Review of IR35 is in: Quelle surprise, UK.gov will forge ahead with controversial tax reforms in the private sector In a move that will surprise absolutely no one, Her Majesty's Revenue & Customs (HMRC) will push ahead with controversial IR35 tax reforms to the disappointment of contractors that hoped the regulation would be halted. The government's eagerly awaited review, published this morning (PDF), admitted the regulation had not been " …
In the last 10 years, there have been 16 IR35 court cases that HMRC have instigated. Just 2 were won by HMRC, and 2 were split decisions. In 75% of the cases that HMRC took to Court, they were proved wrong. Any other body that was wrong 75% of the time would be deemed as unfit for purpose.
This doesn't include where they've investigated, shown a contractor is outside of IR35 and not pursued legal action - I know of a fair few of these.
Deliberately and spitefully manipulating the system so Contractees force a punitive tax regime on Contractors shows the HMRC is rotten to the core. Virtually all contracts have become IR35, not because they are, but because of a fear of HMRC investigation and that's not something fit for a democracy.
https://www.contractorcalculator.co.uk/ir35_court_cases_judgments.aspx
Yeah. That's, er, precisely the problem.
Maybe HMRC could set their finest minds on to that conundrum. Let's see if they can come up with something which applies to multinationals that appear to be everywhere in the world yet nowhere for tax purposes and is slightly less clusterfuckery than IR35 has been over the past two decades (what problem was IR35 designed to solve again? I've forgotten).
An Amazon distribution warehouse can pay less in Buiness rates than a Corner Shop. The build them in such a way that gets around loopholes in the system. Don't dare mention how they drive their workers. Tales of not being able to take a toilet break are rife. Their Health and Safety record is also abysmal.
I'm sure that they are more.
I consider them akin to the slum landlords of the 1960's.
Well yes, if by "in such a way that gets around loopholes in the system" you mean, "not in cities, where business rates are much higher".
Imagine if the Mafia controlled all the land in the country, and some divisions demanded more money from businesses on their land than other divisions did on theirs. Why in that scenario would you not blame the Mafia for charging so much, and instead blame the business that located in the area with the less exorbitant Mafia?
"The build them in such a way that gets around loopholes in the system." - close the loopholes or shut up.
"Don't dare mention how they drive their workers." - go work somewhere else or shut up.
"Tales of not being able to take a toilet break are rife." - go work somewhere else or shut up.
"Their Health and Safety record is also abysmal." - Have they been prosecuted for this?
Dan55 - my company will pay 65% tax on TURNOVER. Here are some readily googleable examples of what you can get away with if you're rich enough to game the system and not want to pay tax. I'm happy to pay tax if its fair, proportional and due diligence is used in spending.
Facebook’s UK tax bill totalling just 0.62% of revenue (just one-hundreth of the rate for a Microbusiness under IR35)
Amazon, (with a revenue of £8.7billion) paid UK tax of £4.5M.
In 2017, Ocado (with a revenue of £1.4 billion) claimed a profit of £1 million and paid no UK tax.
In 2017, Royal Mail (with a revenue of £10.1 billion) claimed a profit of £212 million yet received tax credits of £93 million.
In 2017, BP (with a revenue of £190 billion) claimed a profit of £5.6 billion yet received tax credits of £134 million.
In 2017, AstraZeneca (with a revenue of £17.2 billion) claimed a profit of £1.7 billion yet paid no UK tax.
'How can this be?' said Lord Downey. 'Don't we pay our taxes?'
'Ah, I thought we might come to that,' said Lord Vetinari. He raised his hand and, on cue again, his clerk placed a piece of paper in it.
'Let me see now...ah yes. Guild of Assassins...Gross earnings in the last year: AM$13,207,048. Taxes paid in the last year: forty-seven dollars, twenty-two pence and what on examination turned out to be a Hershebian half-dong, worth one-eighth of a penny.'
'That's all perfectly legal! The Guild of Accountants-'
'Ah yes. Guild of Accountants: gross earnings AM$7,999,011. Taxes paid: nil. But, ah yes, I see they applied for a rebate of AM$200,000'
'And what we received, I may say, included a Hershebian half-dong,' said Mr Frostrip of the Guild of Accountants.
'What goes around comes around,' said Vetinari calmly.
(A repost from last year)
Here are some readily googleable examples of what you can get away with if you're rich enough to game the system and not want to pay tax
No list could possibly complete without the Guardian being given a mention - they are without any shred of doubt in my mind the biggest hypocrites when it comes to matters of taxation. How much did they pay in their Autotrader gains? Why was the Scott trust offshore? The list of aggressive avoidance measures is extensive and yet they rail against anyone not simply handing HMRC their entire paycheck.
