How to lose a UK contractor in 10 days: Make them commit after upcoming IR35 tax upheaval, apparently A survey of UK freelancers has found that changes to IR35 tax rules mean some are considering moving to another client if their current client tries to push them into a permanent position. The changes come into force in April 2020 and put the onus on medium and large employers to decide workers' contractor status and whether …
This!!!
Just to explain to the benighted journo responsible: the freelancer is employed by his or her own company. What you mistakenly think of as the employer is the freelancer's company's client.
Is it even worth reading the rest of the article after an opening like this?
It's even more irritating when:
1) The Register is supposed to be a tech publication which should understand the differences, and
2) They have had these mistakes reported to them, and have corrected them, multiple times in every contractor-based article they have published.
The whole point is that claim has been examined by the taxman and found to be nonsense. The vast majority of IT contractors are in fact either employed or self-employed, and should pay taxes accordingly.
Then why does the taxman lose so many of the IR35 cases which go to tribunal? Why are they having to resort to changing the rules if it is clearly "nonsense" that we are independent consultants providing services to a client?
The truth is that the majority of IT contractors are precisely that. There is a minority who either abuse the system or misunderstand the rules, and similarly there are a small number of clients/"employers" who do the same.
However, even if your assertion was correct, the right course of action is not just to tax them more, but also to force "employers" to provide the rights and benefits to which an employee is entitled. Otherwise, you are effectively allowing people to "opt-out" of employment rights, and employers to insist on such, which is a very dangerous precedent to set.
"the right course of action is not just to tax them more, but also to force "employers" to provide the rights and benefits to which an employee is entitled"
Hmm, let me see. You can choose between paying for something and getting it, or paying for it and not getting it. Why would anyone do the latter?
"Then why does the taxman lose so many of the IR35 cases which go to tribunal?"
Because the clear cases of tax evasion don't go to tribunals, obviously. People who are caught red handed tend to be keen to settle instead of facing criminal charges.
"Because the clear cases of tax evasion don't go to tribunals, obviously. People who are caught red handed tend to be keen to settle instead of facing criminal charges."
Forgive me if I'm being a bit slow here, but did you just equate contractors to tax evaders?
"Because the clear cases of tax evasion don't go to tribunals, obviously. People who are caught red handed tend to be keen to settle instead of facing criminal charges."
Of the cases that don't make it as far as tribunals, the HMRC success rate is even lower. QDOS have a success ratio of 99.6% (they lost 6 cases of the ~1500 IR35 enquiries they defended):
https://www.qdoscontractor.com/ir35/investigations
So what you just stated has no basis in fact whatsoever. HMRC's success rate of ~10% at tax tribunals is positively towering over their success rate of 0.4% of the cases that never make it as far as the tribunal.
"There is a minority who either abuse the system or misunderstand the rules, and similarly there are a small number of clients/"employers" who do the same."
One of the clients that abuses the system wholesale is HMRC. They have huge numbers of contractors at Telford and they have exempted them from IR35 even though they do nothing but work for HMRC and have done for not just years but decades. I'd PMSL if HMRC were forced to pay all the employers' NIC they have dodged over the years.
"The vast majority of IT contractors are in fact either employed or self-employed"
There are very few self-employed contractors, largely because in a previous round of stupidity IR forced them to set up limited companies. That was a bizarre response to individuals who had passed the tests set by the IR to be able to declare that they were self-employed being told that IR would ignore the fact that they passed the tests and would treat them as "disguised employees" IR then offered the advice that contractors should form a Limited to be considered a "legitimate business".
The vast majority of contractors are therefore employed, employed by the companies of which they are directors and shareholders, not by their clients. IR themselves prove this by how they handle the issue of supposedly unpaid employers' NIC. If, as alleged the client is the employer then it is clear that the client should pay the NIC, pensions contributions and all the other employee benefits that the client avoided by using a contractor. Instead the IR takes the NIC from the contractor's company therefore confirming that the contractor's employer is that Ltd Co. not the client. Hence the contractor always was a legitimate employee of their own company.
Of course IR want their cake and eat it so they just grab the cash and the client profits.
And there in lies the problem.
For all possible combinations, its only 3, one of them is viewed as exploiting the system, even if unintentionally.
