No quick fix solution

Caroline Horn offers a practical guide for those starting a career in
interim management

Interim management can appear to be a glamorous career choice. The
perception of an interim jetting into a company at a moment’s notice,
heroically crafting an immediate and effective solution to the client’s
problem, and heading off to the next assignment with a generous cheque in hand,
is an attractive one. And with the latest round of redundancies in sectors such
as finance and telecoms, a number of experienced directors have been tempted by
interim management as an employment option.

But agencies are quick to warn that becoming an interim manager is a
long-term career choice – not a quick-fix solution to short-term unemployment –
and that while the high points are easy to identify, interim management is by
no means an easy career. Julia Meighan, managing director of Interim
Performers, says: "People think it’s a piece of cake becoming an interim,
but it’s tough. You might feel isolated during assignments and people’s
expectations are high – they expect you to understand them, and your role, from
day one."

Getting started as an interim manager is a serious challenge too, says
Martin Wood, managing director of BIE. "A lot of people aspire to do this
work but out of the 18,000 meetings we have, I will only place about 1,000
interims." Dedication and commitment are essential agrees Malcolm Browne,
head of Penna Interim (North), who says he will "try to put off" more
people than he encourages.

To be a successful interim requires the right tools, from the basics such as
professional indemnity insurance and an office, to marketing and networking
skills. Browne says that interims should see themselves as a small business
selling particular skills. "They have to be clear that there is market
demand for their skills set and that their skills are broad and updated on a
regular basis through seminars and so on."

Interims will need a track record of five to 10 years in their skills area
and a fine touch in self-promotion, says Meighan: "As an interim manager,
you might have to sell yourself 10 times a year so you need to be very good at
promoting your achievements and skills."

An interim’s starting point is his or her CV, which needs to be seen not as
a job application, but a ‘market statement’. Browne explains, "It has to
list their skills set, their achievements and their track record. I also
suggest they box off an opening paragraph, stating concisely what their
professional skills are."

For those new to the market, agents can help with the nuts and bolts of
setting up a business. Neil Fogarty, practice director for Interim Management
Services, says that interims should view their relationships with their service
providers as a partnership; agents can be a good source of information as well
as assignments. Interim Performers, for example, offers training courses, from
creating a CV to networking and how to win assignments.

Agents can also help interims to source the best professional help, such as
accountants, as not all professionals will be familiar with the contractual
requirements of working as an interim. Other areas to consider include
professional indemnity insurance – the minimum standard is £250,000 cover,
although most agencies will demand a figure well into the millions. Interims
will also need to ensure their own lifestyle is covered – as they might not
always be employed, they need some kind of financial cushion or another source
of income.

Interims can source assignments by cultivating their own network or by using
an interim management service provider, or agent. Most agents will recommend
both approaches. However, securing assignments through an agent can help reduce
some of the contractual risks, since agents will take on responsibility for
setting up the contract with the client, says Browne.

"We do market research and for each assignment, we will agree the fee
with the client and then present it to the interim. That also means covering
expenses such as travel and hotel rates," he says.

Using personal networks to gain assignments has advantages, particularly
financial, as there are no agent fees.

Finally, the interim will need the right business structure from which to
operate. A range of employment options available to an interim, from working as
an employee or becoming self-employed, to working through a limited company.
Below we deal with the pros and cons of each of the three main employment
routes an interim can take. Putting the right infrastructure in place will have
a significant impact on the success of a career as an interim manager.

As an employee

Clients who are new to the concept of interim management might specify that
they want an interim manager to act as an employee. This situation could occur where
the company has unexpectedly lost a full-time member of staff, or when it is
going through internal changes and needs a skilled but temporary member of
staff to undertake those changes. Often, where interims are at the bottom end
of the pay scale – £35,000 to £70,000 – a client will require them to be on the
payroll.

Interim managers new to the career might also prefer, initially, to work as
a employee says Meighan.

"We don’t recommend people set up a limited company straight away. We
want people to experiment and build confidence. Once they have a couple of
assignments under their belt, fine. Otherwise, they might find they have gone
to the cost of setting up a business, without getting any assignments."

Operating as an employee offers more security than working on a daily rate.
As an employee, interims have the same rights as a temporary worker, so they
get rights to holiday pay and sickness. In many cases, a company will give them
the same benefits as if they were full time staff.

However, working as an employee means that the interim loses the benefits
that might have attracted them to becoming an interim in the first place. As
well as the financial disadvantages – being taxed from source, not being able
to offset travel as a cost against tax etc – the interim loses a degree of
flexibility and independence. The client, in turn, incurs tax, national
insurance and the other costs of taking on an employee.

For interims operating at the upper end of the salary scale – more than
£70,000 – employment is generally not an option – clients will demand they are
already set up as a limited company.

