Foolish Umbrella companies
Umbrella companies can't screw over contractors and consultants. Only HMRC can.
Conservative MPs David Davis, Sir Iain Duncan Smith, and Andrew Rosindell have put forward amendments to the UK's 2021 Finance Bill in a bid to rein in umbrella companies said to be skimming off earnings from contractors and holding back holiday pay. This week, the UK Government was urged to introduce legislation to clamp down …
"New IR35 rules introduced last month require medium and large employers to assess whether contractors meet HMRC's definition of self-employment."
No. Absolutely not. Companies have to assess whether they meet the LEGAL definition of self-employment. This is why HMRC keep getting beaten in Court. Last time I checked, over the last 10 years for the 4 million companies liable for assessment, there were 16 court cases, 2 were won by HMRC, 2 were split decision. HMRC LOST 75% of the cases. So the legal viewpoint is very different to HMRCs.
Currently the legal definition is different to HMRC and HMRCs CEST tool, described by the Lords Committee as 'unfit for purpose'. HMRC say everyone is in IR35, hand over your cash. The legal definition is if there is no mutuality of obligation (ie pretty much all IT contractors) then the contract LEGALLY is outside of IR35.
Qoute " umbrella companies will be allowed to operate providing workers have no material interest in the company"
So, this looks like an attempt to hand the business to the large Umbrella corporations, i.e. their mates.
Welcome to the wonderful world of NHS Locums everyone, interesting nobody stood up for them when all these rules about no PSC's were introduced 3 years ago after the bollocks in the press about them being overpaid.
Other things to watch out for from Umbrella companies at the time were, only rebating the Income Tax on Allowable Expenses, presumably trousering the rest.
"non-compliance in the umbrella sector is reportedly rife and ranges from difficult to spot aggressive tax avoidance schemes to self-proclaimed 'compliant' firms "
So, not surprisingly, a clumsy attempt by HMRC to curb a relatively minor but perfectly legal tax avoidance mechanism has spawned a set of massive and overtly unlawful ones. The law of unintended consequences strikes again, causing yet further damage to an essential sector of our economy. And I still find it completely unreasonable that a contractor under IR35, while deemed an employee and paid net of personal tax on all income must still account for VAT if their "income" exceeds the threshold. Find me a real employee that's subject to VAT and I'll recommend you for a medal the size of a soup plate.
The entire IR35 framework should be scrapped, and individual cases of tax fiddling identified and dealt with case by case instead. It's not as if HMRC didn't have the data from which to identify fiddles (although in my experience they don't seem to be fully capable of understanding the tax returns submitted, or, apparently even doing arithmetic).
I've just been hit for 8ks worth of Corporation Tax on 'profits' after paying my wage. Pardon me if I didn't decide to pay some dividends after forking that out. That's not tax avoidance, that's EXACTLY how the system is set up and works. And I pay FULL Corporation Tax and I don't get to undertake minimising tax like...
1. Facebook’s UK tax bill totalling just 0.62% of revenue (just one-hundreth of the rate for a Microbusiness under IR35)
2. Amazon, (with a revenue of £8.7billion) paid UK tax of £4.5M.
3. In 2017, Ocado (with a revenue of £1.4 billion) claimed a profit of £1 million and paid no UK tax.
4. In 2017, Royal Mail (with a revenue of £10.1 billion) claimed a profit of £212 million yet received tax credits of £93 million.
5. 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.
"That's not tax avoidance,"
You're absolutely right - it's not. But because a small proportion of the contracting profession did try to avoid tax (albeit perfectly legally) by paying themselves the minimum wage and taking the rest as dividend, the entire profession is blackballed by HMRC. And incidentally Private Eye recently reported that the big 4 consultancies are avoiding employers' NI by classing their directors as self employed, and HMRC doesn't seem to mind.
The big boys you cite get away with it purely because they're so wealthy they could drain HMRC's resources with appeals if challenged. The small folks get hammered purely because they can't fight back - just the same way protection rackets work. Pity we have a government that thinks that's legitimate.
Wow talk about over-complicating things.
Here is the US if you are a "true" contractor, you are paid directly by the customer and guess who pays the taxes YOU DO! Including the 7% employer portion of Social Security.
If you are paid by an Agency, you are an employee just like any other. The agency withholds the taxes and remits to the Government.
I will repeat what I always say. You do not pay corporation tax. Your company does. If you want the benefit of limited liability a company provides the. You must except you are not the same legal entity. Company money is only yours when you either claim dividends or sell up you part of the company.