True freelancers and "freelance contractors", i.e. short term contractors, would seem to be the ones being punished, no matter what they do, where as "permanent" contractors, are seen as basically employees.
Take MPs for example, they look exactly like contractors to me, but probably consider themselves freelancers at best, or IR35-exempt at worst.
It's like the "gig economy" workers, some want to be employees with all it entails and some want to be free agents, yet also with full benefits as if they were employed.
There is an error in your terminology here. From my understanding, freelancers and contractors operate under different business models.
Freelancers generally take on a specific piece of work and are paid on outcomes (e.g. they get £X for completing Project Y, possibly split up into payments for key deliverables).
Contractors generally get paid a day rate (or hourly rate) for the time they work, although are normally taken on to complete a specific project. They provide specialist skills which the client needs for that project, but still retain a great deal of control over the work they take on and how and when they do it.
"but still retain a great deal of control over the work they take on and how and when they do it"
The whole point of taking on contractors is that they know 'how' to do whatever needs done.
There is case law where a chef was told what the menu was, but not how to produce it. He was found not to be an employee. (This is from memory so I'm afraid no references).
"whether they need to switch to full-time staff status, pay national insurance and get benefits like paid holidays"
Eh no, they can be taxed as if they were employees, with none of the benefits.
"But the survey found that 83 per cent of contractors have still not had a conversation with their employer"
The company engaging their services on a particular contract is not "their employer"
As above, this is pretty bloody shoddy from elReg.
The reason for using limited companies is actually down to the IR as it then was. Basically if a self-employed person failed to pay tax the first company up the chain was stiffed for the default. As a result of the defaults of a few clients and agents decided, to protect themselves, they'd only deal with freelancers operating via their own companies. Were it not for that the limited company thing might never have got going.
I doubt, however, that facts make much impression when they don't coincide with your existing prejudices.
Take a chill pill, Sajid.
There is Tax Evasion and there is Tax Avoidance.
If the taxman allowed many directors in the public sector to operate through limited companies while working in the same place for many years then why to stop somebody who actually works some place for fixed period?
The whole thing is not to collect more money, it is to line up the pocket of Crapita and a few more at-arms length (in relationship with HMG) consultancies, revolving doors, outsourcing and all.
A contractor will just walk away, imported Indian worker with precarious visa will just suck up any old shit thrown their way as they know their employment depends on it.
It was. It was then copied by a bunch of people who don't want to pay tax.
It really doesn't matter. The law now says that you don't get to choose whether or not you are an employee. There are a series of tests. Either you are, or you aren't. If you are, pretending you aren't is very naughty. The taxman is rightly clamping down on people who, as the comments here tend to show, don't believe they're doing anything wrong but are in fact engaged in fraud with the aim of evading tax.
"It was. It was then copied by a bunch of people who don't want to pay tax"
It was then copied by a bunch of people who wouldn't get a contract if they didn't operate through a limited company, as enforced by clients.
And oddly enough, I, and the company I run, both pay lots of tax.
"Either you are, or you aren't"
And yet if you're supposedly an employee you get no employee rights. So you are, but you aren't really.
Ever thought about giving contracting a go?
>The law now says that you don't get to choose whether or not you are an employee. There are a series of tests. Either you are, or you aren't.
Not so simple, those tests aren't definitive and as many IR35 court cases over nearly two decades have shown, HMRC will happily deem contracts that satisfy those tests (and thus outside of IR35) as being within IR35...
From the nonsensical viewpoint you've pitched in several comments here, I can only conclude that you haven't really spent anytime understanding IR35, preferring to rely on the sort of half-arsed self-opinionated reporting common to the tabloids and august publications such as the Socialist Worker
Even viewing your comment through the filter of the recent BBC case, I think you misunderstand matters.
In the BBC case, the BBC, effectively advertised for 'employees' but then got these prospective employees to contract as if they were 'contractors' - thus it wasn't the worker who was pretending to be a contractor, it was the BBC pretending it was engaging contractors and not employees for reasons revolving around tax efficiency to them. ie. tax evasion .
Viewing your comment through the typical IT contract engagement and it fails to make sense. Particularly as only HMRC can definitely determine if an engagement is or isn't IR35 compliant and even then it is largely some time after the work has been done.
