This was always the aim
then the large consultancies could push their lesser skilled people at twice the price of freelancers.
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 …
They also have the ability to use proper tax avoidance structures, so they can move the profits out of the taxman reach.
When you look at recent umbrella frauds - HMRC already lost more money than IR35 change was in theory supposed to bring (4bn loss on umbrella tax fraud vs 3bn in alleged contractor tax avoidance (never proven))
I don't even think about inside-IR35 contracts any more. All the tax liability is on the client now instead of me. I'll worry about the drop in pay if I ever get desperate and there are no outside-IR35 contracts around. I quit the contract I was on when the client decided my contract (and all the others there) was inside IR35. Time for all those who got moved inside to be brave and look around.
This is not entirely correct - there is an uncharted territory when the client says they made a mistake at the end of your contract and say that it has been inside IR35 all along and then demand that your company pays money back that were supposed to be sent to HMRC.
Equally that’s slightly wrong.
An SDS determination can be changed from outside to inside but that can only occur prior to the end client making the first payment.
How do I know the exact rules, because I triple checked with HMRC until they actually documented the above.
You are talking about a happy path, but the rules are so badly written it's not clear what would happen in that scenario.
HMRC is going quite out of their way to have it as ambiguous as possible. For example they say if the client got SDS wrong, the client or fee payer are responsible for making the deductions, but they don't say they become responsible for paying the worker's tax (as in paying for it out of their own pocket). This means the client or fee payer could very much chase these payments (and often in the contract be it in or out of scope there would be a clause covering that) and claim they made payments to your company in error.
If you look at Loan Charge debacle - ultimately it is the worker HMRC is chasing, not the umbrellas or other intermediaries.
I think the spirit of the law is that you don't get to have someone else covering your tax.
Oh HMRC are very clear in who should pay the bill when it goes wrong.
I've called HMRC's IR35 helpline as the "feepayer" to ask that exact question and the answer was pass the bill to the worker.
Now that's utterly wrong but it's going to require a court case or 5 to get a proper answer.
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.
But this isn't true though, is it?
They do pay income tax like every one else. There is no such thing as being taxed on "lower corporate rates".
There was a tax advantage for working this way, but it was closed in 2017 where Dividend Tax has been adjusted so that when business paid worker low salary + dividend, it very much was equal to PAYE.
People used low salary + dividend, not because of tax implications, but because it suited freelancing better. PAYE is not designed for freelancing (it creates tax code mess and eventually you pay more tax than you should, because HMRC can't calculate it properly and then you have to go through hassle of getting tax refunds).
IR35 is, and always was, about recovering lost National Insurance.
While it is true that the minimal PAYE and Corporation Tax is very close to the rate of Income Tax that would be paid, the NI loss, which when you consider is something like 25% up to about £36,000 once you take into account both employers and employees NI (and at least 15% above this) is quite a significant amount.
Contractors conveniently overlook this when they talk about tax, and I've always been upset about it, as I was a contractor, and am now a contractor working through an umbrella (and have been for many years).
It does not matter how you dress it up, there were financial benefits working through your own company.
Many moons ago, when I ran my own company, I used to pay myself the money I needed to live on through PAYE, paying the appropriate income tax and NI. My contractor friends thought I was mad, but I feel that I was just being ethical and responsible. After all I was still taking home more that I would have been as a permie.
But what successive governments have done is effectively destroyed this way of working, by taking away pretty much all of the financial benefits and allowable expenses (another thing that is not part of IR35, but still erodes what made it possible). It would not surprise me if it were near impossible to find a specialist IT contractor willing to do more than 6 months or so on a contract, and also be unwilling to work any distance away from home unless it really was an outside IR35 contract or the rate is significantly higher than it used to be.
IR35 was always about hitting, preferably closing small companies to the benefit of the large consultancies, some of which advise HMRC. HMRC do everything they can to make it difficult for small companies, from IR35 to making Tax Digital.
