00:27:17] Yeah.

[00:27:18] Yeah.

[00:27:19] Yeah.

[00:27:19] Interesting.

[00:27:19] Yeah.

[00:27:19] I was just wondering if maybe it's pushing people to start saying, Hey, look, if I'm going

[00:27:23] to operate here, I need a partner because this is just too much to deal with.

[00:27:26] Right.

[00:27:27] Um, but yeah, sounds like it's mixed.

[00:27:29] It is.

[00:27:30] Yeah.

[00:27:30] There is, there are, what's interesting and it may well be the case in the States is, is

[00:27:35] in the UK there, because if you imagine up until April, 2021, 21 years of this legislation

[00:27:42] existing and it was a contractor problem, not a client problem, they made the decision they're

[00:27:47] on, they're on the hook.

[00:27:48] Right.

[00:27:48] Yeah.

[00:27:49] Good luck finding any contractor that's prepared to go to a magic circle law firm and pay for,

[00:27:55] you know, commercial advice on IR35.

[00:27:56] They don't, they just made a decision for themselves and keep their fingers crossed.

[00:28:02] Um, so what you then had was none of the law firms would invest in upskilling themselves

[00:28:07] on IR35 because why, who are we going to sell it to?

[00:28:10] It's a contractor problem.

[00:28:11] They're not going to buy it from us.

[00:28:11] So suddenly, you know, what I discovered very quickly in 2021 was, um, most of the law

[00:28:17] firms I spoke to didn't have any more idea about IR35 than, than the clients that were

[00:28:22] asking them for support.

[00:28:23] Uh, I was really fortunate that I managed to cross paths with a guy called Martin Valentine,

[00:28:28] uh, who's now a co-founder in IR35 Pro, which is, which is our IR35 consultancy.

[00:28:33] Martin took a fairly, um, uh, a fairly odd decision, if I'm honest with you, 20 years

[00:28:38] ago by his own admission in that he thought he was so fascinated by the, uh, the complexity

[00:28:43] of, of IR35 that he would do nothing in his legal profession other than IR35.

[00:28:49] So he spent 20 years.

[00:28:51] Uh, I almost described him as like the rain man of IR35.

[00:28:54] You can think, think back to your Dustin Hoffman days.

[00:28:56] He's like an encyclopedia on the subject.

[00:28:58] Um, but he's a rarity and that's the problem.

[00:29:01] There isn't enough Martins.

[00:29:03] Um, and so people run from the problem because they don't understand it.

[00:29:07] Martins or tools, right?

[00:29:09] The tools and the providers that would support this space.

[00:29:12] A hundred percent.

[00:29:12] Yeah.

[00:29:12] Yeah.

[00:29:13] I know I've seen, um, certain, uh, queries or surveys, you know, that are intended to

[00:29:19] try to apply those squishy rules in some way, shape or form.

[00:29:22] And I'm sure they're meant to be helpful, but, uh, but don't capture the pebbles and

[00:29:26] the nuances that you described.

[00:29:28] No, they don't.

[00:29:28] And the reason why is the fundamental flaw is that when the inland revenue come in the

[00:29:34] UK, and it's probably exactly the same in the States, they will look at what does

[00:29:38] the contract say?

[00:29:39] You know, if you imagine Julie, that most of these, um, tools are essentially, um, surveys.

[00:29:46] So there's an algorithm.

[00:29:47] You answer a bunch of questions.

[00:29:48] It might be 20 questions.

[00:29:49] It might be 30.

[00:29:50] It depends how extensive they are.

[00:29:52] And then at the back of those questions is a, is a points calculation.

[00:29:55] And depending on whether you have X out of a hundred, then it's going to say, right,

[00:29:58] is outside our 35, which is self-employed or inside, right?

[00:30:02] That's how it works.

[00:30:03] There's nothing more complicated than that.

[00:30:04] Um, now the reality as I, as, as our, in our revenue will tell you,

[00:30:09] is anyone who spends an hour in the company of one of those tools can quickly work out

[00:30:14] exactly what answers to input in order for it to say what they want it to say.

[00:30:20] Um, but if those answers don't in any way correspond with the contract that's been, uh,

[00:30:25] signed between the two parties, then those answers become irrelevant.

[00:30:28] So it comes down to what does a contract say?

[00:30:32] Um, the contract has to be robust.

[00:30:34] It has to give a level of autonomy to the contractor.

