Hated contractor tax might disappear IR35 – the tax on one-person service companies – might be revoked by upcoming changes to UK tax law. The quango tasked with advising Chancellor George Osborne said it was difficult to know what to do about IR35 because of a lack of solid data. The Office of Taxation Simplification (OTS) said there was no reliable data. HMRC …
IR35 was yet another - prejudiced, ill conceived, ill planned and ill executed policy to drag more money out of legitimate company directors rather than intelligently close any perceived "loophole*". The previous Labour government should be held accountable for this rediculous cost/benefits ratio, and the minsters responsible held personally accountable for refunding any costs that the company directors have lost due to the litany of farcical and protracted court hearings that have ensued in its wake.
That, or I'd settle for Dawn Primarolo being publicly flogged until she admits that she is nothing more than a failed, subservient lapdog.
* - Bearing in mind that to HMRC, a "loophole" is any scenario where they have not yet devised a method to gauge more money out of the populace. Rather than fixing a genuine hole in existing tax policy.
Here we go, more bleating on about contractors avoiding paying tax.
Try being out of work for 2 months between roles, and see how your finances fare. Consider that 'fair reward for fair risk" think about anyone who's self employed. Consider having to manage your own pension and health insurance needs. Consider the flexibility of a contractor workforce, and how many companies would struggle if they had to recruit and keep huge teams of permies fed and watered just to cover short-term needs.
Different strokes for different folks: but knock it off with all the old overpaid bollocks as it's just not true. In my experience the costs to a company of a contractor and a permanent employee doing similar jobs is probably similar, if not slightly cheaper towards the contractor who doesn't come with all the HR overhead and soft benefits packages.
@NogginTheNog
You might call it "fair reward for fair risk", but as a contractor your reward comes from the people who you work for. As a "permie" (for now), my reward comes from the people who I work for.
It is up to you to set your fees to offer fair reward, just as it is up to me to talk to me boss if I want a raise.
If you're out of work for 2 months between roles, you're not taxed for any income you make in that period, so what is the problem? Tax is calculated on annual earnings after all.
No-one's saying you're rich and should be taxed heavily -- we're saying that you should be taxed *just* *the* *same* *as* *us*.
So we're meant to feel sorry for anyone who is hit by IR35? Cry me a river.
Your 'one man companies' aren't companies in any real sense - they are just a mechanism for you to receive a salary over a short period of time. It's only right hat you pay any tax due, especially as you still take home much more of your pay than permanent employees, IR35 or not.
I'm not speaking from ignorance - I was a contractor for a few years. The everyday tax dodging and greed, legal as it might be, was sickening. I got out of it because it just felt wrong, and yet the number of contractors who somehow felt put-upon was amazing. These are people who are legally receiving something like 80% of their gross income of more than 100k. No sympathy.
I suppose I'll get some thumbs-down on this from contractors. A lot of them have a somewhat warped sense of worth.
Yes, I downvoted you, though I'm a permie myself. I'm no idiot, I know the difference between a high hourly rate and what income can end up as by the time you take all the non-billable hours out of a month.
IR35 was never ever about curbing the excesses, it was simply about milking people. The fact that innocent people got caught up in it was irrelevant as long as those at the top got their pound of flesh. Notice how they attacked those at the bottom of the food chain who weren't able to fight back - but did nothing about the billions of tax avoided by their chums in big businesses.
IR35 was treating the symptoms, not the cause.
You say you got out because it was sickening. I don't know how to read that - there are several ways it could be taken.
Note also that IR35 didn't just hit those it was aimed at - if it did then I don't think there'd be that many campaigning against it. It also hit honest people who were paying a fair level of taxation - some of whom ended up with all the disadvantages of contracting (you'll be familiar with them, no paid holidays, no paid sick, no paid time off for training, no job security, no guarantee of a means to pay the biils at the end of the month, ...); while at the same time paying the same tax as an employee getting all of those.
If we're "worth" that little why do companies make use of our services so often.
Plus, you had to be ltd company when I started as there were no umbrella companies to speak of and no company/agenct would take on a person on a self-employed basis. They wanted the protection that ltd company status gave their business.