That's the crux of the matter. 10 years ago a handful of IT professionals were self employed contractors. Today radio presenters, courier drivers, Uber drivers, all shades of temp staff from gardeners and cleaners to the head of marketing at my old job with 100+ staff reporting to them are all 'self employed contractors'. Largely to save the employers national insurance costs and keep employee rights to a minimum.
I work as a BA. Recently when visiting my agency I was sat next to a groundskeeper about to start working for a council who was waiting for help registering with an umbrella company. Even school janitors are at it now.
Particularly as only HMRC can definitely determine if an engagement is or isn't IR35 compliant and even then it is largely some time after the work has been done.
Most definitely not only HMRC as they get overruled about 90% of the time when it goes to tribunal and I just read most disputes don't even reach tribunal.
Exactly right. HMRC are woefully incompetent* at interpreting the law in IR35 cases. IIRC over 99% of "inside IR35" determinations by HMRC are successfully challenged without proceeding to tribunal, and the vast majority which reach tribunal are found to be outside.
For one, this is a massive waste of tax payer money, purely down to the fact that those in HMRC don't understand* the rules correctly. For another, this is why the new rules are being brought in: They are hoping that large companies won't accept the risks of outside IR35 contracts. I know that, in many cases, they are wrong: Several of the large clients I deal with have said that they are willing to take the risk, and have large legal budgets available to challenge HMRC's idiocy*. This may all backfire...
* I am giving HMRC the benefit of the doubt, here, and assuming it's incompetence. I'm not certain that assumption is valid: they could be intentionally trying to break the law.
With those numbers there should be consequences for repeatedly making the same mistake. I'd say after ten successfully challenged IR35 determinations in a year a reduction in rank and pay grade. Of course the clock will also be reset at that time, so there can be multiple reductions within a year. After three reductions there should be dismissal for proven incompetence. And managers without (sufficient) staff can make the determinations themselves and will come under the same regulations.
A nice fringe benefit is the reduction in salary HMRC will have to pay as the staff will be decimated within months (and management within a year).
... a new employment type called perhaps "temporary permanent" (yes, I know, oxymoron but can't think of anything else...) was created, whereby you're a full employee with all the perks and legal protections, but your employmentt will legally end after 6, 12 months etc. The only difference between you and a normal permie apart from the length of service will be that you get paid more.
Anyone familiar with employment law know why this - to my mind fairly obvious - solution isn't done? As a former contractor I'd have much prefered not to faff about with limited companies, VAT or dodgy umbrellas (used them once, never again) since really it was the flexibility and money that I cared about,, not running my own business.
It already exists, its called a temp. or a locum. However, that person is employed by the agency not the client company (where the work is performed).
However, the problem with the "temporary permanent" employment - I think you are proposing, is that you can expect many employers to simply move staff on traditional permanent contracts to temporary permanent contracts. The only way to stop this would be to require employers to pay a premium (x2.5 permanent salary), a higher rate of employers NI and to specify both a minimum number of days per year that will be paid ie. the retainer and the maximum number of days (suggest 100) that can be worked.
You are right in this.
However, companies do not want to do this. Having someone on payroll, even for a short, fixed term, is very expensive. They would need to be covered by the companies own insurances (contractors must provide their own), holidays paid (contractors fund their own), and many other things.
That said, I have told agents that if a company wants me inside IR35 (and I agree to do so), they can take me on at an adjusted (by myself, not them) day rate on PAYE as a temporary employee. "Inside IR35 contracts" are an oxymoron: You should either be on contract and outside IR35, or an employee.
the added bonus of knowing the employee is only there for a fixed time
However, this is where they prefer contractors again. Contractors may have a set contract length, and may have "notice periods". However, with no obligation to provide any work during that notice period, they can simply say on a Monday morning "we don't need you any more, goodbye". I know this from my father's decades of experience contracting (and he experienced this more often than most due to his "abrasive" personality), and there's nothing which can legally be done about it.
Employees, however (even on fixed term or temporary assignments) have some protection in employment law. Notice periods need paying, employment tribunals are available for unfair dismissal etc.
Over one half of those questioned also believe the changes will discourage people from starting as contractors in the future
Well that's the point, innit? The goal of the change is to discourage the status of contractor, because having too many contractors is deemed either a huge loophole by the taxman, or a protection of workers who are forced by companies to work as contractors so as to avoid costly protections and holidays... Depending on who you ask.