"Show me one single shred of evidence that Amazon haven't paid every penny they owe or quitcherbitchin'"
Show me one single shred of evidence that Contractors in general haven't paid every penny they owe or quitcherbitchin'. I agree there are a very small number of cases HMRC have won (THREE), however they have LOST 75% of the cases they brought to Court.
The entire IR35 shitdhow is driven by the big consultancies to feather their nest, it is not in the interests of the people.
Show me one single shred of evidence that Contractors in general haven't paid every penny they owe
They probably will have, its just that the Government have changed the rules so now contractors will owe more.
When the 3rd longest served member of IT at my last bank is an IT contractor, you can sort of see why they have a point. 20+ years in the same gig for the same client and they claimed to not be a permanent member of staff - its amusing, but it's not credible.
That higher public spending everyone keeps voting and lobbying for has to come from somewhere, and it can't come from PAYE as that is already beyond disincentive levels of tax. So what's left? You can't arbitrarily tax a multinational - international trade and finance works on a global scale not a national one. Something or someone you can tax has to pay, and in this case contractors earn a great deal more than most and pay a great deal less tax, and so the government wants to level that up.
Despite being a permie, I'm a little sad about that as I've always wanted to go contracting and kept getting suckered into some "career" thing or other. I do hope the changes don't kill the industry, but I am afraid they might.
Well, given how they can just be terminated without any compensation and nor do they receive any benefits of any kind I would argue they are not a permanent employee. They are a permanent employee of their limited company and their limited company is contracted to the bank. It's not that difficult a concept to follow.
If you want to tax them like an employee then they have to receive all the benefits and rights. Don't be sticking them in IR35 and give them jack shit and higher taxes.
What this about? Choose:
* Someone else is doing something wrong, so why can't I keep doing *my* wrong thing?
* Fix all the other wrong things, before you come to *my* wrong thing?
You rode the contractor IR35 tax ambiguity gravy train, it's coming to an end.
>> huge drop in national productivity
LOL no just get your pay bumped up to compensate and pay the approriate tax according to the law.
If it comes to a point where a permie makes more sense cost wise to the employer, then they will hire permies if you no longer offer a value proposition as a contractor where the legal tax is due.
In other words your value proposition was previous via tax "subsidy" or perhaps tax loopholes.
It is not HMRC job's to subsidise contractor risk or contractors choosing to accept fewer benefits. That is for you to negotiate as part of your fee with your employer (or more accurately your customer).
Tax loopholes/tax avoidance are not an economic subsidy. You are not contractors in an industry where a legitimate subsidy is warranted for wider economic/social good.
Tax money should be used for far more needy subsidies.
HMRC confirmed its previous commitment that information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies for tax years prior to 6 April 2020, unless there is reason to suspect fraud or criminal behaviour"
So, investigations just get opened to fuck with people sometimes? I guess people from different countries truly are more alike one another than you'd originally think.
But... HMRC could write easily say that they suspect anyone now found inside who was previously operating outside, especially on the same contract, to have committed fraud. Their logic would be that they wouldn't have been found inside of they were actually outside, and wouldn't have accepted an issue determination of they were actually outside, so they must have been fraudulently claiming to be outside previously. The same, although more tenuously, with anyone moving from outside to a PAYE FTC or Umbrella.
Around 1990 I set up as a limited company working in a niche area of marine electronics. My mum did my books and my lawyer father helped with the legal side. Fantastic range of clients, interesting challenges, lots of travel and some great perks..... however.....
I was inspected by HMRC three times, had 4 VAT inspections and I was "randomly" visited by Customs 6 times in various UK ports over the 20 year life of the company beginning about 18 months after I set up. A particularly nasty snap HMRC inspection left my mum distraught and convinced ruin faced the whole family.
I'm the only person I've ever come across that has been subject to such an onslaught and to this day I have no idea why it happened.
So, investigations do get opened on a whim. Once opened they are never fully closed as it's impossible for the target to prove a negative.
@AC - you are not alone. My brother - not in tech but has a small one-man company - gets a VAT inspection every year. It started about 7 years ago. They never find anything but every year he gets inspected. It's been the same bloke for the last 3 years, who is also mystified as to why he's being inspected so often.