" ... attempt by HMRC to curb a relatively minor but perfectly legal tax avoidance mechanism ... "
In days of yore there was tax evasion (illegal) and tax avoidance (legal). Tax avoidance was acceptable, almost compulsory, to reduce tax. It seems that HMG and HMRC are successfully blurring the distinction. They should not get away with it.
"and tax all income (including dividends) as income?"
Is that including or excluding the 19% (increasing up to potentially 25%) corporation tax ?
Being a limited company use to be a mechanism where you accepted a greater risk of being out of work and so sacrificed all the employment rights & benefits that go along with it for a larger £££ per day. HMRC have done all they can to remove that £££ gap without balancing the employment rights and benefits.
If all income were taxed the same then there'd be no benefit in paying yourself in dividends instead of a wage because whichever you chose you'd be taxed the same. So you'd take all the money out of the company as a wage, make no profit and therfore pay no corporation tax.
Canning NI and including it in income tax would be good, IMHO and get rid of a lot of the tax avoidance around agency and zero hours staff. I don't think any government of any colour will ever do it for two reasons.
Firstly, it's much easier to increase NI than income tax because the public associates NI with NHS and pensions and so looks on such increases more favourably.
Secondly, the UK looks like a low tax regime with minimum rates of income tax and capital gains of ~20%. Lumping NI into these tax rates would up minimum income tax rate to 32.5% and capital gains would have to go up too - although the actual rate isn't that easy to compute.
I have a suspicion that dividends are taxed at a lower rate, not because "it benefits the economy by fostering investment" or some such similar nonsense, but because dividends are largely the perquisite of the wealthy and influential that can exercise clout over governments.
I too can not see why all income should not be taxed identically. I've been told tax law currently occupies in the order of a million pages. Simplification would seem a good idea, but the problem (as always) is that you get rich by being greedy, and once you're rich you have the opportunity to influence tax law in your favour, while the less well off can't.
And BTW the fundamental problem with scrapping NI is that the resulting visibility of the real rate of income tax (necessarily incorporating the NI amount) would lead to riots.
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No, dividends are not company expenses. They're paid out of profits remaining after corporation tax has been deducted. Trying to treat them as expenses will cause a lot of trouble.
See the gov.uk website or search for "dividends corporation tax".
The entire system and how work and employment is thought of needs to be revised.
Why shouldn't each and every individual have the right to decide whether they want to ne an employee or sell their services/labour as an independent provider of that work or service?
The main reasons for things like IR35 and similar rules designed by HMRC and before them the Inland Revenue are because they are terrified someone is saving a couple of pennies and it means the HMRC has to work a bit harder, surely thay is what WE pay them for.
Maybe there is room also for a total rethink on how to tax and produce fair contributions from contractors and self employed persons.
For an independent contractor avoiding NI (12%) and whose employer is avoiding employee NI (13.8%) then the treasury is losing 25% of the gross salary up to about £60k . That's not pennies.
You could make valid arguments about where that "loss" sits in the system and whether or not the treasury is recouping some or all of it another bit of the tax system, but, as others in this discussion have noted, therein lies the problem - the tax system as it relates to income for individuals and companies is too complicated.
No, because you pay Corporation Tax on dividends (as well as income tax) which fluctuates around the 20% mark (currently 19%) so in the grand scheme of things it is pennies.
If you're a contractor believe me you feel like you're paying tax all end up, mainly because you are.
Ah! Now that the UK is free of it's Euroshackles it can charge and abolish VAT.
Introduced in 1973, the old purchase tax( a wartime introduction to discourage spending on non essentials IIRC) was replaced by VAT and administered by HMC&E was more draconian than the Inland Revenue.
I wonder what could replace it?
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Annual pay £120k + VAT (low for a contractor).
Limited company paying minimum wage (40 hours/52 weeks) and dividends:
£1,190.76 income tax on wage
£20k on dodgy expenses because you can.
19% Corporate Tax on the remaining 81467.2 is £15478.77.
Dividend payment available is 65988.43
Tax on that is complicated.
0% * £2000 = 0
7.5% * £31737.2 = £2380.29
32.5% * £34251.23 = £11131.65
Total money handed to Government is thus £31,257.25
Total money kept by the contractor is a healthy £88k plus change.
Now let's look at the poor sod working for an umbrella company.
Total pay £120k + VAT.