>A contractor invoicing 100K a year is paying total taxes closer to 35-40%, once ALL company and personal taxation is taken into account.
Either you've omitted VAT from that calculation or your company isn't paying a market rate for your skills.
Yes, I know there are (legitimate) ways to reduce your tax bill, but I do have a dislike for IT contractors who don't just flex the rules but positively bend them and walk in the grey area of: is it avoidance or evasion...
Why would he include VAT?
Contractors running Ltd companies are effectively unpaid tax collectors, especially since they raised the flat rate to 16.5%.
For those who think that is lower than 20%, the 16.5% is applied to the invoice+vat amount.
eg invoice of 1000 + 200 (vat) = 1200, *0.165 = 198.
Ok, so we get £2 for every £1000 invoiced.
>Why would he include VAT?
Because firstly to invoice £100k, you will need to be VAT registered, so that £100k is more correctly £100k+£20k VAT actually being paid into the business account and needing to be accounted for.
Due to the fun and games that can be played with VAT, which as you note does impact the post-VAT amount remaining [Aside not sure what FRS rate you are on, but I get £26 per every £1000+vat invoiced.] which is subject to Corporation/PAYE/NI/Dividend tax - depending on how you account for stuff.
Because of this, in my management accounts, I've generally totaled all my taxes, to give an indication of just how much tax I really am collecting/handling on behalf of HMRC. It also allow me to tell anyone who queries the price, an indication of just how much of the invoice is going to the government...
So my question is: why wouldn't he include VAT?
The flat rate scheme makes no sense these days, for exactly the reasons given. You might as well just do regular VAT, and then you can reclaim VAT on all your business expenses, accountancy fees, shiny new laptop etc.
VAT doesn't really count anyway, since if you invoice £100K + £20K VAT, the £20K VAT the client pays to you (and which you forward to HMRC) is deducted from the client's own VAT liability.
When a contractor earns £100k, they pay corporate tax out of the profits. They also have to make their own pension contributions. Assuming a profit of £60k taxed at 19%, then their initial tax is £11,400
Many will pay themselves a low salary and draw the rest in dividends when required, but dividends are taxed as well - first £5k dividends are not taxed, 7.5% for dividends between £5k and £35k ,and 40% tax at the same earning point as other taxpayers (not £37k as you note, but £45k in 2019-2020)
A contractor is basically taxed like an employee when it comes to take-home. The main difference is NI contributions, which are calculated from salary. The introduction of tax on dividends at £5k reduces this difference between an employee and a contractor. But do note that a contractor has already paid 19% tax from profits of his limited company - and dividends are paid from these after-tax profits.
Effectively, a contractor will take home roughly between £42k - £50k from £100k after tax and pension deductions.
While there are a few contractors who do flaunt the rules, very few contractors will take home £80k from a £100k a year contract - and those that do will investigated for "aggressive" tax avoidance.
Hope this helps.
"Effectively, a contractor will take home roughly between £42k - £50k from £100k after tax and pension deductions."
Rubbish.
1) Pension contributions are entirely optional if you're a one person company, you don't have to pay any if you don't want to,l so you can take those out of your formula for starters.
2) The VAT on top of the 100K salary will be paid by the employer and the contractor simply passes it on so thats out too.
3) Corporate tax is on profits - profits are whats left AFTER salaries have been deducted ergo irrelevant.
So all a contractor earning 100K has to do is pay the whole lot to himself at standard tax rate and he'll be taking home probably 65-70K a year.
There's some misunderstandings there.
1. Yes, the contractor could decide not to pay a pension, but what are we comparing here?
Equally, an employee could opt-out of any company scheme so they would have an increase in take-home pay - effectively a higher salary. But then what happens when we all retire?
2. There is no 100K "salary" here. That would be the contract value - paid to the company. But, yes, VAT goes around and around.
3. Yes they are. And dividends are paid on what's left after all that. Point?
Then the conclusion is all wrong.
You are suggesting the contractor "earning" 100K pays himself at "standard" tax rate?
That implies he doesn't pay any dividends so instead of paying Corporation Tax everything is wiped out in expenses. That is pretty much what working inside IR35 is.
"The company" would pay:
- Employer NICs: 13.8%
- The employee's salary.
From which he would pay:
- Employee NICs: 12% (for anything under basic rate), 2% for anything over.