For a start, no contractor takes home 80% of their salary. The best we can hope for is to just pay the income tax at 20/25/40% and hopefully very little employee NI and no employer NI.
The main reason IR35 is hated is because it forces us to pay a whole bunch of EMPLOYERS NI on top of the EMPLOYEEs NI that permies have to pay. So us contractors end up paying MORE NI than permies do. For permies, the EMPLOYERS NI is paid by your employer, funnily enough.
Personally, I don't have a problem with paying employees NI but I don't see why I should pay employers NI on top of that. It's bloody expensive and is designed to be paid by large corporations, not individuals.
And by the looks of it, I'm one of a vanishingly small percentage of contractors who DOES pay IR35 tax. And yes I have been investigated by the Revenue, and that made me glad I paid what I should have, I've heard from friends that when the Rev catches you dodging IR35, you are in for a rather large NI bill, with interest.
I agree that contractors paying themselves dividends to avoid NI completely is wrong, but IR35 moves the ball too far into the other court, so we end up paying more than permies. And considering the risks we take in being temporary staff trying to support families and homes, I think that takes the mick. We should be on a par with permies, and that's that. A good, balanced regime is what's needed.
" The main reason IR35 is hated is because it forces us to pay a whole bunch of EMPLOYERS NI on top of the EMPLOYEEs NI that permies have to pay. So us contractors end up paying MORE NI than permies do. For permies, the EMPLOYERS NI is paid by your employer, funnily enough.
<snip>
IR35 moves the ball too far into the other court, so we end up paying more than permies. "
I think you may have missed the point of contractor rates.
Contractor rates are higher than "permie" salaries because the contracting party doesn't have to pay for overheads such as bench time, holiday, sick leave and (drum roll) employer's NI contributions.
So paying more than "permies" is a natural consequence of being paid more than permies.
I'm on the verge of giving up the "permie" lifestyle and setting up my own limited company, and I'll try to duck any charging I can, but I'll not kid myself that I'm paying the same as permanent employees when I'm not.
I have known contractors who have worked exclusively for the same company for a very long time (20 years in one case), and they really should be classed as employees for tax purposes.
But probably very few of them became contractors with the express aim of finding a permanent job then fiddling the tax system. Most likely they got in with a company, had their contract extended, didn't see any reason to go looking elsewhere, and time drifted by.
That is the problem - exactly when does a genuine contractor become a de facto employee. HMRC have pushed the limit back a bit to far.
This is especially true when other, better paid, sectors are doing exactly the same thing, arguably in a premeditated way, and getting away scot free.
HMRC rules state that if you work for a single company for over 2 years, then they're going to start looking at you. If someone has been working for the same company for 20 years, then his local tax office is very lax, or he has been supplementing his work with employment by other people to regain his claim to be "independent"
"HMRC rules state that if you work for a single company for over 2 years, then they're going to start looking at you."
Can you point me to where this "rule" is? HMRC have no idea who I've worked for over the last 5 years... all they see are the numbers from my Ltd Co. I could've worked for a single client for all they know.
I contracted for 7 years with HMRC (well hmce which then merged to become hmrc whilst I was there), oddly enough they never had a problem with me being there. But generally every other 6 months extension I was working in a different town and on a very different product. And a lot of the time also from my own office.
Duration etc is all not of the essence, how you operate during that time makes all the difference.
20 years, yes. This was some time ago, and the sort of thing which probably brought about IR 35.
I don't have any gripe with contractors. Their hourly rate reflects the lack of job security, benefits and protections which permanent employees get. If they are lucky enough (and useful enough) to get a contract which lasts for years, fair play. They will be the first ones to go, without redundancy compensation, in a down turn.
Charge whatever you can get. But as soon as you become a de facto employee, you should pay the same tax as everyone else.
>I suppose I'll get some thumbs-down on this from contractors. A lot of them have a somewhat warped sense of worth.
Yawn. I'm worth what companies are prepared to pay me. 80% is a ridiculous margin, I have lower costs than most and see maybe 60% at best.
Higher daily rates reflect higher risks - and unlike employees in the UK, if I'm not meeting output its much easier to show me the door.
It's all about avoiding taxes in the end - I worked in the US for a small UK company at one time and our US based company would regularly receive invoices for "management services" and payments for "management services" every quarter as the UK company "adjusted" its tax position to ensure that they made no taxable profits. Needless to say, everyone in the UK company management was a "contractor"...
