HMRC: UK techies' IR35 tax appeals could take years 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 …
Dumb question from a permie here: if you do work for a company and it comes within IR35, how do you know that the company has paid your income tax and NI for you? I mean really know, not just receive a piece of paper from their payroll system.
Do you get a receipt or notification from HMRC? Can you see it in your HMRC on-line account either under SA or under your company?
I ask because, presumably, in the event of a dispute with HMRC, a piece of paper from the company is worth precisely squat.
In terms of NI, log into HMRC's web site and check your NI record. In terms of income tax, same as a permie, you'll get a P60 (or P45). Either you use the figures in a self assessment (if you're getting other income as well) or it will do for HMRC (you'll need to tell them that you're not filing a self assessment).
In terms of the actual ££££ going from the client to HMRC? That's an issue between HMRC and the client. You have the paperwork to say it's been done.
And remember, the Inland Revenue may tell you that "you don't have to file self assessment", and fail to mention that if you're a higher rate tax payer it's how you reclaim the additional 20% credit on any pension contributions you do outside of payroll. Or the additional amount you could save on tax due to charity contributions.
They'd rather keep that money, evidently.
definitely not a dumb question.
happens with Umbrella Companies too. you never TRULY know if they are breaking the law or not until you get a knock from HMRC.
At the end of the day, if your accountant, umbrella company or the inside ir35 firm is screwing you, YOU are liable, which is really unfair as we're IT guys, not finance guys.
I got a nice loan charge bill because of this and the Umbrella Firm got away scott free.
this is why I'm hoping Private firms will see the same issues that public sector is and struggling to hire contractors who are willing to put themselves in that position. I know public sector is having to go to India or further to get people who are willing to work for such low perm wages because they suddenly can't get the staff.
> At the end of the day, if your accountant, umbrella company or the inside ir35 firm is screwing you, YOU are liable, which is really unfair as we're IT guys, not finance guys.
As the original AC, thanks for this answer and thanks also to DevOpsTimothyC . I've been in the same job so long I'd forgotten about P45s. :-) The P60 is only end of year. I don't really trust the P60 either because I had a problem with medical cover being correctly stated in my P60 but not taken into account by HMRC in my tax code. Their reply to my letter helpfully stated "Your employer should report it on your P60" - no shit sherlock, it was the first thing I checked.
I'm wondering whether an appropriate 'civil disobedience' campaign for IR35 is to get every contractor to send a letter to HMRC at the end of each contract asking them to confirm that the right amount of tax and NI has been deducted and if they don't reply within 28 days then that is taken as acceptance on their part?
I assume he had the payslips to show that he had received income net of PAYE and thus not liable.
As for nonpayment of NI, well, also not liable for these payments, however it will probably be in his interests to pay the minimum contribution (out of his net income) to have the year count towards his state pension.
This sort of nonpayment happens a lot when companies shutdown.
"if you do work for a company and it comes within IR35, how do you know that the company has paid your income tax and NI for you? I mean really know, not just receive a piece of paper from their payroll system."
Well, as a permie, how do you know that the company has paid your income tax and NI for you? I mean really know, not just receive a piece of paper from their payroll system?
Not a dumb question. As someone who was briefly CFO for a very small organisation, you use HMRC tools or something like Quickbooks (definitely not a recommendation!) to calculate their tax and NI, providing you’ve correctly identified their NI status (not so easy as you think). You then submit that electronically and pay what HMRC says you owe to them. Much the same for pension contributions. You should be able to ask to see this if you had a dispute.
Unless someone is planning on not being a contractor any longer, and probably not looking at perm work either, you would be insane to engage in legal action with the names mentioned or any of a similar size. Just look at how career limiting it has been for permies to take their employers to court over things like sexual harassment.
