Contractors welcome Lords inquiry into IR35 before tax reforms hit private sector but fear it's 'too little, too late' The House of Lords has opened an inquiry into the UK.gov's controversial off-payroll working rules set to come into effect later this year, as confidence in freelance business drops to its lowest recorded levels. The Finance Bill Sub-Committee will probe the government's proposal to extend IR35 into the private sector on 6 …
The average contractor doesn't have an army of well paid lawyers that can tie HMRC up in the courts for years, or threaten to take their company, and jobs elsewhere, which would also make politically horrendous front page news in addition to the other losses.
Don't expect the likes of Google to pay anywhere near reasonable tax anytime soon.
Contractors are a soft target, but I don't think HMRC are ready for the disruption this will cause with companies and the commercial market generally, and they definitely won't get the millions of pounds extra tax they expect
"You can't really blame HMRC for doing what Sajid Javid tells them to do."
No this has been in the works for ages, HMRC have long had a "thing" about contractors (even though working through a limited Companies was their idea, sole traders got too many deductible expenses, and the Corporation tax rate was higher in times past when they dreamt this up, but time and tax rates change.).
Probably also something to do with "I worked 30 years in this crappy accounting job and all I got was this lousy Civil Service pension", and then seeing others earning money they could only dream about.
This has been in the works for a long, long time...think how long we've been hearing the dreaded acronym IR35?, from badly implemented joke regulation to "I Win" fait accompli, been well over 10 years in coming
Much as I hate Sajid Javid, he's just a bit player in this saga
The annoying thing is that he, as well as BJ and many others, pushed for IR35 to be scrapped before coming to power. In fact pretty much all politicians have said it's a complete mess at one point or another, but give them a sniff of power and they crumble and rub their hands with glee at all the money* HMRC promise will come from it.
* By "all the money", IIRC they are expecting £3bn over 5 years, or £600m/year. For 2017/18, total tax take was £690bn, which puts this as less than 0.1% increase in total receipts. Adding a tenth of a penny to each income tax band would raise more! It's a drop in the ocean, even if it yields as much as they say and doesn't cause any drop in receipts due to damage to businesses...
"even though working through a limited Companies was their idea, sole traders got too many deductible expenses, and the Corporation tax rate was higher in times past when they dreamt this up"
Not my recollection. Inland Revenue (as it was then) never wanted PSCs. Why would they when they meant (a) more work: instead of one tax return they had to deal with a CT return, a Director's return and a PAYE scheme; (b) less yield: eg they allowed contractors to pay even less NICs - and NICS more than tax was often the big driver.. As for rates, during the 1990s the basic rate of income tax fell from 25 to 23%. The small companies CT rate from 25 to 20%. But comparisons had to allow for personal allowances etc. The CT changes that stoked the fires came after IR35 - the 10% rate in 2000 and (bizarre) 0% starting rate in 2002.
The HoC library has a good reputation for impartiality on such things so I commend their https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05976.
Oh, and Inland Revenue staff advising Ministers had no reason to be jealous of contractors when they mostly had much more contact with (and more in common with in terms of background and skills) senior accountants, lawyers, bankers etc whose salaries and benefits dwarfed most contractors.
IR actively encouraged incorporation for small busineses in late 1990s. They even put adverts in the papers aimed at electricians, plumbers etc, saying how the self-employed could benefit from moving from self-employed to Ltd Co. IR35 came along shortly after and its purpose was to stop the 'Friday-to-Monday' effect, whereby an employee leaves on a Friday and then returns to the same company as a Ltd Co contractor the following Monday.
On the day of Geoff & Diana Jones' s660A case (Arctic Systems/Jones v Garnett) hearing, BiS website was still advocating H&W incorporation as effective (even though the '2 director' rule had been repealed even before Arctic Systems was incorporated, let alone by the time IR as was got around to challenging it)
So government was simultaneously encouraging and litigating against it as a structure...