[00:30:38] If we don't want it for it to be out, to be self-employed.

[00:30:40] Um, and it has to have those, you know, those services, those deliverables that we talked

[00:30:44] about.

[00:30:45] If it does, honestly, you're going to be on pretty solid ground.

[00:30:48] And if it doesn't, um, then you're not, that's pretty much it.

[00:30:53] So I, I have a burning question to ask you.

[00:30:56] You mentioned earlier when we were talking about, you know, folks increasingly, um, taking

[00:31:00] on external work as a side hustle.

[00:31:04] And, uh, I, I know we see that to be more and more of the case, uh, in the U S as well.

[00:31:10] And yet it seems unfair or unright that a company who's paying you a full-time salary,

[00:31:16] you know, should expect that its employees are hustling on the side.

[00:31:21] Actually, maybe, you know, maybe it's, uh, it's shorting their, their value and their

[00:31:27] dedication to what's going on with their full-time employer.

[00:31:30] Is there any connection, any meaningful connection, um, between the side hustle and, um, and, and

[00:31:38] a full-time employee or any, anything that dictates that being right, wrong, covering

[00:31:45] yourselves or not, I mean, is there any relationship at all?

[00:31:47] I want to take a break real quick just to let you know about a new show.

[00:31:52] We've just added to the network up next at work hosted by Jean and Kate Akil of the Devin

[00:31:59] group.

[00:32:00] Fantastic show.

[00:32:01] If you're looking for something that pushes the norm, pushes the boundaries, has some

[00:32:06] really spirited conversations, Google up next at work, Jean and Kate Akil from the Devin

[00:32:13] group.

[00:32:16] Well, I mean, I mean, first and foremostly, um, you know, a lot of companies are pretty

[00:32:20] in tune to this and they'll have restrictions in the employment contract that will prevent

[00:32:24] that individual from being able to, to perform a side hustle without, you know, without due

[00:32:30] permission.

[00:32:30] I mean, I, I think that people take a fairly liberal view.

[00:32:33] I mean, we probably all sold things on eBay.

[00:32:36] Um, you know, which you could argue is exactly the same thing.

[00:32:39] Um, but, but yeah, so the reality is that, uh, it does happen.

[00:32:43] Um, it actually, it's actually, I would say it's less prevalent in the UK at the moment

[00:32:48] than that sort of 35, 40% I mentioned in the US.

[00:32:52] Um, but, um, but it's becoming a thing and, and, and it, there will become a tipping point

[00:32:58] where those side hustles are an entry point into, you know, a different way of working.

[00:33:03] Um, almost like this kind of fractional support where you develop an expertise in, in, in your

[00:33:08] subject matter and, and you make a conscious decision that actually, um, I'm going to go

[00:33:14] and serve his five clients fractionally.

[00:33:17] Um, uh, you know, a client will start to look certainly in the procurement space, for example,

[00:33:21] well, you know, if you imagine this is why we set up smart buyer, which is like an expert

[00:33:25] network is because the reality, as I mentioned at the start of our podcast is that in order

[00:33:29] to get the best deal on what you're buying, you need to have deep subject matter knowledge

[00:33:33] of, of the market and the suppliers and the commercial models and the questions to ask,

[00:33:37] et cetera.

[00:33:38] Now, if you present a typical procurement department, you know, probably spends a billion dollars

[00:33:43] a year.

[00:33:44] It might have 10, 12, 15 people if they're lucky.

[00:33:48] Um, but if I'm honest with you, 90% of the time they'll spend processing paperwork.

[00:33:53] So how, you know, they might have a thousand different things to, to buy each one of those

[00:33:58] things is a million dollars.

[00:33:59] How are they going to have the depth of knowledge in each and every one of those areas to be

[00:34:02] able to, um, ensure that the client or the employer gets the very, very best deal.

[00:34:08] And then, and truth is they don't, you know, they have, you know, probably 30% of it covered

[00:34:13] and the rest of it's just kind of Google and guesswork.

[00:34:15] So you're going to, you're going to see a, uh, certainly in the procurement space, and

[00:34:19] this is why we set up smart buyer.

[00:34:20] You're going to see an evolution where companies realize and individuals realize that I have

[00:34:24] knowledge in, you know, R35 or RPO or MSP, whatever it may, and I'm actually going to

[00:34:29] go and carve a career for myself.

[00:34:31] Um, you know, providing that support to, to multiple clients, I'll become an industry

[00:34:35] authority on the subject.

