IR35 is the biggest threat to the contractor working model, survey finds

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 …

[Aristotles slow and dimwitted horse]

I'm a contractor, but...

There are still loads of contracts out there, and it just means that a fair few will now need to go through Umbrella companies and such like. IR35 is not really an existential threat to contracting as a way of working per se.

For my own part, I remain a contractor for the sole reason that it gives me a lot more control as to how and when I work, and so I don't have to do office politics or jump through internal "objective based" hoops just to keep my job.

[AMBxx]

Re: I'm a contractor, but...

I normally work for multiple companies and very independently, so not directly affected by IR35. My concern is in being caught in the cross-fire. I've already had one public sector customer announce that they think I'm within IR35 even though I do less than a week per year for them, very much on an ad-hoc basis. Once challenged, they realised the mistake, but how many organisations are being put of by the daft new laws?

[elsergiovolador]

Re: I'm a contractor, but...

I normally work for multiple companies and very independently, so not directly affected by IR35.

This is not really an indication of self-employment. You can be employed by multiple companies and given autonomy.

[unimaginative]

Re: I'm a contractor, but...

It is not proof,but it is an indication.Multiple companies, a limited amount of time working for each, not being supervised are all evidence of being self employed.

[elsergiovolador]

Re: I'm a contractor, but...

Again, no matter how much would you like it to be true, it has no bearing whether someone is considered self-employed or not. You can be employed at multiple companies at the same time e.g. part time and working without supervision at each. Here is a mind twister - you can also be employed and self-employed at the same time!

What matters the most from the IR35 point of view is whether you are hired to do work personally or whether the client has hired your business and therefore anyone qualified at your business can perform the job (substitution) - with a few limited exceptions.

It completely does not matter if you have your own office, accountant, website, multiple clients or use your own tools from IR35 perspective. It matters how the client wants the relationship to be and to place contract in scope, to avoid HMRC scrutiny, they just need to ensure that they have a right to reject a substitute and may add few bits for a good measure like specifying hours of work.

[AMBxx]

Re: I'm a contractor, but...

If it helps to end a boring argument, I subcontract work too.

[Roland6]

Re: I'm a contractor, but...

>I normally work for multiple companies and very independently, so not directly affected by IR35.

Irrelevant to IR35; IR35 applies to individual contracts - you can have concurrent inside and outside contracts...

[elsergiovolador]

Re: I'm a contractor, but...

It depends on your area of expertise. After changes most clients insist on working in-scope because that way they completely avoid the risk of HMRC looking into it.

There are outside contracts here and there, but because it is so few of them you will have much longer downtime between them. This means several weeks of downtime often offsets the loses from in-scope contracts that are available pretty much immediately.

IR35 is not really an existential threat to contracting as a way of working per se.

I remember few folks saying that. They kept their out of scope status when their colleagues either quit or gone in-scope. It was an ego boosting moment, but didn't last long. Their contract ended and the plenty of "outside contracts" turned out to be bait and switch. After burning through their war chest they are now in-scope or found employment.

[Dr. Mouse]

Re: I'm a contractor, but...

Personally, I have had no problem at all finding outside IR35 contracts, nor have I needed to lower my rate expectations. Sure, there have been a lot of agents and companies approaching me with inside contacts, but I only have to make it clear that I'm not interested and they leave me alone.

I am worried about the possibility of bait and switch, but I haven't seen any myself as yet. Also, as I make it very clear that inside roles will not interest me in the slightest and would instantly turn down and walk away from a no-rights staff position, I think I'm at less risk than some.

That said, this contrasts strongly with my father's experience. He contracts in a very different field, and cannot find any outside roles anymore. So I guess it varies.

[Anonymous Coward]

£300bn annually to the economy?

That's the biggest load of crap I've heard this year.

[Spoonsinger]

Re: £300bn annually to the economy?

I don't know? With inflation the pound isn't really worth as much anymore.

[Why Not?]

Re: £300bn annually to the economy?

1.5 million - 2M UK contractors, a reasonable developer nowadays can get £500 a day = £125K. Senior Finance and business management contractors would expect £500-£1k a day = £250k. I have talked to senior management consultants that charge £10k a day, where do you think the money goes during insolvency?