I fear the damage is done. For some that damage is the winding up of perfectly healthy businesses. For others, giving notice on current contracts and taking a break to minimise the risk of their current contract suddenly being inside IR35.
If this is a "governement of all the talents"... we're all in trouble.
I contracted for about 5 years as an analyst, mostly business but utilising IT skills to do it. Would I do it again? No. When contracting you are at the mercy of your employer and have no rights, they can end your contract and if you don't turn up you don't get paid. The plus side is that the wage is better and with that you pay less tax because nine times out of ten you are working away from home (mine were in Birmingham and London) and you put your expenses through so you don't pay tax on them. This is the issue the government has, they want that tax without considering why it's not being paid. It's wasn't going in my pocket it was being paid to companies. I believe this is an extremely shortsighted view because all that will happen now is that people will not contract and any gains in tax will be lost in other tax revenues such as mileage/travel (you have to pay tax on that petrol or train fare). It will also create a severe skills shortage in areas of business because people with the right skills will not be available to grow the businesses on a short term basis. Maybe they hope people with skills will start accepting zero hour contracts. Not going to happen because personally I would rather be out of work than put myself in that position. I'm not privileged, I just finished a 4 month contract at ASDA as a store assistant on close to minimum wage to improve my social skills after working from home for the last 14 years. Not sure what I'm going to do next but I won't be contracting.
you are at the mercy of your employer and have no rights, they can end your contract and if you don't turn up you don't get paid
You think you should get paid if you don't turn up? What kind of a job are you used to??
The whole reason you get paid more as a contractor is because the company wants the flexibility of having someone around who they pay for a specific task/role and can cut loose when they don't need you anymore! Don't like it, then accept a salaried job at less pay. But you'll still have to show up at work to get paid, with few exceptions...
It depends on your contract. If you are paid by result, not by attendance, then as long as you deliver on everything the contract promises, then non-attendance should be paid.
But this is one of the things about IR35. If it is a contract that is paid by result, then you will probably be outside of IR35 anyway. If it specifies guaranteed hours of attendance that should be provided, that looks a lot like control when HMRC looks at the role.
The problem is that many contractors currently work somewhere between these two extremes.
I decided to work through an umbrella some time ago, a long time before this current brouhaha, but my role specifies pay for days worked, but the assignment and the contract (from what I've seen of it) does not actually specify what hours I work, and pays by the half-day, not by the hour. A half-day is at least 4 hours, and I can only bill two half days in a day. There is no overtime provision (in my contract) except weekends and bank holidays.
The client actually values flexibility, is prepared to bend the rules slightly to recognize the fact that some days are actually longer than 8 hours, and allow me to 'carry' hours from one day to another, provided that I do actually work the equivalent of the number of days billed.
This would be great, except that one of the agent timesheets that need to be filled in as part of the billing process is very strict in implementing the 2x4 hour half-days per day. If you put more that 8 hours on the timesheet, you only get credited one day, If you put between 4 and 7:45 (it only has 15 minute granularity), then you get credited half-a-day. If you put anything under 4 hours, you don't get anything.
So the way that the agency works makes it much more likely that the role would be inside of IR35, although the client is actually more friendly.
This does not overly worry me (remember, umbrella and full tax and NI paid on all income apart from the very limited HMRC allowed expenses), apart from the implied fraud of billing the wrong number of hours for some days in the agent timesheet (my conscience is clear, however, as I actually work more than 40 hours in a normal week). But this is neither paid by result, nor is it strict hours of attendance. Several of my colleagues appear to be trying to persuade the client that because of this along with several other CEST answers, that they should be regarded as outside of IR35, although the higher-ups in the client are pushing back, because they don't want the risk.
I contracted for nearly 17 years and i must say though I got good money it mostly went on travel, accountants and breaks between contracts, which got longer once on-shoring of non UK staff by the big body shops kicked in in a big way.
I've been working in a good permanent role for nearly ten years now and I must say, my expenses are predictable, I don't have the worry of what any individual tax inspector thinks I may have underpaid or should not have claimed, or the hassle of preparing accounts for the yearly audit by a chartered accountant.