IR35 wouldn't exist if tax fiddling wasn't so rampant in small companies and contractors.
AC obviously.
I managed to get out of contracting before the rules were tightened around 2007 ish. Though to be honest my last 'contract' wasn't through an agency nor was there a contract. A local authority asked me to quote and then I supplied the work. So I probably would've escaped IR35.
After today's pile I might consider going back to being my own boss, we'll await what Osborne does for us. Probably it'll end up being relaxed for old etonians only.
"The true impact of the tax is hard to judge because many contractors now work through umbrella companies rather than their own limited companies."
Should read:
"The true impact of the tax is that many contractors now work through umbrella companies rather than their own limited companies."
And not just by Dominic T. To quote from the article : "It stopped one-man service companies paying themselves low wages, with limited National Insurance payments, but stonking share dividends, which do not attract NI payments."
The choice of whether to pay yourself dividends or salary (if you're the owner of a limited company) is unaffected by IR35 (and doesn't deliver the benefits that Dominic seems to think*). IR35 was intended to prevent people who are 'really' (in the eyes of HMRC, anyway) employees from masquerading as a company. If all (or most) of your earnings as a contractor come from a single source, then (under IR35) the Revenue can treat you as an employee and tax both you and your 'employer' accordingly.
* You can't simply set yourself up as a company and pay 20% tax on earnings of 100k. First, the company will pay ~20% corporation tax. Any dividends are then payable free of basic rate tax (as is the case for any dividends from shares that you may own) but are *still* liable to higher rate tax. So at the end of the process, unless there are other shareholders who can take a dividend and have no earnings that would take them above the higher rate threshold (e.g. a non-working spouse) you've saved a few percent in NI, but lost most of the benefits that it is intended (I know, I know, it's not hypothecated) to deliver such as unemployment benefit, retirement pension etc.
One significant difference between being an employee and being self-employed (whether via Schedule D or setting up a limited company) is that you can offset expenses against earnings, so items such as travel to the office are paid out of gross income. Now, in most European countries (France and Germany, not sure about others) ordinary employees can also offset travel costs. So your season ticket in France (which will cost << half what it does in the UK, to begin with) is paid for out of gross income. If employees want to complain about the unfairness of the tax system, I reckon this would be a good place to start (and it would encourage the use of public transport, and so tick the 'green' box as well).
You pay yourself a salary of £6545, which attracts a small amount of NI. That gives you your NI related benefits, and also uses up your tax free personal allowance. If you have a non-working husband, wife, civil partner etc, you can also pay them a salary of £6545. You then pay corporation tax at 21% on the remaining profits up to £300k.
You can then pay dividends tax free up to the top of the basic rate band for you and any spouse. If you wish to pay money into a pension, you can do so, and that is a deduction from your profits for corporation tax purposes, but you have to pay tax on your pension when you receive it.
Once you get into the higher rate, you have to pay tax on any dividends on top of the corporation tax, and that works out about the same as tax and employee NI on a salary, but you still save the employer's NI.
You can leave surplus money in the company bank account and only pay corporation tax, not income tax on dividends, and then draw it out as a dividend in a later year when your income is lower.
Back a while when La Vache a Fer, ( maggie ) to most of you, took power a mole in the tax office passed a letter, to the tax inspectors from the government, to leave our friends alone ( the big boys in the city ) and go after the little people instead.
I dont think there has been any change in policy for the last 25+ years do you???
The author doesn't appear to understand what IR35 is or what it was supposed to achieve, the rest of the article then follows on from that lack of understanding;
"The law, much hated by IT contractors, was passed in 1999. It stopped one-man service companies paying themselves low wages, with limited National Insurance payments, but stonking share dividends, which do not attract NI payments."
It certainly doesn't stop you paying yourself a minimum salary and large dividend, which is exactly what most contractors do. What it is supposed to do, is stop you being a hidden employ who does that.
So long as you genuinely are self employed then it has no bearing on how you pay yourself at all.