Not entirely unlikely. Add the Agents cut 20% and other bits and bobs £300 billion seems almost reasonable. £200 billion is probably a better guess. Though many contractors have multiple clients and charge different rates for each.

90% of them not paying the "right amount of tax" i.e. 20% less than they should be= laughable.

[Velv]

Re: £300bn annually to the economy?

IT Contractors UK had this to say on the subject:

There are approximately 2 million self-employed professionals working in the UK. Out of which, approximately 1.77 million working as full-time contractors and about 234,000 working on a self-employed basis as their second job.

Number of self-employed professionals in the UK has increased by 43% approximately. The overall contribution to the UK economy by freelancing professionals is around £119 billion.

I think that's a more believable number. I would point out however that these 1.77 million people are not all about to stop working and the revenue will continue if they go permanent, so to say "worth £300billion to the economy" is bullshit.

[Why Not?]

Re: £300bn annually to the economy?

See its all made up like IR35.

1. I paid more tax overall because I turned over twice as much as my permie salary. I even spent it in the UK unlike my future employers.

2. Many of my peers started up companies using their contractor returns. Some even employ other people. I just sub contracted other people and paid them.

3. As using an Umbrella or an accountant doesn't actually protect you when accounts they file are incorrect many just file minimum accounts when IR35 caught 5% of turnover is easy to calculate. So caught probably won't go Umbrella.

4.No PL etc insurance purchased by an employee.

etc

[elsergiovolador]

Re: £300bn annually to the economy?

Re 3. The 5% thing no longer exists.

[Why Not?]

Re: £300bn annually to the economy?

oh blimey HMRC took that as well?

[Warm Braw]

Not just a UK issue

How to deal with people who don't have a "traditional" full-time job seems to be something that other governments struggle with too and it's interesting to observe their different motivations. In the UK the focus seems to be on the recovery of tax from the contractor and there is seeming indifference to the lack of employment rights that results. In Portugal, the motivation seems to be to prevent temporary contractors undercutting full-time employees and undermining their rights. One consequence is that if at the end of the year it transpires you've made more than 80% of your income from one client, that client gets lumbered with a social security contribution on your behalf; there are also significant restrictions on temporary and part-time contracts.

I'd be interested to know if there are examples of good practice. There seems to be an increasing desire for at least a proportion of people to work more flexibly and it's something employment law/taxation ought to be able to accommodate rather than view as problematic.

[AMBxx]

Re: Not just a UK issue

That 80% sounds good in theory, but how is the customer to know they're going to be hit? Just going to make the market less flexible as companies worry about being liable.

I don't know the solution, but would be interesting to see what other countries are doing.

[Why Not?]

Re: Not just a UK issue

That sounds like the Australian rules. The 80% from one customer (related companies count as one) triggers a determination and the worker pays extra tax.

Easy solution get multiple customers. Under Australian rules I would have definitely escape IR35 via this. I got to about 30% from other companies.

However there are 3 initial questions you can pass and not need the 80%.

Is payment only received after the work is completed?

Does the contractor’s business need to provide tools and equipment?

Is the contractor required to correct mistakes and defects at their own cost?

answer no and the 80% rule kicks in.

then there is another series of questions do you have a business premises, employees, unrelated clients or advertise.

Credit CUK for detail.

Key thing these are are objective tick boxes that the contractor can prove not some HMRC wonk making it up as they go along - e.g. if it walks likes a duck I don't know "rhymes with Duck"

[DevOpsTimothyC]

Re: Not just a UK issue

Most IT contracts are still based around time and materials (have a day rate) rather than a delivery cost. If you're billing by the day and regularly charging 5 days a week then there is a high probability. Rather than 80% perhaps a more generic if the client is billed by the day, or if they are billed more than a certain number of days in the year.

[Stork]

Re: Not just a UK issue

The customer only knows it too late, I can tell from experience.

We, that’s the company we then had, had a brickie plus helper working for 5 or 6 weeks (AFAIR), all billed. We paid, and much, much later came a letter from Social Security that they wanted another 30% on top. Obviously because all his other work was black.

Nothing to do but pay up, but we didn’t give him any more work

[elsergiovolador]

Re: Not just a UK issue

This is not a tax issue, but is being framed as such. The issue is that independent contractors are a pain in the backside to all those big consultancies.