Umbrella Company fee: £20 * 52 = £1040
£16,416.48 Employer's NI
£28,445.81 Income Tax
£5,929.71 National Insurance
Total handed to the Government is thus £50,792.
Total money kept by the contractor is a measly £68k. Over £20k less than the guy exploiting the system.
In the grand scheme of things £20k is not pennies.
"The main reasons for things like IR35 and similar rules designed by HMRC...."
I rather think the main reason is that HMRC staff are salaried employees. That's the way of working they understand. They prefer PAYE - a tax system designed by employees for employees. Anything else is foreign to them and hence automatically suspect.
I ran a PSC for years & found it simple enough, just track expenses etc & send to accountant, pay myself & pay whoever needed to be paid as advised by accountant, with mostly minimal stress or hassles.
Some years later, I found one of my co-workers arguing with his Umbrella Company via phone about how & when he was likely to receive his pay & other issues. I asked him about his UC, setup, how much it cost etc & once done commented that sounds more stressful & convoluted than simply paying my accountants 55 quid a month & sending them the paperwork.
Meanwhile, last week's BBC File on Four and website had this item on mini-umbrellas, focusing on 48,000 UK MUCs that now each have directors in the Philippines and are likely each using the £4000 Employment Allowance to avoid paying employer's NIC. Presumably there'll be plenty more with directors in other countries. The companies are created using a UK director recruited money-mule style, but those directors resign once it's formed and registered with HMRC.
Mind you, this report wasn't about IT professionals. It began with people recruited to work on G4S COVD-19 testing sites, each recruit discovering they were being paid by a different company none of them had ever heard of.
It really is like putting lipstick on a pig.
IR35 itself is the problem,or if you want to be less generous, HMRCs bone-headed handling of IR35 is the problem.
IR35 could, perhaps, work - but only if HMRC were capable of accurately stating who the law says falls within it.
Companies being wary of contractors doesn't stem from IR35 so much as the liability inherent in a system where HMRC suddenly decides anyone with a dog falls under IR35 and pops up demanding money with threat of menaces.
The mess they've created - with money grabbing umbrellas - was entirely predictable.
The only way to fix it is to either fix HMRC or scrap IR35. The latter being easier.
I understand where you are coming from but as others have said this is the case of a few (and from the complaints, it is not just a few) have gamed the system to the point that something had to be done. Everyone will have a view on what could have been done but as I have said before, if IR35 is so bad financially for the people that fall under it's scope, it does rather suggest that what went on before was not necessarily resulting in an appropriate overall tax contribution.
It is the same for those who were impacted by Covid and eligible furlough who were self employed in some guise yet because of the way they had arranged their company/income/accounts, meant that they had no realistic income.
> this is the case of a few (and from the complaints, it is not just a few) have gamed the system to the point that something had to be done
Oh, undoubtedly. But, it's that "something must be done" that lies at the heart of so many Government screw-ups. The focus is on being seen to do something, rather than on *how* to do it, resulting in massive, massive screw ups.
IR35 is exactly one of those things. It demonstrably wasn't working properly when applied to contractors employed by the public sector, but they plowed on with private sector implementation regardless.
> if IR35 is so bad financially for the people that fall under it's scope, it does rather suggest that what went on before was not necessarily resulting in an appropriate overall tax contribution.
IR35 isn't great for people who fall under it's scope, but that's not the real problem with it IMO.
The _real_ problem is the uncertainty.
You can read what the law says, and decide that your contractors clearly don't fall under IR35. Except, HRMC will use their own inconsistent standards to assess it and decide that they do - at which point they'll pop up demanding payment and threatening legal action. That they've lost the majority of cases they've dragged to court doesn't appear to have dissuaded them much either.
What it means is that having contractors outside of IR35 is viewed as a massive potential legal liability - are they far enough outside that even HMRC won't view them as falling within it?
> It is the same for those who were impacted by Covid and eligible furlough who were self employed in some guise yet because of the way they had arranged their company/income/accounts, meant that they had no realistic income
Yep, but I think there's an element of "don't blame the player, blame the game" here.
That our tax-code contains so many legal loopholes isn't the fault of those who use them - hell, some of them probably didn't even fully know they were using (if you pay your accountant to set things up in the most tax-efficient manner (s)he is going to do just that).
Ultimately, our entire system needs an overhaul, but that won't happen because some of those same loopholes are used by friends of those with the power to effect change.
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