"The law, much hated by all contractors, meant that all new contracts needed to have their wording changed such that the contractor fell outside of IR35. It was an utter waste of time and any additional tax take was far less than the cost of obtaining it. Contractors still paid themselves minimum wage and took the extras as dividends."
"It stopped one-man service companies paying themselves low wages, with limited National Insurance payments, but stonking share dividends, which do not attract NI payments."
Way to mischaracterize the entire debate. That's not what IR35 did at all.
What IR35 tried to prevent was people doing the above *while effectively being in full-time employment*. IR35 looked at the contract between you and your client and tried to infer whether or not it was in practice an employment contract. If it was, you got seriously fucked over, and had to pay NI on your entire *revenues* (so, those flights and hotels you bought and expensed to the client - you're paying NI on that, sonny).
It was a glorious piece of FUD, in that some saps actually pre-empted the possible investigation and coughed to the extra NI. That'll be the 30,000 idiots mentioned in the article.
Meanwhile anyone who changed clients every few months, and wrote their contracts carefully, was safe as houses. These people continued to pay zero NI (not "limited" - if your salary is the right amount you pay no NI at all; I haven't paid NI since 2005, and it still counts as if I had).
Come on, guys! At least get the story straight! Companies using contractors would themselves be liable for the back-tax, if IR35 was applied. IR35 doesn't just hit the contractor.
Contractors pay corporation tax, as well as cost of company administration, assets that have to be written down over five years (in IT???), and holidays that are self-funded. Yeah, real cosy...NOT!
Corporation tax and admin costs are part of running a company. A consequence of owning the company you work for is that, in a loose sense, you are funding your own holidays. That is all part of being a contractor.
Do you think you should pay no tax at all, and that somebody else should pay for your time off?
These are the exact reasons I decided NOT to be a contractor. If you don't like it, get a job.
There are two side to the IR 35 argument, but general bleating about how hard it is being a contractor doesn't add anything.
The main reason given for the tax being suggested was to stop the 'Friday to Monday' scenarios where a large business encourages staff to go contract so they avoided employer responsibilities and pay the ex employee a fraction of the savings. So the IR35 tax attacked the employees?
Some contractors also had the audacity to use the perfectly legal EBT's a variation of legal tax avoidance schemes used by most multinationals. Where you set up an office with one person and a fax machine in a tax haven / low tax country and lend the UK company large amounts equal to taxable earnings, these are paid back with the taxable earnings resulting in minimal UK tax.
Both were completely legal and were tricks driven by large multinationals.
The FUD surrounding 'tax cheating contractors' is carefully crafted out of suggesting they are equivalent to employees. They aren't, legally or morally.
If you set up a window cleaning business then you pay the tax the same way a contractor does.
If you are a company of 20 employees with 100% of your business with one customer then you pay the same amount.
If you are an outsourcing company shipping in cheap staff abusing ICT and inserting them like the end customers staff then you pay the same amount of tax. Actually you probably won't as you are likely to pay your staff below the market rate and load them with excessive charges for benefits such as accommodation and cycling so they don't pay UK tax. But the employees are happy because despite working 100 hour weeks they are earning the equivalent of a rock star in their home countries. Whilst driving down UK salaries & rates.
part 1.
OK so the tax is the same or less than any other similar legal entity would pay. So its not 'FAIR' that contractors pay less tax than someone sitting next to them.
1. Anyone who is not an employee in a business is likely to pay less tax, be they visiting foreign consultants, directors or contractors. This is due to tax variations between countries and incentives given to business owners to create jobs so that HMRC can tax the employees to pay for more tax inspectors.
2. The risk associated with being in business is higher than being an employee (I have been both).
If you fail to deliver on time as an employee then your boss gives you a good talking to it is unlikely they will fire you for fear of being sued.
If you fail to deliver as a business then you can be terminated immediately without being paid or pay financial penalties.
If someone trips over your briefcase its very unlikely you will get sued, a business may well be.
If you can't pay your tax on time HMRC will arrange a payment scheme, they will wind a company up then go after the directors house if a business doesn't pay even if they are wrong.
3. Some contractors actually become employers. I work with two on a daily basis. Is it worthwhile sacrificing some tax (<13%) to create 10 more jobs that pay significantly more tax?