A scenario I have seen many times is that a corporation would hire a team from a big consultancy and then a couple of independents to supervise them.

This means these consultancies had to put quality and expensive workers to given projects and often had work rejected.

The IR35 makes it more difficult to source such specialists.

HMRC was never able to prove there is large scale tax avoidance taking place. But when you single out particular group and then keep repeating they are tax dodgers, this creates anger in wider society that then gives ground to justify such legislation. Most people don't understand what essentially IR35 is - a revenue tax on service based small businesses.

If only they did similar campaign against corporations that actually avoid paying taxes.

The second issue is that because of self-employment big corporations are struggling to find talent. They are also lobbying governments (and through WEF) to limit people abilities to go independent.

You know, everyone should be working for a big corporation, that's the agenda (also in infamous WEF's Great Reset).

If you look at people working on IR35 at Treasury, you'll find some of them have great affinity to WEF and YGL.

[DevOpsTimothyC]

Re: Not just a UK issue

This means these consultancies had to put quality and expensive workers to given projects and often had work rejected.

Are you a sales person for one of these big consultancies? I'll agree that more often than not the workers will have a high cost to the end client but most big consultancies struggle with the quality because they often put workers in with very high markups.

[Why Not?]

Ah good job HMRC know the difference between their Arse & their elbow.

"HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023"

Hmm remind me again how much of the £6 billion COVID grants etc fraudulently claimed from HMRC that ended up in Organised crime hands should not have been paid out? Oh yes none of it!

Fraud of 8.7% by a conservative estimate is not as bad as those filthy contractors paying their hotel bills to work away before tax.

Hint for HMRC - the elbow is the bit that doesn't normally smell of poop!

Back when I was a contractor the fear was that HMRC would make up an imaginary figure then pursue you to bankruptcy unless you had legal representation, then they normally eventually lost the case. HMRC have a 35% win rate at court (last 20 years) and a thousand+ cases they didn't take to court. See CUK's figures.

Many people decided to become employees to avoid these risks, I for one pay less overall tax than I did then, earn less so contribute less to the local economy.

Many multinationals (the sort of clients I had) are incorporated abroad and due to transfer price manipulation and internal fees avoid paying corporation tax or buying products in the UK

"You don't actually think they spend $20,000 on a pound of coffee, $30,000 on image rights, do you?"

If you are caught by IR35 paying for your own training (in the UK) as I did is after tax so much for retraining the workforce.

[Ian Johnston]

I am shocked, shocked, to learn that tax dodgers object to attempts to clamp down on tax dodging. Coming next: what drunk drivers really think about breathalyzers.

[elsergiovolador]

It's remarkable how many people believe themselves to be intellectually superior for repeating what authority tells them.

It's also remarkable how school is structured to reward students for repeating what authority tells them.

[Anonymous Coward]

Contractors are not tax dodgers.

See contractors (proper ones) have to pay for extra bits and pieces to be able to their jobs. Like insurance, their own equipment, accountants, solicitors and so on which is tax deductable.

This is fair because a regular employee would not ordinarily have to supply / maintain their own kit, pay for insurance, lawyers, accountants etc. all of that is paid for by your employer...who also deducts it from tax...as well as your free tea/coffee, your laptop, stationary, electricity, phone bill etc etc...which is why you don't get to deduct it.

Anything that can reasonably be considered an "operating expense" is tax deductable because it is money spent before tax is calculated.

The amount of money an employee gets NET isn't that far off what a contractor will get NET. Only the gross is significantly different.

[elsergiovolador]

See contractors (proper ones) have to pay for extra bits and pieces to be able to their jobs. Like insurance, their own equipment, accountants, solicitors and so on which is tax deductable.

Not many people realise that "proper ones" also have to pay for insurance, equipment, accountants, solicitors etc. when they take a contract in-scope. In that case they have to pay tax on their revenue through a Fee Payer. It's farcical.

Many in that situation don't bother and just become employees of an umbrella.

[Anonymous Coward]

Yes, and thus fall under IR35.

[elaar]

"See contractors (proper ones) have to pay for extra bits and pieces to be able to their jobs. Like insurance, their own equipment, accountants, solicitors and so on which is tax deductable."