Yes, but that way you do get the minimum amount of squawking. What you do get though is contractors sucked back into boring permanent jobs in big companies, rather than contractors who could and did use the money earned from well paid temporary work to set up their own companies, innovate and increase general economic prosperity. So file the dream of Britain booming with tech startups in the same bin as the review you conveniently announced just before the election.
Furthermore you get some jobs not done at all and a "zero rights employment" regime. I contract to solve specific problems on assignments typically ranging from months to days. No business is going to take on someone on a contract for services to do that as the costs of recruitment are too high. So either the problems will not get solved, or the contractors will have to become employees of umbrella companies that have a long standing record of both abusive employment and fiddling tax.
Alternatively (or maybe alongside) permanent employment could disappear as businesses convert everyone into an IR35 contractor, thus avoiding the need to pony up for statutory employment benefits and gaining the freedom to fire (sorry "downsize") at will. None of this matters a tinker's cuss to HMRC, who only care about tax coming in right now, but the long term wider economic damage will be huge.
It's not a very satisfactory form of government that takes active steps to bugger the country.
Almost every other field manages the concept of short-term consultancy contracts just fine. It's only the smart-arses of the IT world who have tried to use it to escape paying tax and NI for years and are now being deservedly brought to heel.
There is nothing to stop you taking on a one-day consultancy contract (I have one in a couple of weeks myself) as long as you pay your bloody taxes. There, that wasn't so hard, was it?
it isn't just about the tax
It's mainly about the NI - the tax advantages are not what they were. I'm not sure what you mean by a "genuine" contractor, but, to be fair, neither does the government.
I don't have much sympathy for the whole PSC model with artificial, tax-friendly dividends, but that doesn't mean I wouldn't (and haven't) taken advantage of it when it's there. The big problem, as I see it, is that a lot of people working in the economy have no clear status or real legal rights. I'm more concerned in general about Uber and delivery drivers and people in "hospitality" on zero hours contracts than someone on a daily rate that approaches their monthly take-home, but adding more people to the pool of casual labour seems socially undesirable.
"There is nothing to stop you taking on a one-day consultancy contract (I have one in a couple of weeks myself) as long as you pay your bloody taxes. There, that wasn't so hard, was it?"
What you're missing is that the problem is contextual and your view is highly subjective. I.T is a highly technical field and generally requires longer terms. You can't possibly drop in for a day and be done.
If you were changing a boiler, that's probably a day's work. If you're implementing technical change for a regulatory piece of work, then you're going to need a LOT more than just a day.
You're right in that there is nothing stopping I.T. contractors to take one day contracts other than they don't exist.
Can back up your claim of why "'smart-arses' of the I.T. world" are taking advantage by giving some examples of I.T. work that typically lasts a day?
What you do get though is contractors sucked back into boring permanent jobs in big companies, rather than contractors who could and did use the money earned from well paid temporary work to set up their own companies, innovate and increase general economic prosperity.
Will that be the effect though? I know contractors who are doing precisely the opposite - they were always the ones who were likely to do something useful and productive and this has shifted them sufficiently out of their comfortable rut that they are doing something about it.
The ones who have shifted to permie roles either were just permies on a tax dodge (let's not pretend there have not been any of these) or who were forced to work as contractors at employers that wanted to avoid their responsibilities.
People will end up getting what the market deems they are worth - and it's a global market.
I'm not sure the short term disruption will be especially problematic, it's just a bit of sorting sheep from goats.
(That's not to say any of this has been implemented or policed well, or that clients are sufficiently well-informed and confident in the processes that they feel able to do the right thing)
This is the HMRC report on its intentions for the Finance Bill. It still has to pass Parliament, and the report from the Lords call for written evidence that closed on the 25th Feb. is still not in. So there's still a slim chance things might change a bit for the better. If not, we're stuffed of course but as IR35 is based on the fiction of a special class of company that has no legal existence, there's also always the possibility of a judicial review if someone can raise the dosh.
Everyone thinks not paying tax is great. And it is, until you realise that there are consequences...
IR35 is there to try to grab more tax because the rest of us (I'm not a contractor so will inevitably be downvoted) also refuse to pay more tax. Imagine you are a political party suggesting it may be a good idea to pay more tax. If there was a general election, in December, say, how do you think the public would vote?
No one wants to pay more tax, but if you want our society to function someone should. The easy answer is, someone else should pay, the rich should pay, etc, etc.
Well guess what, the contractor market is not big enough to make the government shit itself, so instead it shits on the contractors; easy pickings.