Better still it's not in the UK so HMRC don't see a penny, I expect to have a lot more Brits for company soon what with this farce and "proper" Brexit kicking in next year!!
So I did the HMRC CEST tool last week based on my current contract and my actual ways of working, and the results quite rightly put me outside IR35. My current end client however is looking to implement a blanket "in" approach which will mean me either going umbrella, or onto a fixed term permanent contract, or leave - even though I don't so a job similar to anyone else in that organisation (which is why they hired a specialist contractor in the first place) nor am I subject to "control" in terms of the execution of my works. My default view then is that I'll leave early April, take 6 months off, and then head back to Europe or the UAE.
In my view then, it actually makes CEST, and the projected HMRC tax-take projections for IR35 utterly useless if I can't actually get work due to big employers now deciding hire in cheap foreign labour instead. To me it's just another excuse for Gov to try to corral all UK workers into the same pigeonhole to make their life easier. BUT... it's not the Governments job to be dictating to me how I work or earn a living, especially as on the other hand we get BERR saying that due to BREXIT, that the UK needs a highly mobile and flexible hi-tech workforce.
Government idiocy at it's finest.
"even though I don't so a job similar to anyone else in that organisation (which is why they hired a specialist contractor in the first place) nor am I subject to "control" in terms of the execution of my works"
Is that the only reason you feel you should be classed as a contractor?
I work for an ISP, and yet we have bought out so many companies over the years we have a vast array of employee skillsets.
I found out the other day we have a couple of home-based guys that repair/replace ancient pcbs from old nuclear power stations. A small office that produces parts for Navy submarines. A few guys specialising in old mainframes for a particular large university.
It doesn't really fit in with the roles of the rest of the company, where we specialise in Storage, MPLS, Cloud based ISP type stuff, and yet they're all classed as employees.
"My default view then is that I'll leave early April"
Be careful
The draft legislation says that any *payments* made after the rules come in are subject to the new rules. So, even if you terminate the contract at the end of March, if the invoice isn't paid before 5th(?) April the new rules apply and (if they have determined you inside) will be paid net of taxes.
Also, although HMRC say they won't use status under the new rules to open investigations into previous years.... Does anyone believe that? IMHO if you were operating outside and then accept an inside determination with the same client, HMRC are likely to say that meant you were inside in the first place. Hell, I wouldn't even move from outside to umbrella for a current client, or accept an umbrella gig with a recent client I've worked outside for. I don't trust HMRC as far as I can spit!
Most contractors I know are saying they will terminate their current contracts by the end of Feb to ensure invoices are paid before the new rules come in unless they receive an outside determination.
I have two main issues
First, CEST clearly puts me outside IR35. I take a financial risk and the end client doesn’t control my work. However, I suspect the end client will end up just blanked deciding I am inside
Second, worse actually is that they still haven’t advised us if we are inside or out so we can’t do any realistic planning. I am assuming the worst.
My biggest beef about this is the way it creates an employment limbo where you are some sort of Schroedingers worker. Simultaneously an employee and contractor having the obligations of one without the benefits of the other.
I also hope no one is expecting anything at all from this Boris "fuck business" government. Who are now proceeding to do fuck all about the increasing number of jobs that are no longer available to UK citizens if they are unable to show they can work in the EU.
> Simultaneously an employee and contractor having the obligations of one without the benefits of the other.
Don't worry, I'm sure our current govmt will level the playing field by stripping away all workers rights, so an employee may as well be a contractor. That way everybody's errrr.... happy?
They seem to have omitted the link to the consultation, which is here: https://www.parliament.uk/business/committees/committees-a-z/lords-select/economic-affairs-finance-bill-sub-committee/news-parliament-2019/call-for-evidence2019/
I'll be submitting my own views and I encourage you to do the same.
It's interesting to note that their online submission page isn't working - I wonder why not?
