Institute of Interim Management asks Treasury to reconsider proposed legislation on “income shifting”

The Institute of Interim Management has advised HM Treasury that its proposed “income shifting” legislation would result in unreasonable and unfair treatment of many professional interim managers. 

The professional interim managers which the IIM represents provide a business-to-business service to clients and operate as independent businesses under their own company structures, and many would be adversely affected by the new proposals.

Unlike part-time or temporary workers, professional interims carry total responsibility for tax, insurance and other statutory or regulatory requirements.

The client relationship, whether direct or through an Interim Provider, is subject to commercial law and not employment law.

The statutory and regulatory burden is increasing: HMRC also explicitly included interim directors in the new Money Laundering Regulations, threatening them with unlimited fines and jail sentences for failing to comply with new documentary and reporting requirements.

IIM Deputy chairman Tom Brass says: “It is an unavoidable feature of being a professional interim manager such as the IIM represents that working patterns involve periods of ‘feast’ and periods of ‘famine’: it is most unusual that an interim manager can arrange for his/her next contract to start immediately the current one finishes, and so must endure a period when no external income is generated. And the periods of famine can be long – in difficult economic times, often running to several months or more.

“HM Treasury’s consultation paper is filled with examples of alleged income shifting when businesses are profitable, but there are no examples of what happens when there is no externally-derived income coming in. At such times of course, Individual 2 in the examples given in the consultation is probably making as great, or greater, contribution to the ongoing running of the business as the income-generating Individual 1.

“A further feature of the proposed legislation would be to discriminate in favour of larger companies to the detriment of the small practitioner: if an interim manager is provided to a client by a large company under a contract, the profits of that company are distributed as dividend by that business, and are taxed by reference to the marginal tax rate of the shareholder.

“However if the Interim manager is supplied under an identical contract, but by a company which is owned by the Interim and his/her spouse, the dividends from the resultant profits are taxed at the highest tax rate of the interim manager, not at the marginal tax rate of the shareholder, if lower.

“Most professional interim managers chose to share the potential risks and rewards by having their spouse as co-director of their personal service companies.  They collectively share the risk of being in business together, and their reward is profit – which is different in nature to salary and does not come with the safety net of job security. Any calculations of the contribution made by a spouse on the basis of some sort of salary equivalence are therefore specious.

“Indeed, it is an important aspect of profit that it can be retained in the business as undistributed dividend to tide things over in bad times – when the payment of a market rate salary or even any salary at all as assumed by HM Treasury, may be wholly unrealistic, but marketing and administrative activities must still be carried on.   It is clear from the consultation paper that the Government has fundamentally misunderstood the nature of family businesses.

“When families go into business together, they do so out of choice and possibly in circumstances where they would not go into business with a third party, because they trust one another to rally round when the need arises and are prepared to share the rough with the smooth.  HM Treasury demonstrates a worrying unawareness of the realities of running small family businesses when it asks for ‘documentation to demonstrate the nature and extent of the work done by individual 2, which may include contracts of employment, time sheets, board minutes, any research done on the market rates of pay for the duties undertaken by individual 2’ and other such requirements.”

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