Hey, I'm not saying it's right. What's right is that we all should pay more tax. There I've said it, but don't worry, there isn't another election for another five years so it doesn't matter.
As you were.
I'm curious if you even know how contractors "pay less tax" outside IR35? Every penny one takes out of their company is taxed by the same rules as everyone else...
Anyway, that aside, imagine having 2 engagements in a year - doing much the same sort of project - one you and the client have got good paperwork in place, the other you've been a bit laxer. What IR35 gives you is totally different tax treatment for each - does that make sense to you? It certainly doesn't make either party's life easier.
Fundamentally the problem is IR35 itself, not specifically these changes.
PS I should also add that most clients exhibit just as much control and direction over consultancy firms as contractors, but these engagements will almost certainly end up outside IR35 ... but there you go.
@Anthony13
For contractors it depends on how contractors pay themselves and how much money they are making. If they run limited companies, pay themselves a salary under the NIC threshold and take nearly all their income from dividends then they avoid paying NICs, currently 12.5%. It's a bit more complicated, depending on how much you make cos of the way dividends are taxed and also because the Ltd pays corporation tax. However, under today's tax rates a contractor running this model still pays less tax overall than if they were taking all their money as a salary.
The other issue is that under the contractor model the employer also avoids paying NICs on the contractor's remuneration - currently 13.8%.
So the government is looking at 25% of contractor pay as an opportunity. It's quite a big chunk - but only if you are looking at it greedily and not considering any wider implications such as loss of productivity and flexibility, offshoring of work, etc, and other such consequences which might reduce the net take below what they are getting today.
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"This option is not usually available to permanent employees."
On the contrary, EVERY company I've worked for has permitted employees to make additional contributions to the pension scheme, or to a personal pension scheme BEFORE Tax. This is standard tax law.. What the company does not do is match those additional contributions.
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Not sure why you are explaining to me? It was a bit of a rhetorical question for the OP and permies... i.e. non-contractors claim contractors pay less tax, but have no idea how or why that might be - a contractor could just pay themselves straight salary if they wanted and tax would be exactly the same! But OMG, they could claim travel expenses etc. etc.
Key point is, in my line of work at least, IR35 is pretty much a bureaucratic exercise where lots of clients just don't want to do the paperwork. That's fine by me, but they are going to have to pay extra for that laziness. And if they won't do that, going perm is a last resort. Kills flexible resourcing and probably raises less tax overall, but what can you do... It's clear no political party is going to scrap or fundamentally change IR35. The only winner is consultancy firms (hence my other observation regarding control and direction...)
This option is not usually available to permanent employees.
Sure it is. One of the biggest reasons permies use this is because after 100k the effective tax rate becomes 60% on the next 25k. Shotting it into a pension avoids paying 60% now, when you'll almost certainly not be paying that much in retirement.
This panic over the "cost" of tax relief on pensions contributions could best be solved by doing away with tax free earnings allowance withdrawal, then more people would pay tax now at the prevailing 42% (instead of 0% now and probably 20% decades later).
However, under today's tax rates a contractor running this model still pays less tax overall than if they were taking all their money as a salary.
But they also receive no benefits paid for by the contracting entity and therefore their limited company needs to foot the bill for this. You cannot just compare the tax paid whilst not accounting for the benefits one receives over the other. 4 weeks paid leave would certainly account for a chunk of that "less tax".
Funnily enough, when I was a contractor I paid quite a bit more tax than I do now I've become a permie. I now earn much less and achieve a little less, but because tax is so steeply "progressive" in the UK for actual earnings ('investment' returns are another matter) - and my costs are lower - I only take home a bit less cash and I also, frankly, do less work. I used to be skeptical of the argument that trying to squeeze more tax out of higher earners actually reduced tax take, until I realised that I am that phenomenon in action. If lots of contractors get pushed into the same choice, or just retire earlier on less, the country's probably going to have to get by on quite a bit less tax revenue. Be careful what you wish for...
Hey, I'm not saying it's right. What's right is that we all should pay more tax
we all should pay more tax
What you mean is the country needs to raise more revenue.
One way is to increase the overall tax take, and as you describe, every government fudges around the issue, trying to eek out gains without causing general uproar.
The issue is that the structure of the UK tax system is no longer fit for purpose. NI is an anachronism and needs to be removed. A simple set of (adjusted) tax brackets that apply to all would be a much fairer system with many fewer loopholes to stretch tax avoidance but still permitting those that want the ability to operate in flexible manner.
But no Government is willing to risk making the change lest it lead to their unemployment (and it's their ego that keeps them wanting to be a politician).