To have a hint at a fair trial the person or company initiating these sorts of claims should have their name suppressed otherwise damages should include "The amount I would receive over the rest of my career"
Here in the US I've never had my PSC contract directly with a client, I've always had to go through a contract house acting as a pass thru. When I consulted in Canada I went through THREE layers between my actual client and my PSC (one of which was in Bermuda which seems kind of shady, but my actual client was one of the largest banks in Canada so there probably was something shady going on...)
Here in the US this is done because big companies (I only ever consulted for Fortune 500 or similar sized clients) don't want to deal with thousands of single person corporations, so they have a very small approved list of companies (sometimes only one) they will contract services with. I think it also may have something to do with not wanting them to become "employees", but that was before my time I guess.
I'd arrange the details with the person I knew at the client, they'd pass me off to someone who knows the contracting stuff who could tell me who to contact about setting up the pass thru relationship with one of their approved contractors. Usually they'd end up taking $10 or $20 an hour. Which yes is way too high since they were purely acting as a pass thru, I'm dealing with my own social security (NI for you Brits) business liability insurance and the like, but that's what you get when you have only one or two options so there isn't much room for negotiation unless you have someone batting for you in the corporation - once I got them down to only $5 which left more for me!
My PSC operates the same way as if I was contracting directly, other than the cut the pass thru is taking and some added delay in getting paid. Not sure IR35 allows pass thrus as a way for the major corps to wash their hands of compliance or not.
Generally yes it operates that way in the UK. Typically the client will have a contract with an agency and then the agency will have a contract with the PSC often naming the consultant and always naming the end client.
At the bigger or smaller ends of the spectrum the client will run their own in house recruiters so will have direct contracts.
It gets "amusing" when the the agency isn't paying attention and the terms are no aligned. I'm been on contracts where I only need to provide 1 weeks notice yet the agency needed to provide 4 weeks to the client.
When HMRC thinks you did something wrong, they first take your money or lock your accounts, and then they talk. When HMRC screws up, they don't seem to care.
Their CEST tool has been proven to be a joke, and nothing's changed. They still use it as gospel.
IR35 is an abusive legislation designed to downright steal money from hard working people. They want us to pay taxes as if we're employed, but they don't care that we have none of the rights and benefits employees have.
Downright shameful.
And more than a little one-sided with that insert in the article dear Reg. How about stating how much HMRC spend on operating the legislation, vs how much tax they are recouping? It doesn't pay for itself. I speak as a Ltd company owner and ex-freelancer, and now an employee. I have so few of the risks I had, less flexibility for R&D equipment and learning, and pay a shit load of tax more than I used to. Having lived both lives, it is not fair to take PAYE and income tax from genuine contractors taking material risks, treating them as employees without giving them the benefits. How to kill a freelance sector - way to go HMRC. Meh.
What it needs is a way of getting compensation awarded from HMRC for lost income due to having to wait for the appeal to work its way through the system. That would speed things up a bit, if they ran the risk of having to give some of it back. Of course, the law is written to avoid that happening.
True. However back then, the contractor's company paid a minimal wage. That meant little or no tax and NI (employee and employer) was due. The bulk of the contractor's company dosh went to them as a pretend loan (no tax or NI due) or in dividends which got taxed at a far lower rate than payroll taxes.
Even today a contractor working through their own company can pretty much choose for themselves how much or how little tax they pay. That's what the contractors in our place tell me.
as a pretend loan
The contractors who did that closed their companies in bankruptcy and defaulted on their loans. That was always tax evasion and possibly fraud (they never intended to pay the money back). HMRC has been going after people who did that to pay all the taxes, ban then from being company directors, bad debt reports on credit records etc.
While some contracts may say they are self-employed, they say that because it's easier to explain to the vast bulk of people who don't understand how LTD's and taxation works when you're an owner and director of a small limited company.
The vast majority of contractors are Directors of their own PSC's. They typically receive a minimal salary with the rest of the money being paid through dividends. HMRC is getting somewhere between 19%-25% from the companies profits before dividends are paid and then you're taxed the same as anyone else filling out a self assessment, which these days means the tax you pay to HMRC is similar to what a permie pays + corporate tax.