I nearly became an employer myself whilst I was a contractor. I was substituting other contractors on a regular basis and once confident I had a supportable revenue stream I would have hired someone. I know of many more contractors turned businesses that are paying significant tax bills. I pay less tax as an employee than I did as a contractor, I also take home less so spend less in the UK!
But the key thing that annoys most contractors about this tax is that isn't clear cut.
How do you tell if you are caught?
Is it if number of clients > 1 in twelve months?
Or is it if revenue of each client over X years > 80% total sales to all clients?
Is it if you have employees?
That was the basis of Australian version and it works.
No the reality is if in the opinion of a tax inspector you 'look' like an employee. If they do think this then they pursue you until you give in or fight too hard. Whether you look like an employee is something they are spectacularly bad at working out as they repeatedly lose when tested at the commissioners or professional tax lawyers get involved.
Of course if in the 1 in 100 chance you are found IR35 caught when tested properly and therefore look like an employee legally its highly unlikely your 'Employer' will stump up for holidays or sickness or let you join their pension scheme. They aren't legally required to do so. Temporary employees paid by Agencies now get these benefits, contractors don't.
If you are caught not only do you pay more tax than an employee in real terms, valid expenses will have to come out of your post tax income, think about that as you go on employer funded training and enjoy the buffet or stay in a nice hotel and hammer the expense account! - I do.
But that hasn't stopped HMRC chasing people without a shred of proof or people deciding to join Umbrellas and pay >20% extra for certainty.
So it is an unfair tax because its a woolly tax, how would you like it if in the 'OPINION' of an HMRC person they feel you need to pay £100,000 more on your PAYE. When you go to an accountant who does your tax returns for help and he says 'sorry its a grey area get a lawyer'.
Obviously its unlikely they will win but they don't award costs so the business may well go bust. HMRC seem to be wasting your tax contributions out of spite.
Its so bad one tax tribunal was held in a contractors front room because after a heart attack he was too ill to attend HMRC's offices. Surprised they didn't bring Bananas!
If HMRC think it is a valid tax then they should publish a full account of tax take, success rate where professionally contested and the costs expended pursuing it. A flow chart that shows how it can be applied logically without grey areas would be nice too.
if IR35 must exist make it a calculation not an opinion, don't stifle real business growth and let it reflect the risks involved in running a business. If it were and the Government stopped flooding the market with cheap imports I would consider going back to contracting and maybe create some jobs that pay more UK tax.
I don't worry too much about IR35, I have always paid myself a reasonable wage rather than the absolute minimum and I therefore pay a little more tax and NI than the "hated contractors" but I'll be honest here, that extra payment I make is "insurance" for if I was ever investigated... I would argue that I do absolutely nothing different as a one man band than Accenture do as a PLC exept of course I probably pay far more tax in real terms than Accenture do. I'd like to make it clear that I'm not picking on Accenture, simply that I was a permie with Accenture and I now do exactly the same kind of work directly as a contractor as I used to do as a member of Accenture Services.
My major complaint is that IR35 isn't specific enough to catch the people it was allegedly meant to catch, perhaps if it had been linked to the 2 year rule and you contracted only to one end customer then that would be specific and would seem logical and workable, I for one won't mourn the passing of IR35... so just the S660 rules to worry about next ;-)
Its a comment section, they want opinions, pity you don't seem to have one.
Really simple for Dodo.
IR35=Bad tax because it isn't exact or enforceable.
If you are permanent and you are jealous how much tax business pays then start one and give up your job.
Extra - Primarolo is a muppet!
I always thought IR35 had another purpose - to spoil relationships between employers and contractors, with the uncertainty around employer liability pushing companies into bed with consultancies like Cap Gemini and Capita (very rarely to their benefit either). I currently have 2 agencies between myself and my main employer, no doubt to make sure they're in no way exposed to any tax liability or employment rights claim I might have on them.
The funny thing is that I believe IR35 and it's unintended consequences are one of the reasons the government's had so many problems delivering IT projects in the last 15 years. If a single contractor's underperforming then they get the heave-ho but if a consultancy's underperforming then the procurer suddenly finds out why the consultancy has more lawyers than software engineers and what project Hell really feels like. That and they utterly lack the competence to manage projects within the civil service. Of course, there are contract project managers for that too...
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