This Country wants our skills and our taxes but not the hassle.
That's not entirely correct, and I'd argue not correct at all.
The combination of Dividend Tax, Corporation Tax and Income Tax is more or less equal to PAYE that includes Employee's NI.
Since NI is not hypothecated and if there is a shortage of NI, it can be topped from Income Tax and conversely, if there is not enough Income Tax, it can be topped up from the NI bucket.
This means the Income and NI divide is already very much meaningless.
What HMRC perceived as missing was Employers' NI. But since the client is not an employer, this NI was never due.
HMRC couldn't prove that worker was a disguised employee in most cases.
Now businesses caught by IR35 pay tax on revenue and both employer's and employee's NI without getting benefits of neither.
This is a crazy tax regime where the small guy pays fortune while giants like Amazon pay peanuts.
It would not surprise me if it were near impossible to find a specialist IT contractor willing to do more than 6 months or so on a contract
The length of a contract is irrelevant from IR35 perspective. It's all about risk aversion of the client, and declaring contract in-scope is the only 100% way to avoid getting a penalty.
They are a long way from "more or less the same"
An example from t'internet - couple of years old but I'm about to go to the pub so didn't have time to find something more current and they make the point.
If you paid yourself a salary of £8.6k (NI threshold) and a £30k dividend then you'd pay about £1860 tax
If you took £38.6k as salary you'd pay £5,220 tax + £3,596 in NICs. The company would save £5700 corp tax on the £30k salary but pay £4135 NICs. Total tax+NIC= £7251.
£1.8k vs £7.3k are a long way from being more or less the same.
The main problem is the way that NI and income tax are treated differently. I'd bin NI and have single tax and I'd tax dividends a the same rate as income*. This would remove any benefit from the dividend model. The problem is that UK gov likes to boast that it's a low tax economy with a 20% base rate and 19% corp tax rate when in fact the base rate for income tax is really 32% and corp tax is higher when NICs are included. It's also easier for the gov put NI up because we all love the NHS and we assume that's where it's going even though, as you point out, it's not really hypothecated.
Happy weekend - I'm off to the pub.
*As long as there aren't nasty side effects like Brown discovered when he buggered pensions.
The problem with your numbers is that the dividend has to be paid out of profits, which have had corporation tax applied to them, so the same £5700 that you're saving in scenario 2 needs adding to your £1860 from scenario 1, taking you up to £7560
That puts them back into more or less the same ball-park
That's correct. People tend to forget the fact that dividend comes from profits and company pays corporation tax on that.
The myth that you pay less tax this way usually comes from people who just started contracting and they are used to the fact that the money they get paid is already after tax. When they get their first invoice paid, no tax is deducted at source. So they would boast to their friends about how they pay no tax etc. Then the perception quickly changes when it comes to pay Self Assessment and later on the Corporation Tax. If they didn't set money aside, there is crying and frantic searching for often substantial sums that need to be paid to the taxman. But they rather won't their friends that, so the myth perpetuates...
*As long as there aren't nasty side effects like Brown discovered when he buggered pensions.
One problem with integrating NI with income tax is indeed pensions. Money paid into a pension scheme is paid before tax is deducted but after NI has been taken. By adding NI to income tax pensioners would therefore pay NI twice, once on the way in and again on the way out, something they might find objectionable.
There are a lot of pensioners and every one of them has a vote, something which will not have escaped the attention of politicians.
"What HMRC perceived as missing was Employers' NI. But since the client is not an employer, this NI was never due."
The freelancer's company was their employer and paid employer's NI. The payment a freelancer receives has to cover employer's NI as well as employees - just one of the little details permies overlook when trying to make comparisons. I doubt HMRC perceived it as missing, given that they' been collecting it for years.
It was before my time but I understand that the use of companies was a response to IR discouraging sole traders where that might have been a concern but sole trading was replaced by the freelance company way before IR35.