Yes a contractor can redirect funds into their pension in the same way a permie can, and they can choose to leave funds in their limited company so their company will be an additional source of income like a pension. That's just deferring their tax for a few years
If they have to pay the same tax then they should get paid holiday, statutory sick pay, grievance procedures, proper HR policies to follow around termination.
Contractors get none of those.
That's the trade off - you either get paid more, or you get job security.
HMRC want to change that so contractors pay the same tax as the permanent employees, but without getting the same employment benefits.
Essentially, IR35 encourages all companies to make ALL roles contract ones. They still pay the same, they still have payroll to do and taxes to pay, they just don't have to worry about pesky employment legislation any more.
HMRC want to change that so contractors pay the same tax as the permanent employees, but without getting the same employment benefits.
Apart from checking nobody's paid below minimum wage, HMRC doesn't give a shit about employment benefits. That's a matter for DWP. Though they don't give a shit about them either - zero hours contracts and suchlike.
HMRC is trying to get contractors to pay tax that reflects their actual income. IR35 is a fucked up way of trying to achieve that. The problem is/was too many contractors and employers/clients taking the piss to avoid paying the tax and NI that should have been paid. There were and are other ways to sort out that piss taking. However HMRC chose IR35 and fucked up the enforcement of that fucked up scheme.
>HMRC is trying to get contractors to pay tax that reflects their actual income.
Delusional thinking.
With or without IR35, a UK registered company will pay all UK taxes HMRC demands for its level of income and expenditure. It in turn will pay its (UK-resident) employees in accordance with UK tax law.
So UK resident contractors working through a UK register company will already be paying the tax that reflects their actual income.
HMRC through IR35 effectively determines, for specific contracts, that all monies paid to a company are (for tax purposes) direct payments to the individual employee of that company. Note this determination take no account of the tax arrangements the company has with its employees.
Sorry to disabuse you, there is no legal way for a UK resident contractor working through a UK registered company to not pay the tax that reflects their actual income.
"Camouflaged employment" is under IR35 just a way for HMRC to deem certain business-to-business arrangements are actually employer-to-employee arrangements. Remember HMRC have not satisfactory explained how camouflaged employment by HMRC of personnel from their big SI partners is okay, yet exactly the same arrangement with an independent contractor isn't.
My accountant assures me that everything they do is in accordance with UK law as they understand it, hence the tax I pay does reflect my actual income; however, HMRC might choose to have a different interpretation and so ultimately it would be up to the courts to decide who's reading of the rules was correct.
I accept the tax I pay may be different to an employee, but it isn't my fault employees don't have the same accounting and tax freedoms.
"My accountant assures me that everything they do is in accordance with UK law as they understand it, hence the tax I pay does reflect my actual income"
Nope - it reflects what your accountant thinks is your actual income (in accordance with UK law of course). Which is not necessarily the same as the pre-tax cash that goes into your bank account.
"it isn't my fault employees don't have the same accounting and tax freedoms"
In other words, you can get away with paying less tax than you would as a permie who was earning the same money.
>In other words, you can get away with paying less tax than you would as a permie who was earning the same money.
You are aware that some permies pay less tax than other permies who are earning the same money?
Much depends on whether their employer is taxwise or not. (*1) But in general my P60 doesn't look significantly different to when I was a permie and I avoid like the plague umbrella arrangements, which just allow the agency to extract even more money from the contract and has created new ways for them to avoid paying UK tax.(*2)
You do realise there is no law that requires people to maximise the amount of tax they pay on their income, although there are some in HMRC who would prefer that to be the case.
(*1) A simple example, is your pension scheme contributory or non-contributory? If it is contributory then your employer and you are paying NI on those contributions deducted from salary. The laugh is that the employer has chosen to operate a contributory pension scheme and so pay more tax than they need to and thus saddle themselves with higher dead costs in their HR budget.