[00:34:37] Um, so it will, it will creep into that.

[00:34:39] I think, I mean, if you, if you wind the clock back when I was young, it was quite normal

[00:34:44] for people to spend 30 years with an employer.

[00:34:47] Um, and now, you know, that's totally the exception.

[00:34:51] Yeah.

[00:34:52] Yeah.

[00:34:52] Three years if you're lucky.

[00:34:53] Yeah, for sure.

[00:34:54] For sure.

[00:34:55] Awesome.

[00:34:56] Well, I know you mentioned, uh, I've seen you, uh, have some, uh, teasers around some

[00:35:03] upcoming radical changes to IR35.

[00:35:06] And, and I think you've even alluded to a couple of them as we were having this conversation.

[00:35:11] So I love to, I'd love to hear for a moment what you're expecting to come.

[00:35:16] I know many folks are just going to be grappling with IR35 in its own right.

[00:35:21] And, and, and yet changes are afoot.

[00:35:23] It seems what, what are you, what are your predictions or what are you seeing?

[00:35:27] The kind of the good news is the changes are actually already now with us.

[00:35:30] The reality though, is that, um, unless you are obsessed with IR35, like I am, um, you're

[00:35:36] probably not going to be close enough to know about those changes.

[00:35:38] So the, the, the big seismic change came, uh, this year in April where they introduced what's

[00:35:45] called the offset change.

[00:35:46] Um, and it's quite simple, um, Julie.

[00:35:49] So if you imagine that the, the paralysis, uh, that occurred was because, um, you know, CFOs,

[00:35:55] FDs, CEOs back in 2021, we're looking at what would be the, uh, the cost and the vulnerability

[00:36:01] of, of getting the decision wrong.

[00:36:04] Um, and in theory in a revenue would come after them for all of the taxes.

[00:36:09] So if you declared that individual to be self-employed and HMRC were to challenge that

[00:36:14] successfully, which is not straightforward for them, by the way, um, then they could

[00:36:19] make the client liable for all of the tax that would have been, uh, received had it

[00:36:25] been an employed gig, which is actually the tax that both the client and the contractor

[00:36:31] would have paid.

[00:36:32] So it's a big number.

[00:36:33] It could be $60,000 or 60,000 pounds per contractor.

[00:36:37] You know, so when you're times that by, you know, 200 contractors you might have in your

[00:36:41] base, suddenly you got 12 million pound liability.

[00:36:45] And hence the reason why they went, oh, this doesn't feel very comfortable.

[00:36:48] Let's just not, not work with self-employed.

[00:36:51] Um, so what, but what, um, the private sector has done in the UK is going, well, hold on a minute.

[00:36:57] Um, logically you can't ask the client to be liable for all of the taxes, uh, that it would

[00:37:06] have enjoyed on a self, on an unemployed basis and allow them to keep all of the tax that

[00:37:12] has been paid on that particular self-employed engagement because that's just double taxing.

[00:37:17] So, um, you have to take into account all of the tax that has been paid.

[00:37:22] So if you imagine that, um, Julia, say you're, you're self-employed, you're working for a

[00:37:26] client, it's been declared as a self-employed contract.

[00:37:29] You're still going to pay a substantial amount of in the UK corporation tax, a dividend tax

[00:37:34] salary, um, relating to that particular engagement.

[00:37:37] So you may want, you may want to spend a year with a client and two years time, HMRC come

[00:37:41] in to an investigation, just decide for whatever reason that there wasn't enough pebbles in

[00:37:46] your bucket.

[00:37:47] And actually you should have been, uh, employed, right?

[00:37:50] The, they may, the, the client may have been on the hook for a calculation of let's say

[00:37:54] 60,000, um, for all of the taxes, but hold on a minute.

[00:37:59] Judy's already paid 45,000, um, in tax relating to that engagement.

[00:38:04] So they've got to offset that against the liability.

[00:38:07] So in simple terms, it actually reduces that 60,000 down to 15,000.

[00:38:14] So suddenly that, that, that risk has been reduced down by 75%.

[00:38:19] Um, and actually the interesting thing there is that the, the cost, the additional cost

[00:38:24] of engaging someone, uh, on an employed basis in the UK is about 25% more.

[00:38:29] And yet the liability for getting it wrong on a self-employed basis, if you can follow my

[00:38:34] logic is 15%, so you might as well just default to be taking them on a, on a self-employed basis

[00:38:41] and, and just, uh, you know, hoping that you get away with it.