Nope the use of limited companies has nothing to do with HMRC - It goes back to the 1977 Agencies Act that banned agencies from employing workers on a self-employed basis.
Very quickly afterwards limited companies started to be used to provide the 3rd party required between the agency and the worker
I thought it was all about liability (to the agency); by getting contractors to be Ltd's the agency significantly reduced their contractual risk exposure and could also be all sloppy shouldered about tax liabilities.
In some respects, it is hardly surprising the agencies have again played fast-and-loose and off-shored umbrella companies, to the detriment of HMRC.
"IR35 is, and always was, about recovering lost National Insurance."
That's true as far as it goes, but the legislation was NOT introduced originally to target individuals, it was designed to stop companies doing exactly what the BBC have been found to do, chucking people off payroll to save the NIC costs (amongst other things like pension costs, which were not mandatory back when IR35 was introduced)
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The way it was presented was to prevent evil companies doing that to poor downtrodden employees, not well-paid media types.
Actually one of the classic precedents was quite an old one that of an actress who was ruled to be self-employed by virtue of the gig nature of that profession. I don't know for sure how HMRC worked their way round that one; it may be that the Beeb insisted on some sort of exclusive service contract.
IR35 didn't change any tax rules for people who weren't engaged in criminal tax evasion. Everyone who is a real contractor remains unaffected. The tax fraudsters pretending to be contractors moan a lot, but IR35 has actually achieved exactly what was intended and stopped them evading taxes by lying about their employment status.
Well my current contract started as psc but then was moved to IR35 - the main client did this for every contractor.
So I just shifted over (it did help that this contract pays 50% more than the old one) even so it is almost easier I get paid and don’t have to worry about invoices etc.
Some may say I am slightly odd but when working via the psc I took a salary that covered my day to day living costs without tapping into the rest of the funds rather than a minimum wage rate.
I am not saying it is a good thing but it does work for me.
In another story about umbrella companies (linked in this one), the primary interest group engaged in lobbying against umbrellas seems to be ... unions.
It's the same on this side of the pond. Whether it's contracting engineers, tech workers or independant Uber drivers, the underlying motivation to shut all this down is to push workers into positions that fall under our NLRA (National Labor Relations Act) authority. So they can 'organize' and vote themselves some nice, fat union dues.
Although the problems are always stated in terms of revenue lost to various gov't programs, the truth is that it's always something. Until everyone joins a union shop.
Interesting thing is that workers in scope of IR35 are not subject to employment law. This means Unions in this scenario are pretty much irrelevant.
Government gave big corporations probably the greatest union busting tool. All they have to do is to terminate their workers employment and get them to sign in-scope contracts.
This pretty much can send the unions packing...
As we hear about fire and rehire schemes being invoked Unions started waking up, but it's quite a bit too late :-)
Not only is my new contract with a large computer supplier dependent on me working via an umbrella, but they insist on fitting an agency in-between who they are giving a 4% cut of the money. I suppose that's one way to make sure Michael keeps his hands squeaky clean in the eyes of HMRC.
It's only just now (IME) starting to even out, I've been seeing the most ridiculous inside IR35 classifications in the name of playing it safe over the last 6 months. Apparently creating a new desktop image with applications and a new GPO and AD structure to go with it is a job an employee could do these days, so too Office 365 migrations or on-prem to cloud server migrations.
Even the boots on the ground aspect of a desktop refresh is being considered inside IR35 by a lot of firms, and I've heard of at least one case of a contractor taking a role to keep some cash coming in and then being moved to do the image creation at the same rate as the guys putting PCs on desks because inside IR35 roles don't have a definied scope. Needless to say he quit in disgust.
Well all of those tasks could be performed by an employee, just like all tasks being performed by contractors; the issue is about how the task is packaged up and contracted for and whether HMRC (after the event) agrees with the arrangements...
Personally, I don't do simple T&M, I always do defined workpackage-based work, which may be on a T&M basis but will have agreed deliverables and milestones.