- PAYE: 20% basic rate, 40% higher rate.
Also, that 100K turnover for the company has to cover unavoidable expenses, such as accounting reports, etc.
So your (probable) 65-70K/year take-home figure is definitely absurd.
"3. Yes they are. And dividends are paid on what's left after all that. Point?"
Yes they are what? Profits are whats left after running costs are deducted. Salaries are a running cost.
"That implies he doesn't pay any dividends so instead of paying Corporation Tax everything is wiped out in expenses"
Wtf are you talking about? Take no dividends, pay the entire company earnings on salary (minus costs than can be offset against tax) and "employee" pays full rate tax.
"So your (probable) 65-70K/year take-home figure is definitely absurd."
Funny how I managed it then and HMRC haven't been after me yet. Perhaps you need a new accountant as he doesn't seem to understand the difference between gross and net profits if he makes you pay corp tax on your companies gross income.
>1) Pension contributions are entirely optional...
So you are suggesting that contractors shouldn't be making pension contributions...
So who do you think will be paying the contractors pension when they retire? or are you expecting contractors to only qualify for state pension benefits?
>2) The VAT...
If you had read the comment, you will see that VAT isn't mentioned, even though many contractors will derive a small taxable benefit from handling VAT payments, so don't see what point you were trying to make here.
>3) Corporate tax is on profits
If you had read the comment you would of seen that the poster had divided the £100k into £40k employee costs and £60k profits...
>So all a contractor earning 100K has to do is pay the whole lot to himself at standard tax rate and he'll be taking home probably 65-70K a year.
Whilst a contractor, through an umbrella company (or sole-trader) would have the entire 100K treated as salary, HMRC would demand it was taxed as salary and hence be liable for full PAYE/NI deductions at the higher rates...
Naturally, if you are not UK domicile for tax purposes then you can take advantage of off-shore accounts and arrangements to maximise the monies taken home, in those circumstances 70K plus take home isn't unreasonable...
1) Retirement poverty is indeed one option to be considered
2) I did not mention VAT as you quite rightly point out it doesn't factor in this
3) You could indeed pay the entire lump as a salary, but you will end up paying more in employer and employee NI.
I do see that if you skip pension provision, a take home pay of £65-70k could be devised from basic salary + dividends. Certainly not the 20% tax claimed in the comment I was replying to, though.
If, as you claim (in a later comment), you drew your contractor income as a regular salary and got £65k from £100k, then it looks like your accountant may not have bothered with niceties such as employer NI contributions. On £100k, employer NI would be roughly £12k. You will be liable for this if investigated. Please ensure you have your books checked by a competent accountant - not the one who advised you to do this.
>Am I correct in assuming you have to also factor in Accounting fees?
Depends on how good you are at accounts and company's house filings, I know several contractors who don't actually use an accountant - as they use one of the many business accounting packages that create their books for them. However you do need company insurance...
I hate these permies who are too cowardly or lazy to contract, having a go at the contractors. R
You can no longer claim back most of the things that you think you can. You only get relief on £2000 of dividends. My effective tax rate is around 38%.
I contract because employers cant be trusted. I don’t have to sit around when the CEO tells the permies that they won’t get made redundant, the week before redundancies.
I don’t have to pointlessly fill out “skills matrices” every 6 months to update a skill set that the employer won’t pay training for.
I don’t have to justify myself to HR bods.
If a Director of the client (or one of the users) comes along and tries to get shouty, I’ve got no long service to protect so can tell them that they are being arses .
I don’t have to sign a contract with the usual “It is expected that reasonable overtime is worked. YOu won’t be paid for that” The reasonable overtime becoming every weekend. If you want extra hours from me; you pay double or you move your deadline down.
I don’t have to go to “Town hall meetings”
I Can get in the office, do my job and leave. No politics.
I don’t become one of those loser permies who stay in the same job for 30 years with no interest in expanding their skill set. I can move every 6 months or so, keep the day job fresh and not festers like most permies seem to do.
Most importantly when some moron comes up and asks for help because they can’t work the printer - I can ignore them.
Contracting isn’t only about the money, although companies complaining about the lack of “Good Senior Staff” and then expecting us to take a 50% pay cut for 20 days holiday and a 3% pension can just go bugger off.
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