No one is questioning things that are legitimately tax deductable. It's more the private limited companies/umbrella companies, paid in dividends, and other overall dodgy tax avoidance measures that *some* people (not all) think are perfectly acceptable because they work on contracts rather than simply work for one organisation. It's just a different method of employment, which should have allowances but similarly not be open to tax avoidance.

[Graham Dawson]

Avoidance is not evasion. Avoidance is when you don't pay taxes that you don't owe. Evasion is when you fiddle your accounts to not pay taxes that you do owe. I will keep saying this every time this topic comes up until someone actually understands it.

Tax avoidance - not paying tax that you aren't required to pay - is not only legal, it's ethical and rational.

Look at it this way: you're walking down the street. You see a police officer at the other end of the street. You decide turn down an alley to go a different way.

If you did it because you're an asocial bastard who doesn't want to have to deal with people, you're avoiding.

If you did it because they just spotted you beating an old woman around the head for her purse, you're evading.

What you're doing, when you whine about tax avoidance, is conflating a legal and rational behaviour with the behaviour of a criminal. The unspoken accusation is that everyone who does the former is no different than everyone who does the latter.

[elsergiovolador]

Dividends are paid from a profit which then attracts Corporation Tax. Those screaming tax avoidance have sudden amnesia about that.

Contractors are paid dividends not because they avoid tax, but because PAYE is not fit for purpose for this type of work.

Small salary + dividend tax wise is very much the same as PAYE. The only beneficiary is the client who doesn't have to pay Employer's NI - and rightly so, because the engagement is not of employment nature.

HMRC constantly messes up tax codes and makes you pay tax based on assumptions that you must correct with accountant and hope for a swift tax refund.

People easily take in HMRC propaganda and lies and don't check facts.

[elsergiovolador]

One may ask - so if the tax is very much the same as PAYE then what's the fuss is about?

The problem is that you cannot deduct legitimate business costs - the IR35 is essentially a revenue tax. Biggest lie in that is that it claims that worker caught by IR35 pays the same tax as the employee - which is not exactly true.

Worker's employer when they buy tools, software, office space etc. for the worker to use, they can and do offset these costs against their tax. The employer also has to set aside money in the event that worker gets sick or issues happen like their client pulls out of a contract - the worker still has to be paid and the worker is not asked to cover these out of their salary after tax.

This is a huge difference and where unfairness lie and this is how HMRC and Treasury keep misleading people.

[martinusher]

> that tax dodgers object to attempts to clamp down on tax dodging

If you're a generic stiff working 40 hours a week on PAYE (or whatever its called these days) it may very well look like tax dodging.

The reality is that tax law isn't very clear and specific interpretation may be a matter of opinion. Big money tends to be the people who know most about this because they've got the budget and people to make arguing with the Revenue profitable. (For many others, its "Heads, we win. Tails, you lose")

[matjaggard]

Contractors are often tax dodgers - registering their work for a single company in a different way to pay less tax. Until IR35 that was tax avoidance, after it it's tax evasion.

Sadly the rules have been changed so badly that the whole system is suffering from not knowing what's in and what's out and the enforcement of those rules is somewhere between unlikely, difficult or impossible.

[Roland6]

From reports IR35 has spawned a whole new sector of tax avoidance - Umbrella Company operators; who (with HMRC consent) are able to srt up offshore arrangements and avoid paying UK tax. Reports are HMRC have lost more tax revenues from the Umbrella company operators doing this than they supposedly lost from UK resident contractors playing the tax system...

[Dave314159ggggdffsdds]

IR35 is about increased enforcement, not changed rules. It only affects fake contractors. Real contractors weren't pretending to be contractors in order to evade tax, and haven't had to change a thing.

The rest were always evading tax, and are lucky not to be facing criminal sanctions. They've roundly screwed things up for those of us who were sticking to the rules.

[Why Not?]

Define a 'real contractor' - HMRC can't.

[Anonymous Coward]

> "Define a 'real contractor' - HMRC can't."

No, but I think we all knew people who were contracting purely as a tax dodge. There was a time where people would go home from work one day and come back the next as if they were self employed.

There's an argument that they took the wrong route and should have removed the advantages of self employment instead, but that would have been just as complicated.