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For pity's sake! This isn't about contractors trying to pay less tax. I pay Income Tax, Employee NI, Dividend Tax, and Corporation Tax, and I collect VAT for the Treasury.
I run a one-man PSC. I create software test frameworks for a specific project, train the testers on how to write the tests for it, then I leave. I'm typically in a company for three months, four at most. I have also been asked to come back to a previous company to make modifications and enhancements to the framework, or to train others. It makes zero sense for me to be a permanent employee.
The company would have to set up a pension, health insurance and other benefits for someone who's only going to be there a few months. I'd have three new pensions every year which would almost immediately go into Paid-Up status. This is not of financial benefit to the company or to me.
By claiming that "IT contractors" are avoiding tax, you're showing an abject lack of knowledge on this issue. If anything, it's the companies we contract to who are avoiding tax as they don't have to pay the 13.8% Employer's NI.
IR35 gives contractors no rights, no benefits of being a permanent employee, and makes us pay EmployeR's NI and the Apprentice Levy. How is that even remotely fair on us?
If you think everyone should be working under PAYE, then watch as thousands of accountants, recruitment agencies, insurers, B&Bs, hotels etc. go out of business.
There is an easy fix for this mess: ditch IR35 and implement a hirer's tax, paid by the company for every contractor they hire. Simple.
Putting my cynical hat on for a moment..oh it's already on..anyway - I suspect this has a lot to do with who has been lobbying hmrc to implement these reforms.
Let's just say a lot of the big agencies appear to be rubbing their hands in glee and I definitely heard one cackling to themselves the other day.
There is an easy fix for this mess: ditch IR35 and implement a hirer's tax, paid by the company for every contractor they hire. Simple.
... or, better still, just ditch National Insurance Contributions and collect the same revenue through income tax and corporation tax.
It must be better to have fewer kinds of tax and keep things simple.
@dajames - this is a great idea but I think that NICs will stay for 2 reasons:
1 - people see NICs as going towards the NHS and retirement so are more kindly disposed towards them than they are towards income tax.
2 - it would put the income tax and corporation tax rates over 30%* which would put paid to any UK Gov selling the UK as a low-tax environment. I know that these rates are already the case, but it's a matter of presentation.
*might be a bit less if it resulted in more tax being paid.
Sure, the best way is to make contractors pay the same taxes as an employee. Make the employer pay NI for the contractor as well. The negotiation for a higher wage to cover 'employee benefits' is left between the employer and contractor not the HMRC and the taxpayer. Completely fair. The contractor gets to keep on moving jobs and reaping all those benefits, except tax reduction.
"HMRC confirmed ... the rules will not be used to open new investigations ... unless there is reason to suspect fraud or criminal behaviour"
Pretty sure HMRC already class any mistakes in tax returns to be fraud or criminal, so they can and will go after anyone. It has already happened in the Public sector despite the same promises.
Coincidentally (well probably not), I have been asked to do a small piece of work - scheduled to be done off-site and taking about 1 day to analyse a rather odd problem involving the stats on a safety-critical device. I was told this morning that of course, it would run foul of their new IR35 processes. Having told them to bugger off two hours ago, I await their reply (it is apparently time critical!). Never has reductio ad absurdum been so widely practised.
The point is simple. Contractors on the whole sit next to permanent employees doing the same or very simlar role but earn more by changing their tax arrangements. This now changes the dynamic to not being able to pay less taxes, this is fair. The contractor now needs to earn the extra money, to make up for holidays/sick leave/bonuses etc by charging the employer more. If the employer is not willing to do that I can only imagine that is a negotiation that should not involve the HMRC nor the employee who pays their fair share of taxes.
Contractors do not 'earn more'. The company that employs them has a daily charge out rate, that may or may not be more than permanent employees. It is not a wage, it is a charge-out rate.
Permies rely on the the Company mothership to shield them, find them work, bid for them, sort out the legals for them, chase up payment for them, pay for their holidays, pay for their training, do their tax, sort out their VAT, arrange insurances, pay T&S, not just cut their contract, make sure they are not discriminated against, pay their pension. Etc Etc. And when they feel a bit poorly (and often when they don't) they still get paid for not being productive. Quite a bit of backside wiping goes on for you that you're blissfully unaware of.
Don't be under the illusion that permie and contractor engagement are anything alike. A permie gets a wage and you get that because the nice people have done your tax for you, a contractor's business gets a day-rate which starts off with VAT and gets taxed progressively - there's no free money in contracting.
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