"Due to website maintenance it is not currently possible to make a submission online. Instead, please email your submission, name and contact details to financebill@parliament.uk The deadline for submissions is 23:59 on 25 February 2020"
Perhaps we should band together and submit a fixed-price proposal to implement a comment submission system that actually works. With a substantial mark-up due to the fact that we are shouldering the risk. And strictly-managed changed control that means if they want to change one of the colours it will cost £10k. What could possibly go wrong...
AFAIK, no, it's not law yet. It's draft legislation, supposed to come in the budget.
That's part of the problem, it's difficult to prepare for a new law coming into force in a couple of months when the final legislation still hasn't been finalised. How do we know something important isn't going to change at the last minute, something which will render the vast amount of time and money put into preparations completely wasted?
... it will have served it's purpose even if they don't carry it forward this year. Several large clients have already moved to enforce either on-payroll or umbrella working, which will possibly bring in more tax, and almost certainly more NI.
I suspect that someone in the Treasury will smile to themselves, and announce on March 11th that it has been postponed until April 2021, knowing that this still leaves the Sword of Damocles hanging over the head of clients and contractors who have not yet switched, but also knowing that other than putting some words in a draft law which were not carried forward into the eventual legislation, they've still had a win. Clients that have changed their engagement practices will probably not switch back to off-payroll working just for a year, and will carry forward their existing plans as if it was actually read in to law.
I'm sure that was not their original plan, but this is what I predict they will do.
"Several large clients have already moved to enforce either on-payroll or umbrella working, which will possibly bring in more tax, and almost certainly more NI"
That does not take into account the substantial number of contractors who (if these comments are anything to go by) seem to be retiring, leaving the profession or leaving the UK. Unless someone can magic up large numbers of people to replace them, that work will go offshore or just won't get done. The tax / NI take from that will be zero.
But robbing Peter to pay Paul
Get more Income Tax and NI, no VAT, Corp tax, CGT from the contractors
They may make a few £ more, but I cannot envisage it being as much as they think.
Also, my client has done the same blanket approach so I am off. To me the risk of staying on as an umbrella is too high as when HRMC find that this big gain is not there I can see them investiating all the contractors via umbrella companies and finding out where they were before April. Anyone who is at the same client and declared outside until April and then inside after had better have a good explanation
Of course, change of client and that specific arguement ends
"...applies to all contractors and freelancers who do not fall under HMRC's definition of being self-employed."
The biggest problem I have found is that HMRC are deliberately vague about the rules. There seems to be no cast-in-stone checklist you can go to to definitively check IR35 status.
Of course, this is deliberate - HMRC like things vague so that they can make the rules up as they go along. Which they do on a very regular basis, and not just with regard to IR35
This is where terminology is vague in general.
To me, self-employed would mean operating as a sole trader. You, personally, get paid by your clients. You can then deduct some legitimate expenses, but are then taxed as income on all profits remaining. Many tradesmen operate on these terms, but most freelancers/contractors don't.
So it could be quite correct for HMRC/the govt to say these rules won't affect the genuinely self-employed, as these are not even covered by the IR35 legislation as it stands, let alone the new rules. Many will be affected by these rules even where they are provably operating outside IR35, but that doesn't affect the truthfulness of that statement because they are not self employed, they are employed by their company...
Good points, badly made, now consider this...
For future roles, knowing how companies love to save money, why employ permanent staff when you can employ contractors, and not have to pay for the 25-30 they aren't actually working for you (holiday), no pension contributions, training, no paternity or maternity right but pay them more (let's go with 20%) which they'll be taxed more on.
Now move forward a little time, why have permanent staff at all? I can employ people, lower the rates down gradually (do you want the job or not?) so eventually it's parity with the market rate for a full time employee, but I get 25-30 days more productivity out of the for the same cost, I don't have to pay pension contributions, training time off for illness and other things and I can get rid of you without a tribunal (you're not an employee), that what this does.