[Anonymous Coward]

Easy. A contractor has no responsibility over any company related decisions, doesnt have their own phone extension or desk, works for more than one firm and operates under their own insurance. They also don't have business cards with their name on for the company they "contract" for.

[Anonymous Coward]

Trouble is as a contract CTO things aren't as clear cut...

Also that "works for more than one firm" is debatable as in practice most contractors will only be under contract to one client at a time.

[Mike 137]

"The rest were always evading tax"

Such as was performed was avoidance not evasion, and avoidance is legitimate (i.e. perfectly legal). There is no obligation on anyone to pay more in tax than the law requires, and many perfectly honest folks seek (and use) numerous legal ways to reduce their tax liability.

The mechanism used (payment via a mixture of salary and dividend) is one of these, and is widely use by City magnates, and indeed by the "partners" of the big consultancies. But it seems that in those cases HMRC thinks it's OK. It's apparently only illegal if a sole director limited company does it, not if a megacorp does. One law for them, another for us. I have as a result a very strong suspicion that the big consultancies might have advocated IR35 in order to squeeze the competition.

What has emerged as a result of the rules is the opportunity for businesses to provide "zero rights employment"- a deal far worse than that afforded staff on PAYE contracts of service. Plus. it puts the contractor on a different footing with the client - becoming viewed subjectively as an 'employee' under orders.

[Anonymous Coward]

Re: "The rest were always evading tax"

> "Such as was performed was avoidance not evasion, and avoidance is legitimate (i.e. perfectly legal). There is no obligation on anyone to pay more in tax than the law requires, and many perfectly honest folks seek (and use) numerous legal ways to reduce their tax liability."

An interesting piece of sophistry there.

The difference between evasion and avoidance is only relevant when people are talking about the law, to call it evasion in normal language is perfectly reasonable.

Secondly, the law doesn't define the limits of morality. You can do all sorts of deeply immoral things without falling foul of the law and when those limits are pushed beyond what the government considers acceptable the law is changed. As happened here.

But the argument that something is acceptable just because it's not criminal is silly.

[Mike 137]

Re: "The rest were always evading tax"

"the argument that something is acceptable just because it's not criminal is silly"

The point you missed is that according to HMRC it's OK for some but not for others. When big consultancy "partners" and megacorp directors get paid in exactly the same manner as "personal service company" directors could do if outside IR35, HMRC doesn't object. "Personal service company" has no statutory definition in company law, but was invented by HMRC to define a category of business that gets poorer treatment under the law, but the law should apply to everyone equally. And if the law allows you to pay less tax, will you pay more tax regardless of the option?

[Strahd Ivarius]

So how many billions have been retrieved from Uber and other like companies?

[Why Not?]

Indeed real companies only pay 1% tax !

[Roland6]

>They've roundly screwed things up for those of us who were sticking to the rules.

If you've been sticking to "the (IR35) rules" and thus not a "fake contractor" then you won't have been screwed up...

[andrewmm]

An old timers views

Worked as a contractor since the 80's

mainly around Europe,

Even back in the 80's

the European accountants called the UK Ltd company system as "a joke",

But

In my opinion

The Ltd company system suited those "with money"

but in the 80's

plebs like myself used it to our advantage

and those with money moved to other tax avoidance techniques

So we got stamped on

One thing I can tell you is IR35 has put the rates in the UK up at last

they have been lagging behind for 15 years

[Peter D]

This pudding is over-egged

A contractor on £700 a day who operates under an umbrella and pays full employer's class 1 NIC can still sacrifice £91 a day in salary to put £24,500 a year into his pension with the taxman throwing in another £15,500 to meet the allowed maximum to take home £6,866 a month all clear and avoid the 45% bracket altogether. Cry me a river. Yes, I am such a contractor.

[Paper]

Weird system

Over here in Canada, if you contract and earn more than $30,000, you literally HAVE to register yourself as a business and claim your services as a business expense, and you're expected to charge sales tax to your customer from then on. Then you could leave it as business income and charge eligible items to the business (rent space, phone bills, internet, business lunches, new laptops, etc).

Why wouldn't the UK government encourage this?

[Graham Dawson]

Re: Weird system

Capita told them to eliminate the competition.