James Smith & Sons (est 1830)
...are no doubt pondering what shower of a government brought this in.
At the eleventh hour, UK government has detailed plans to regulate umbrella companies, some of which stand accused of dodgy dealings as their use grows among IT contractors after IR35 tax rule changes. Following an earlier announcement of a Single Enforcement Body to tackle modern slavery, enforce the minimum wage, and protect …
This is not necessary. The problem is one of Governments making. Contractors were unfairly victim of a change in tax regime such that they were forced to use umbrella companies. The situation was simple: contractors earned substantially more than employees doing the same job but whereas an employee got paid holidays, sick pay, training, job security, possibly very good pension. Those costs fell on the contractor, the change left them worse off than employees.
Reality is that many contractors are only needed for relatively short time to deploy their specialist expertise on a project. That expertise (especially in a fast moving field like IT) calls for a lot of cost, time and effort to keep up to date, more than many employers want to spend on an individual who might at any moment take their newly acquired skills to a better employer. The individuals expertise is no longer needed by the employer who then has dead-wood on their hands. What to do with that worker? Retrain in a completely different skill? Make redundant? And how does the employee feel about those options? Discard their hard earned expertise, possibly years of varied experiences developing an in-depth knowledge of their subject or go look for another job? And over 50, nobody believes that age-discrimination is not still widespread.
Their expertise is not always in high demand so a contractor may find himself unemployed for several months a year and needs a financial buffer to see him over the quiet periods, doubly so as that time and money will likely be spent on updating knowledge and skills.
From the blinkered perspective of HMRC those guys were not paying "their fair share" of income tax and NI while working while disregarding all the other factors. Another motivation was to force contractors to become employees to the benefit of government and large employers (IT depts in particular).
In practise those employers found many contractors quit their current task at the earliest opportunity causing immense damage to the UK economy. Some now need to outsource the whole project or suffer significant disruption from having to replace contractors frequently involving much effort on recruitment and initial drop in productivity as the new incumbent familiarises himself with the organisation and the task.
The initial HMRC aim (in about 1999) was that this should raise about £300m more Tax/NI, the evasive answers as to whether this was achieved suggest it was not.
There are other fields of employment where the situation is different, consider for example the building trades. An good electrician or plumber can operate as a one-person limited company just as IT contractors did in the past because his need for continual professional development is less and contract durations may be for a few days or weeks. If they have regular work for let's say, a building company, at the point that they risk falling foul or IR35, it's relatively easy to switch to a different building company. The skill set is relatively standard and from an employer perspective the change of individual worker is relatively simple, quick and inexpensive.
You are right that this was a problem of the government's own making. It seems to be the normal way of government in the UK:
1. Media publicises an issue
2. Knee-jerk political reaction to increased media coverage
3. Rushed sticking-plaster legislation
4. Unintended consequence
5. Rinse and repeat
IR35 was a massively unwieldy sledgehammer to crack a nut. A nut nevertheless; when I was a contractor in the 90s most associates paid themselves a pittance of a salary and took all their income as dividend to avoid paying National Insurance contributions. When IR35 was announced, that nut was already about to shrink considerably because the national minimum wage came in in 1999; assuming enforcement was planned it would have been harder to pay yourself ~£60 a week while billing the client for 35 hours. Why successive governments have remained wedded to IR35 is a mystery to me. There must be simpler solution, for example a punitive tax on dividends which exceed a threshold based on the salary bill of the company?
But likewise there appears to be a nut now: e.g. MUC scams utilising the £4000 Employment Allowance. Imagine you are a contract services company and you win a contract to supply 1000 short-term staff for, let's say, a 'track and trace' system, if you set up 100 unrelated mini umbrella companies with a Filipino sole director, employing 10 staff each, claim the Employment Allowance for each company, then you have basically made a cool additional profit of £400K (minus expenses) on the contract at the expense of the taxpayer, and as a bonus your 'employees' have no comeback against you (or indeed anyone) if they don't get paid, etc. I suspect that this revenue loss to HMRC is the issue that is prompting the latest knee-jerk...
There is a lot of misinformation about that if you are a contractor working inside IR35 then you must use an umbrella.
You can continue to work with your own company, but instead you need to have a so called Fee Payer that collects the tax before the deemed salary comes to your company.
Some umbrella companies offer that service.
Government departments are guilty of high levels of non-compliance with the UK's off-payroll tax regime, according to a report by MPs.
Difficulties meeting the IR35 rules, which apply to many IT contractors, in central government reflect poor implementation by Her Majesty's Revenue & Customs (HMRC) and other government bodies, the Public Accounts Committee (PAC) said.
"Central government is spending hundreds of millions of pounds to cover tax owed for individuals wrongly assessed as self-employed. Government departments and agencies owed, or expected to owe, HMRC £263 million in 2020–21 due to incorrect administration of the rules," the report said.
Britain's tax collection agency has released a survey whose results downplay the impact of IR35 tax reforms in the public sector, apparently showing those in the private sector that everything went swimmingly.