Luckily companies aren't unscrupulous I suppose, otherwise that would be a real concern...
Ah, but HMRC are basically saying that those contractors are employed: Their working practices are the same or very similar to an employee. In fact, the IR35 legislation calls them "disguised employees" (That's the IR35 regs currently in force).
So, by bringing in laws around it, the government is legitimising "disguised employment" and saying they don't care about it as long as they get their pound of flesh (tax). These "disguised employees" are, by definition, employees and therefore should be entitled to employment rights.
It is not a huge stretch to see Amazon or ASDA starting to take on "resources" as inside-IR35 contractors. As the government has effectively given its blessing for this way of working, it would then take an employment tribunal for these "contractors" to get the rights they deserve, and that's assuming the employment law stays the same...
The legislation covers payment of services, not delivery of services. So all the contractors where I consult have been told to go umbrella or leave on February 28th. No consultation, no analysis, no risk.
This is a large engineering/aerospace company that is famous for not doing "IT" with over a thousand contractors...
Personally I'm going to retire. Yes jealous permie tax collectors... I've worked hard for over 20 different companies and paid many thousands in tax, I have enough put away to retire at 50 and sail around the world. Note, sail; not fly... I've seen the deliveries of end or year bonus driven safety systems and I'm not ever getting on a plane again! (or paying tax :p )
Remember that if you get a pension whose payments take you above the LEL for tax, you will actually pay tax.
And if you drew it all out as salary or dividends, and put it into investments, then first of all, you've already paid a lot of tax on the money, and also any interest above the LEL will also be taxed.
One way or another, you are still likely to pay tax if you have an income high enough to pay for cruises.
(I wonder. What is your country of residence and/or taxation if you are on board a ship in international waters for over 6 months of the year?)
What is your country of residence and/or taxation if you are on board a ship in international waters for over 6 months of the year?
To some extent it depends on your home country. Some jurisdictions consider you liable for tax even if you're never in the country.
I remember reading about a plan to build a kind of floating island for super-rich tax exiles. It would make sure they were never in one tax jurisdiction long enough to be liable. I suspect the project foundered because there's no point in being super-rich if you have to spend your life at sea, and the idea of being cooped up with other plutocrats is deeply unappealing.
@Peter, Yes you are correct, I'm kidding myself if I think I will never pay any more tax. I've never trusted pensions though, so we have a big lump sum and a budget (living on a yacht is cheaper than you think - look up sailing SV Delos on YouTube for a Microsoft developer that did it.) But we will still be taxed on the interest and have Self employed NI contributions, possibly also Council Tax on the house (if we can't persuade the children to pay it!)
But the key part is... Fuck-em (HMRC that is)... I've done my bit, no longer will I be an unpaid tax collector, No longer will I wonder if they've changed the rules at the end of each tax year, no longer will I have to pay tax 6 months in advance, no longer will I be wondering just how much the agent is ripping me off, no longer will I panic between contracts, no longer will I argue with the accountant on what is tax deductible, no longer will I wonder if I can have a holiday this year.
I hear Easter Island is pretty remote :)
>One way or another, you are still likely to pay tax if you have an income high enough to pay for cruises.
Depends on how well your PEPs, ISAs and endowments have done - all of these if held for sufficient time and correctly drawn down (ie. not converted to an income), are free of capital gains, income tax and NI...
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It is utter ill thought legislation that puts pressure on business resolve there back log of skill shortage to employees resolve internal issues, complete disregard to contractor tax benefit on lack of pension, sick pay nor holiday pays, no job security for the contractors already taking that risk to have jobs and yet the government sees it fit to imposs Ir35 to bring them inline with permanent staffs who already have those above mentioned benefits, don't usually have exposure of a contractors of expertise as those on the field, as they are usually home grown. Contractors don't get the benefits of being trained by employers as they more than often skilled by different exposure to varying environments some vary challenging I might add to technically resolve and those sacrificed effort and risks taken by individual contractors rubbished by the government is wholefully disgraceful and backward thinking.