The art is learning how to respond to clients who will treat you like an employee eg. while you are here can you look at this...
True, I should have given examples of the Statements of Work I am seeing which is things like "Consultant required for desktop refresh project". The wording there would lead to an outside indication (yes, that's very high-level and there are a myriad of other factors to consider to get to the actual determination).
The one good thing (IME) about the changes when I was working in the private sector, is I found instances of "while you are here you can look at this" were cut by 90%. It was more a general conversation about things, and if it was clear that it was something I knew about then it would be added to the contract scope before I did any actual work on it.
> I should have given examples of the Statements of Work I am seeing which is things like "Consultant required for desktop refresh project".
Understand what you mean. I've found it useful to cultivate a relationship with HR who (as permanent staff) should better placed to assist departments on an on-going basis with the scoping and drafting of outside IR35 SoW's (although I can offer the services of my HR associates ...). Given the example, the first piece of Consultancy I would quote for would be the drawing up of a SoW for the desktop refresh project, mandating the involvement of HR experts with IR35 awareness in the process.
But even then, I can see some being so in fear of HMRC, they will still deem a piece of IT-related work to be inside IR35, even though they have no problems engaging cleaners outside of IR35.
The thing is the SoW do not protect the client from a potential fine. If HMRC is going to think that SoW have been created as a mean to avoid tax, then they will not accept it.
It's actually down to whether the client wants the work to be done by you personally or your company (and by that it means by anyone your company would provide). If the service provided is personal then in HMRC mind it is in scope, regardless if it has SoW or not.
If the client does not want to bother with any assessments, they can just fetter substitution clause, to ensure the service is delivered personally by yourself. They may also designate where the work has to be done and specify hours to make sure. It does not matter whether you are running a genuine business or not, the contractor's individual circumstances do not matter at all.
This is what HMRC and Treasury have been lying about.
The so called appeal process also does not work in practice. If the client wants to have these specific clauses in the contract, there is no way that you can make the client to change them if they don't want to be potentially liable. They can just not sign the contract and look for somebody else.
>It's actually down to whether the client wants the work to be done by you personally or your company (and by that it means by anyone your company would provide). If the service provided is personal then in HMRC mind it is in scope...
Interestingly, from my experience over several decades, that still largely applies to contracts with the big integrators, the only advantage the big boys have is a warm feeling that they have the reserves to resolve any delivery problems that may arise...
The permi receives about 30% in untaxed benefits through sick and holiday effectively reclaiming back all the tax they paid. The contractor pays roughly the same tax as a permi with some expenses possible. Now its only fair according to HMRC that the Brolly worker gets stung for an extra 30% tax liability with zero benefits.
Www.tenaka.net/ir35 has a full comparison.
It's often omitted, that when employer buys tools for employee to use, they can deduct them from tax. If you are buying the tools and you are in-scope, then you have no way to deduct any of those.
In theory you can ask the client (deemed employer) to provide you with all tools necessary, as if they were providing the to an employee, but there is no legal obligation for them to do so.
So you end up paying for everything out of your deemed salary (even day to day business things like paying accountant, your own office, insurance) and running your business into debt.
Security of employment, e.g. being employed as a Civil Servant by HMRC, is also a substantial untaxed benefit in kind. An MP with security from only one election to the next would have much less security and a minister, at the whim of the PM even less again and possibly even less than a contractor.
Lower overall tax rates paid for by taxing these benefits should be able to get buy in from Parliament and ministers as they would gain accordingly. I'm surprised HMRC haven't suggested it as it would, at a stroke, get rid of the disparities and ensure everyone pays the right amount of tax.
I was trying to think of a public service or government initiative that actually worked for the benefit of the populaous or, insome cases, worked at all. You won't be surprised to learn that I couldn't think of a single one. Yet people still support them and Johnson is popular, I beging ro see why conmen are so successful......
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