[00:38:44] Right.

[00:38:44] Right.

[00:38:45] Yeah.

[00:38:46] That's crazy.

[00:38:47] Uh, well, I don't, uh, Pete, I don't know, uh, what else you were thinking, Mark, is there

[00:38:52] other items or aspects of this?

[00:38:54] You know, to me, we haven't spoken a whole lot or enough maybe about, um, about alternative

[00:38:59] work sources.

[00:39:00] So this is thrilling to start to have this conversation, uh, about the tax impact, which

[00:39:05] is where all the money in the business case is.

[00:39:08] Right.

[00:39:08] Um, and, and it feels like Mark, while you're a UK expert, I think you've been clear in some

[00:39:14] of our conversations about the fact that really this probably applies not just in, uh, on

[00:39:19] our respective sides of the pond, but every country is quite likely to have some similar,

[00:39:24] similar conundrum or similar compliance, uh, laws to navigate.

[00:39:29] Right.

[00:39:30] Yes.

[00:39:30] And it will get, it will get worse.

[00:39:32] It will get more complicated and you, whether you've seen the States, but you have these,

[00:39:35] uh, the evolution of things like the Uber driver cases, um, and, uh, and that, that kind

[00:39:41] of, you know, the, the, uh, the gig economy becoming more and more prevalent.

[00:39:45] Um, it's this kind of complexity of, of employment status is going to get worse.

[00:39:50] Um, uh, not, not, uh, not easier.

[00:39:52] Um, so, you know, companies can't run away from the problem and certainly that reliance

[00:39:57] on the flexible workforce is not going to be disappearing anytime soon either.

[00:40:01] Yeah.

[00:40:01] Yeah.

[00:40:02] I think it's a good time for, for everyone to sort of step back and kind of, you know,

[00:40:05] maybe even if you're not in the situation where you're, you're having this happen yet

[00:40:09] and you're needing to comply to it, sort of getting yourself ready to be able to, because

[00:40:14] I feel like at this point, you know, everyone's trying to open up as many channels as they

[00:40:18] possibly can for talent.

[00:40:20] At some point you're going to get pulled into places that you're not familiar with.

[00:40:23] And I think this is where being prepared ahead of time, we're having a partner or, or something

[00:40:28] to, to give you some stability versus going in with roller skates on, right.

[00:40:32] It's going to be so much better.

[00:40:34] So, cause the fines are, Mark, I was looking at some of the fines for this, uh, prior to

[00:40:38] our call.

[00:40:38] They're pretty, they're pretty nasty, right?

[00:40:40] Like, well, only if, um, if, if people are reckless.

[00:40:43] So using that example, this is the problem with those, um, invert commas tools that are

[00:40:48] out of the market.

[00:40:48] If people think that all they need to do is answer a bunch of, you know, provide some

[00:40:52] fictitious answers to a, a survey tool and go, you know, it says it's self-employed, therefore

[00:40:57] we can relax now.

[00:40:58] Um, then, you know, absolutely expect to be penalized for that because in most of these

[00:41:03] businesses are substantial businesses and the inner revenue would therefore expect them

[00:41:08] to have the means to be able to use, uh, and engage experts to advise them.

[00:41:13] Um, so there's, there's quite, you know, almost like the bigger you are, Pete, the less tolerant

[00:41:17] than the inner revenue gets of you, of you getting it wrong.

[00:41:20] Um, so as long as you can, as long as you can evidence that you, um, that you took reasonable

[00:41:25] care, inverted commas.

[00:41:27] Um, uh, and, and in that room, you just not expect you to get the answer right because,

[00:41:33] uh, it is to Judy's point earlier, it is quite gray.

[00:41:37] Um, so, you know, you can't expect everyone to agree with what HMRC is saying, but if

[00:41:42] you can evidence that there is a least method to your approach and it's been a considered

[00:41:46] decision, we believe that it should be self-employed for the following reasons.

[00:41:50] And HMRC won't ever apply any penalties.

[00:41:53] That's a good sound.

[00:41:54] Awesome.

[00:41:54] Yeah, right.

[00:41:55] Like that sound.

[00:41:56] Yeah, yeah.

[00:41:56] No, I love that.

[00:41:57] Yeah, no, I've, I've just seen some of these in the news.

[00:41:59] They always seems to be the media industry for some reason that I always read about.