(*2) You may have noticed the absence of complaints about IR35 from the agencies...
A freelancer earns a higher day rate and is allowed under the rules to maximise returns, no rules are broken.
Permie employees cannot be bothered to go out and be freelance so they avoid earning more and then they hide it in pensions, so really permies are the ones who cheat the exchequer by not paying tax now so they can dump it in pensions for later.
I think you'll find it HMRC who are depriving contractors of employment rights. EVERY contractor I know has the same view. If you want to tax me as an employee then give me the same rights as any other employee.
Contracts knowingly agreed a business to business relationship with their clients transferring most of those responsibilities from the client to their own limited company. In exchange for a higher daily rate employment is shifted from the client to the contractors limited company. The contractors limited company is then on the hook for things like holiday and sick pay etc. The client's who agree to this are happy to pay that increased day rate. Much of the time it's what the company would be paying for an employee any way once you take into account holiday, sick pay, pension contributions etc.
HMRC is wanting to impose all the taxes of an employee into the business to business relationship without address any of the employment rights that were shifted. Go setup your own limited company, try contracting, then share informed opinions.
I (just a person) pay more tax than some people earn as salary, even through PSC.
If these multi-million dollar businesses employing thousands of contractors like me each of whom pay tax... well it's not rocket science is it.
The coffers at the treasury would be nicely filled.
The HMRC are trying to turn high-earning contractors (paying lots of tax) into lower-paid employees paying less tax.
It's easy to see how ...er... they are ...er.. increasing the treasury's take. .. ?
I'm not seeing anyone winning with this IR35 legislation, but the train's left the station now, so there's no listening to rational arguments.
Just shut up and pay tax.
The same people who argue like "same as everyone else" guy also like speed cameras.
(Don't get me started)
This statement exemplifies the error that HMRC have assiduously promoted. Freelancers under a contract for services don't have an employer - they have a client and have as a result no employment rights. Only those under a contract of service have an employer and have those rights. HMRC have chosen to ignore (or rather, override) this distinction, and the resulting utterly unreasonable position is not helped by the media perpetuating the error.
One of the fun offshoots of IR35 which not a lot of people talk about is lorry drivers. They were all IR35 working for multiple companies and now the older ones have all decided to just retire which has messed up our supply chains no end. I'm not taking anything away from the clusterfuck that is Brexit but when you combine the two you get a major shitshow. Not to worry though, Amazon and the rest still don't pay any tax so our politicians can sleep easy on their beds of donations and after dinner speeches when they retire on their comfy pensions.
How about inflation. 1997-2021 it was 68% according to BoE. (and that's quoted on the low side according to some others.)
Meanwhile wages have not gone up in line with that AND we are now hit with being inside IR35 as well.
So a job with a leading Insurance company in say "Norwich" via numerous Agencies was about £18.63/h in 1997, yet today its £22/h. It should be around £34/h with inflation. (In 2000 it was £200+ a day with BP and CISCO, 2012 it was the same with YAHOO and NEC/gov.uk)
The real cheek of it is on mobile jobs is they expect you to eat the first 50miles on your own before handing out a paltry £0.25/mile with your own vehicle. (thats £15+ a day pay cut these days.)
Personally I'm not bothering with IT anymore. Kicking cones down the road or spending all day with feet up on the dashboard with the music blaring out at roadworks or a gate closure at NMW (on a 12hr shift) outside IR35 pays more and is more fun (as i can play internet spaceships or other activity instead of dealing with ungrateful asshole clients.)
When pay rates go up for Deployment, Desktop Support/Field Support let me know.
(in the meantime, it might be me laughing at all you lot sitting there pulling your hair out in gridlocked traffic, trying to get your phone satnavs to tell you how to get out of the nightmare road layouts from all that eco-road widening/narrowing/cycle/bus/one way roadworks bullshit)
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