The study [PDF] commissioned by Her Majesty's Revenue & Customs (HMRC) in 2020 to look into the "longer-term" impact of the rule change for public servants, was supposed to be released just before it rolled out the reforms to the private sector.
The research showed that in the public sector, 24 per cent of contractors were classed as falling "inside" IR35, the anti-avoidance tax legislation. This means they will be taxed as employees, not as self employed contractors.
IT contractors who have faced blanket bans on employment via their personal services companies (PSCs) could face years trying to challenge the decision, according to officials from the UK's tax collector.
Speaking to members of parliament, Her Majesty's Revenue & Customs (HMRC) compliance director Nicole Newbury acknowledged that businesses implementing blanket bans on contracting PSCs could be found not to have complied with freelancer tax reforms, dubbed IR35, but challenging decisions could be a lengthy process.
The new rules, which place the burden of determining the tax status of freelancers on the employer, were brought into the public sector in 2017. They came into force for medium and large businesses in April 2021 following a report from the House of Lords, which said they were "riddled with problems, unfairnesses, unintended consequences."
UK IT contractors have been given no guidance on how to claw back tax erroneously taken by employers under IR35 rules, which already cost central government bodies £263m when they failed to correctly adhere to the guidelines.
According to a report from public spending watchdog the National Audit Office (NAO), the UK's tax collector has failed to clarify the controversial new rules which govern contractor's tax status, while there is no new legal framework to interpret the rules.
The IR35 reforms, which put the onus on the employer, rather than the contractor, for determining their employment status, were introduced in the public sector in 2017. Following a year's delay, they were introduced to large and medium-sized private sector businesses in April 2021.
The majority of contractors see the UK's IR35 changes to the way employment status is judged as the biggest threat to their business in 2022, according to recent research.
A survey of more than 1,200 contractors by IR35 insurance provider Qdos shows that 61 per cent see the rule changes as the "biggest threat" to the contracting business model, which is said to be worth more than £300bn annually to the economy, according to the IPSE, the contractors, consultants and interims association.
Qdos found this was more than 10 times the number of contractors most concerned about the impact of coronavirus (6 per cent) or Brexit (6 per cent). Incoming dividend tax increases (18 per cent) were earmarked as the second biggest threat, although only a third of folk surveyed were concerned about those changes.
A former worker for Pimlico Plumbers has won a case in the Court of Appeal over the right for backdated holiday pay in a case set to help employees of umbrella companies in all sectors, including information technology.
Gary Smith won the right to have paid holiday backdated following a ruling from the Civil Division of the Court of Appeal, which found that as an employee he had the right to paid leave and that right could be carried over.
Working for Pimlico Plumbers from August 2005 until May 2011, Smith had previously taken the company to court over his employment rights. An earlier ruling had concluded he was an employee and entitled to holiday pay.
Optionis, the group that includes umbrella and accountancy companies providing services to tech contractors, has confirmed that following last month's digital break-in customer data is being leaked online.
As we revealed mid-January, Parasol Group, which provides payroll services to freelancers, shut down its IT systems for an extended period to deal with a serious attack, thought by some to be ransomware. Parent Optionis Group later said that divisions SJD Accountancy and Nixon Williams were also hit.
In an email seen by us, Doug Crawford, CEO at Optionis, today thanked contractors for their "patience over the past few weeks." "The incident has now been contained and we have notified the police and relevant authorities," he continued.
Updated The UK government's own employment checker tool and guidance has led to wrong calls on the tax status of freelance workers, costing £120m across two Whitehall departments.
According to recently published financial reports, the Ministry of Justice and the Department for Environment, Food and Rural Affairs [PDF] are facing combined additional tax bills of at least £121m due to incorrectly determining the status of their contractors, despite following Her Majesty's Revenue & Customs' "accompanying guidance" and using HMRC's Check Employment Status for Tax (CEST) tool.
More than a third (35 per cent) of contractors in the UK have become permanent employees, retired, shifted to work overseas or are "simply not working" since IR35 tax legislation was revised earlier this year.
This is according to the Association of Independent Professionals (IPSE) which found 35 per cent fewer freelancers among those it surveyed since 6 April when the government pushed through the delayed reform.
"This research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic," said Andy Chamberlain, director of policy at IPSE. "Now, just when contractors are needed the most - amid mounting labour shortages across the UK and particularly in haulage - government decisions have drive out a third of the sector."
Updated Her Majesty's Courts & Tribunal Service has been forced to pay the UK taxman £12.5m due to incorrect assessments regarding the employment status of contractors under controversial IR35 rules.
Disclosed in the court service's annual report [PDF], the payments were a result of a challenge from Her Majesty's Revenue & Customs (HMRC) to the Ministry of Justice's handling of IR35 rules between 6 April 2017 and 5 April 2020, which had concluded workers were operating outside of the off-payroll working rules.
Under IR35, contractors, many of whom work in IT, that are "deemed employees" by HMRC need to pay income tax and National Insurance as though they are employees but are not entitled to benefits such as holiday or sick pay.
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