It is utter ill thought legislation that puts pressure on business resolve there back log of skill shortage to employees resolve internal issues, complete disregard to contractor tax benefit on lack of pension, sick pay nor holiday pays, no job security for the contractors already taking that risk to have jobs and yet the government sees it fit to imposs Ir35 to bring them inline with permanent staffs who already have those above mentioned benefits, don't usually have exposure of a contractors of expertise as those on the field, as they are usually home grown. Contractors don't get the benefits of being trained by employers as they more than often skilled by different exposure to varying environments some vary challenging I might add to technically resolve and those sacrificed effort and risks taken by individual contractors rubbished by the government is wholefully disgraceful and backward thinking.
The Ministry of Defence lost 30 of its 32 contractors, who balked at the department's allegedly blanket approach to enforcing the guidelines
It was insane. The MOD kept submitting the contractors they thought fell within IR35. Then after a couple of weeks HMRC would tweak the rules. Then they'd resubmit. Again and again.
Having said that, there were day-rate Oracle contractors there who'd been there 5-10 years, so I was actually pretty happy that something was digging the Army out of its intransigence. But it appeared to be very cynically done by HMRC.
The word "reform" in dictionary.com is firstly defined as "the improvement or amendment of what is wrong, corrupt, unsatisfactory, etc"
It does not say words like break, injure, damage ruin or destroy even though that is what most government 'reforms' are meant to do.
If you are not on a PAYE scheme then you owe tax from the instant that you earn a quantity of money. The pennies in each pound which are payable to HMRC never belong to you. It is the responsibilty of the earner to pay HMRC the tax due - and it is NEVER anybody elses fault if the tax is not paid. The problem is that is has become common practice to engage in systems of behaviour which seek to avoid confronting this reality both as a payer and a payee.
I transitioned to being a contractor due to the government pay rise cap severely twisting my renumeration compared to the market. Once they implemented IR35, I just went private. Now that it's being implemented in the private sector, I'm just moving my business outside of the country. I'd expect many more to follow.
Time to ditch big companies and work for startup and small companies which is much more interesting, I am!
https://www.gov.uk/guidance/april-2020-changes-to-off-payroll-working-for-clients
The rules apply to all public sector clients and private sector companies that meet 2 or more of the following conditions:
you have an annual turnover of more than £10.2 million
you have a balance sheet total of more than £5.1 million
you have more than 50 employees
Every time I read this I still fail to see the logic.
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Government increases tax take from contractor, contractor charges Government more for the same work.
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Good news. Our tax revenue has gone up by £400 million.
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Unrelated news. Our expenditure on IT services has gone up by £500 million.
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Ummm...hey, let's raise taxes on IT contractors. That should raise another £100 million and cover the shortfall.
I've worked in IT for >20 years now and have frequently worked alongside contractors who do the same job as me but pay a lot less in tax, told by the boss to work Mon-Fri 9-5 like any other employee. From my conversations over the years, a lot of contractors have taken tax avoidance to new levels of pee taking, from claiming their new gaming PC as a business expense to taking their salaries as 'loans' and not paying any tax at all. I always wondered when the government would crack down on this, but I suppose the number of contractors has expanded over the years due to the tax advantages becoming more apparent and it cannot be ignored anymore.
The IR35 rules have been around for many years and made no sense at all for all of those years. Most independent contractors that I've worked with are not in it for tax dodges, we're in it because we were encouraged to do so by the market when we started up. There are few benefits and quite a lot of extra work outside normal hours. The key benefit is flexibility and freedom to move around jobs.
The main issue I have with paying PAYE up front, is that all of my work involves travel (in the UK and abroad). Why should I pay tax before my expenses are accounted for? Or should I be limited to only working for companies within a commutable distance?
Also, I'm not an accountant, but I do employ a reputable one, and from what I understand, if I take a loan from the company, then the company is taxed. When I pay the company back the tax is refunded. Sounds like you've been working with a few cowboys.
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