Becoming self-employed

Many accountants advise prospective interim managers to be self-employed if
they provide a service for a fixed fee. For the interim, this does have
significant tax advantages – not being taxed at source, being able to offset a
range of expenses against tax, and so on – as well as the freedom of not
belonging to an organisation.

Unfortunately, though, operating as a self-employed interim manager is not a
good way to go about getting business, says Meighan. "A lot of clients
won’t touch self-employed interims because companies can be held responsible
for paying their national insurance and other taxes. If the Inland Revenue
decides the interim is actually working as an employee, then it is up to the
company to ensure the tax obligations are met." So while self-employment
offers many financial advantages to the interim, it is not generally a viable
option in the marketplace.

Setting up a limited company

Setting up as a limited company is viewed as the simplest and most effective
business structure for an interim manager, offering the best financial
structure and the greatest flexibility. Clients often request it and, at
director level, it is essential, says BIE’s Wood. "You have to set up as
an independent consultant contractor. You have to have your own office, and
your own VAT returns."

Setting up a limited company does not have to be expensive – costs can be as
little as £90 through the internet – although there are other costs such as
printing of stationery to consider. Operating as a limited company means it is
the company, rather than the individual (who becomes an employee of the
company), that is responsible for fulfilling the contracted services. There are
financial advantages to the interim, while the client avoids additional
employee costs.

The main drawback is the uncertainty of the new tax regime. Until the
introduction of IR35 in 2000, there were standard operational parameters and
the risk of falling foul of tax regulations was minimal.

IR35 legislation, introduced in April 2000, investigates whether freelance
contractors are genuinely employed as a ‘contractor’, or whether they are in
effect, working as an employee. An interim needs to know what’s what – they
could incur extra costs if they fall within IR35.

Anne Redston, partner with Ernst & Young, says there is a simple test
for judging if a contract is inside or outside IR35: "If you take away the
limited company, would this person be an employee of the company? If, to all
intents and purposes, the interim looks like an employee, then they will be
caught by IR35," she says.

The easiest way to avoid coming under IR35 is to show that an interim could
send in someone else to do the work, if necessary. But since substitution does
not work for most interims, Redston says: "You can look at the area of
control. If someone is telling the interim which project to work on or what
hours to do, then they are effectively an employee. If the consultant decides
what they can do and how, then they are not an employee and therefore not
affected by IR35." The interim probably also needs at least four contracts
a year – one or two is probably not enough.

It is important to work in partnership with the client company to ensure the
contract between interim and client suits both parties, says Fogarty. "Two
years ago, we were mindful of IR35 but because it had only just been
introduced, our clients weren’t. Now they are more aware of it, and more
prepared to be flexible in how to draw up the contract." While it had been
thought that interim rates would have to increase to take account of IR35, this
has not happened as a result of the difficult market conditions. If one interim
turns a contract down, today’s business climate means there are many more ready
and waiting to take it up. µ

Case study: The financial benefits of setting up as a limited company

Rachel
Scott is an HR manager who has recently become a professional interim

Scott has worked for several years in a senior management
capacity in HR and recently decided she would take a career step into interim
management to gain wider business experience.

In her last permanent role, Rachel was earning £50,000 a year
and enjoyed several benefits including a generous pension, stock options and
private health cover. She decided to set up on her own as a limited company
because she believed it would be tax-advantageous. She calculated that she
should charge a minimum of £250 a day for her services.

When calculating her annual income, she multiplied her daily
rate by five days and then by 48 weeks – she assumed only four weeks of unpaid
days – this would give Rachel an annual income of £60,000.  Once she had paid for her own pension and so
on, this gave her a net income of £46,050.

As you can see from the calculations below, there was an
incentive for Rachel to set up a limited company. Rachel could offset many
running costs against her income, pay herself a minimum salary and the rest of
her income could be paid by way of dividend. The only tax to pay would be
corporation tax, which is calculated at a rate of 19 per cent – far more tax
effective than income tax, which attracts a maximum rate of 40 per cent.

Unfortunately, since the introduction by the Inland Revenue of
the IR35 ruling, if Rachel is seen as working for a company as an employee, but
for the existence of her own limited company, then not only would all her
income – bar a few expenses – be taxed as PAYE, but the limited company and
Rachel would end up paying both the employer’s and employee’s National
Insurance. Also corporation tax would be charged on any profits.

The result is that unless the work undertaken by Rachel can be
safely regarded as falling outside the IR35 ruling, when earning £50,000 a
year, she would be £6,260 better off on a PAYE scheme than as a limited
company. On a positive note, however, if her contract were IR35-compliant, then
Rachel would still be £5,090 better off as a limited company than on a PAYE
scheme.

Interim Performers offers HR
professionals who have chosen to become an interim manager the opportunity to
attend finance workshops with a specialist tax consultant. For more information
visit www.interimperformers.com or call 020 7382 0680.

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