[00:42:02] Um, and, and it's, uh, yeah, like there's always some, some nasty fine that comes along

[00:42:07] with it and, uh, surprises on all sides.

[00:42:10] So very interesting.

[00:42:11] Look, I, I think this is, um, you know, this is just part and parcel with, uh, the world we're

[00:42:15] living in and the new way of work and, and certainly the, the, the, the broader footprints

[00:42:20] that folks have and stuff is going to get more and more complicated.

[00:42:23] Yes.

[00:42:24] Yeah.

[00:42:24] It definitely, definitely.

[00:42:25] And you know what I say, it's not helped by the fact that the software isn't planning to

[00:42:29] catch up anytime soon.

[00:42:31] Yeah.

[00:42:31] Maybe AI will help us.

[00:42:34] Possibly, possibly not.

[00:42:36] Well, that's okay.

[00:42:36] We could, our, our listeners can be assured we know where the, where the expertise lies,

[00:42:42] Mark, and just, uh, hearing you walk through it in such plain English is so refreshing and

[00:42:47] I'm sure we'll be encouraging.

[00:42:49] You make it sound very simple.

[00:42:50] I know.

[00:42:52] Oddly, Pete, it is.

[00:42:53] That's, that's the irony of it.

[00:42:54] Particularly when I've spent two and a half years in Martin's company.

[00:42:57] So he's the, he's the guru, but when you, when you distill it down, um, if you just

[00:43:01] get, if you get the key pillars in place and, and also ensure that the contracts are drafted

[00:43:08] robustly to, to reflect that, then you, you know, you don't have to worry.

[00:43:12] You can, you can sleep, you can sleep at night without one, one eye open.

[00:43:15] Um, so, but it's the, the, the reality is that, uh, it's, it's misunderstood by most of the,

[00:43:21] uh, companies in that supply chain.

[00:43:23] MSPs don't understand it.

[00:43:25] Recruitment companies don't understand it.

[00:43:26] Clients don't understand it.

[00:43:27] So everyone's sitting there going, I'm not quite sure, um, what I'm supposed to do here.

[00:43:31] I say the technology isn't, isn't helping me.

[00:43:34] A wing and a prayer, right?

[00:43:35] That's not good.

[00:43:36] That's not the best way.

[00:43:37] Hope is not a plan.

[00:43:38] Exactly.

[00:43:39] Hope is not a plan.

[00:43:39] Right.

[00:43:40] Awesome.

[00:43:41] Well, Mark, how can, uh, how can folks get ahold of you if they're interested in finding

[00:43:45] out more?

[00:43:46] I know I personally follow you in LinkedIn and I find the videos and the information you

[00:43:50] release about this just fascinating.

[00:43:52] Cool.

[00:43:52] Um, yeah, just, just reach out.

[00:43:54] So, uh, I've got a website.

[00:43:55] Um, in fact, my, my email address, best one is, is mark at IR35pro.com.

[00:44:02] So you pop me an email across, um, Martin has knowledge on, um, you know, territories

[00:44:07] outside the UK.

[00:44:08] You'd be pleased to know, uh, we're actually working on a solution right now.

[00:44:12] We're building a, um, a piece of software that would integrate with the VMS platforms

[00:44:17] to, to take on the classification responsibility.

[00:44:20] Um, so, uh, so it'll take a little while before we're ready, probably six months.

[00:44:25] Um, but hopefully that will be able to plug the gap.

[00:44:27] Um, and that again, we'll apply to, um, to whatever, um, territory they're recruiting

[00:44:33] in.

[00:44:34] Excellent.

[00:44:34] Oh my gosh.

[00:44:35] Well, we're going to have to have you on again for an update at some

[00:44:38] point in time.

[00:44:38] And as always, I know Pete, you will, you will enter the, all the notes and the different

[00:44:43] connections and touch points.

[00:44:44] You have an article that you've written in, uh, recently that I think we have a link for

[00:44:49] also.

[00:44:50] So I encourage people just to reach out and, uh, and check out what Mark has to say on

[00:44:54] this topic because it's a, it's one of those compliance, scary things that might keep you

[00:44:59] up at night until you know better.

[00:45:01] Yeah.

[00:45:02] Thanks for coming on, Mark.

[00:45:02] Really appreciate the insights.

[00:45:04] No, it's a real pleasure.

[00:45:05] Thank you.

[00:45:06] Awesome.

[00:45:06] Take care, everyone.