The exodus continues: Less than half of contractors expect to stick with their employment set-up after IR35 A survey of independent contractors shows only 45 per cent plan to stay with their chosen mode of employment after the introduction of the IR35 tax legislation in the UK private sector come April 2021. The study by IR35 tax advisors Qdos found that with less than six months until the reforms, many contractors, including IT …
The IR35 reforms are an appallingly thought out piece of legislation. One which has had a serious impact on contractors in financial services. When writing to my MP, they have shown absolutely no understanding: delaying the legislation by a year has merely prolonged the pain. If it is to be introduced (appalling as it is) then it should be done forthwith. To delay it merely extends the limbo. Moreover all companies I have contact with have unilaterally decided that all of their contractors are either to be terminated or re-employed within IR35 with a pay cut. The only option to any larger company if it is to take the risk of determining IR35 status is to "play it safe", to avoid a potential mis-determination, thus avoiding a potential future fine, which could be very large.
Hence in financial services the current IR35 legislation impacted it about 2 years ago. It was effectively considered a "fait accomplit" by those companies. Work done by those contractors that were lost has now moved abroad. We have lost an industry due to the short-sightedness of the Treasury. Thus the tax revenue will have largely gone. Also the impact of the trickle-down effect on the economy has been felt and will be further felt. The majority of those that remain as a contractor in financial services will has effectively taken a 30-40% pay cut (as they will have to pay tax, NI, will not get any paid leave (including statutory), no sick leave, no pension, no health insurance, nothing). As mentioned the loss of the trickle-down effect on the economy can only be speculated about because of the current impact of Brexit & COVID-19.
It’s well thought as as having the intended consequences.
Get your personal services company to run payroll like any other normal company and lay your wages this way.
Most of the basic Accounting Packages also have a payroll module - Quickbooks for example.
Skim your dividends money off in the same way you would it you owned shares and declare it via self assessment.
Murky going’s on substituting dividends in lieu of regular pay is what the whole drive is about.
Put some money aside for all of the other things you belly-ache about - hols, sickness, pension on your payroll etc.
"Skim your dividends money off in the same way you would it you owned shares and declare it via self assessment."
Er no - that's exactly what you can't do, in fact that's exactly what IR35 is designed to stop you doing. If the contract is within IR35 and you wish to operate through your own company you have to pay tax, ni and company ni on about 95% of what you charge the client.
@Neil
It not really that simple though, because the way that we are being forced to work is to go through an umbrella - we wont be able to keep our limited companies open so that avenue isnt open to us.
You say "Put some money aside for hols etc" but thats what we do, My holiday and sick pay buffer sits in the company account until its needed.
Let me illustrate with a quick (very simplified breakdown)
Assume that someone is on £350 a day outside IR35, for simplicity I'm leaving off VAT and Expenses
Outside IR35
Billed amount (Gross) : £7000
Corporation Tax : £1400
Wage (PAYE) : £1000 [1]
Dividend : £2000
Gross Take Home : £3000
Net Take Home[2] : £2800
Leaving £2600 in the company to cover pension payments, sick pay, holiday pay, Accountancy fees, insurance, and putting some aside for the potential (inevitable) downtime looking for new contracts which can be several months at a time especially at the moment.
Inside IR35
Company doesn't exist so no billed amount and CT
Net Take Home [3] : £3740
So by your logic a contractor should take the £940 a month difference and use this to cover their pension payments AND put some aside for time off for being sick/holidays and for periods of being out of contract?
Its just not going to stretch that far, once you've taken a pension payment out it its pretty much gone, so where does the holiday/sick pay come from? Where's the contingency for the end of the contract where we might not work for 4-6 (or more) weeks?
I get that from a permanent employees point of view the headline £350 a day, £7k a month seems excessive and the personal tax % may seem low, but lets remember that rate to your employer doesn't change under IR35 - they will be paying the same amount for the contract resource (Maybe more because there will be an umbrella company in there taking their cut), all that's really happening is that contractors will be treated like employees for Tax but not for Benefits and based on the numbers in this article, the tax take to the treasury goes down because more contractors move into permeant positions and don't pay as much ££ tax [4].
The proposed IR35 changes only make the government more money if most contractors suck it up and remain contracting inside IR35, but we know this isn't going to happen, a significant amount will go perm or retire, a good number will find roles still outside IR35 (As has happened in the public sector where event HMRC are advertising for outside IR35 roles). So where is the benefit?
[1] In real life it would be a little less than this, but the annual personal allowance / 12 is easier to work with.
[2] This is a rough estimate based on the current dividend tax rate, not 100% accurate but not a million miles off.
[3] Pulled out of an online contractor calculator that didn't give a tax breakdown.
[4] Based on a role paying £45k which is about average for a permanent developer where I live (based on limited data gleaned from recruiters emails and LinkedIn jobs) my Annual PAYE would be around £6500 a year with NI of around £4000 (Total £10,500). But as a contractor my CT this year was £12k and paid around £2500 in personal tax too, at the same time I supported a local accountancy business and an insurance firm.
I believe It is an option to keep your limited company open (though perhaps not with the company you are working for) you just have to make a declaration of earnings. You still have to raise your fees to the client but only by about half as much as through an umbrella company. You basically pay tax, NI and company NI on each contract that is inside IR35 by making a declaration.
This will be the case for many who have a number of clients, some of which may be outside IR35 and some of which may be inside.
All as I understand it last time I researched it a few weeks ago. It appears the 5% allowance may be going though.
"I believe It is an option to keep your limited company open"
Technically feasible, but I enquired about this while looking for a new role back in January and not one Recruiter or client was willing to take the risk preferring to use a "trusted" umbrella company instead, so technically possible but in practice its not likely to happen.
This is another issue for me, I do sporadic work for the NHS and a few local charities, its outside IR35 and totals a few k a year at most, its only profitable for me because my overheads are covered by my main contracting activities, if my main contracts go inside IR35 I'd either have to put the rates to the NHS up or stop doing the work for them because what they pay me currently would barely cover my insurance and accountancy fees.
"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."
Strange the courts & tribunals do not always agree with HMRC. Look forward to them disclosing how much the public sector IR35 has gathered.
You may have to wait for HMRC to release any figures - it's not the done thing to set policy based on actual data. Instead, vague threats and faith based policies are to be pursued.
This should be a real embarrassment for our Government, right at the time where agile support for new businesses, SMEs and greenfield projects are most needed.
In the Gov department I'm in contractors have been offered 2 year contracts on perm pay, I'm not sure there will be any take up for this.
The pay cut would be at least 30%-40% for the current contractors that are inside IR35, who have already taken a cut of 30-40%.
Meanwhile HMRC and the Home office are offering outside IR35 Roles on 650+ a day because they are struggling to get resources in.
This information from a friend who is a hiring managed in the home office and is trying to get me onboard at the moment.
Anon because I dont want to jeopardise my chances :)
@Anon
Thats the problem, there is no requirement for them to do this, some clients will put you inside IR35 and treat you as an employee with the associated benefits some will put you inside and treat you like a contractor.
If you get the former you are either lucky to have found a good client, or they not realised that they are not obligated to give contractors inside IR35 these benefits.
If they're on the hook for all of those, can't you also make the case that they should be paying the employer's NI contribution?
At which point you're an employee on a fixed term contract, rather than an external contractor contracting out your services. Which sounds reasonable.
As a developer who been directly affected by this I can say that there is an exodus to Europe and further afield of developers. Meanwhile, all the developer jobs are going to developers abroad now instead of local developers in this economy.
There is a misconception that developers do not pay tax, yes they do and this legislation has a double effect of losing tax and we will see this in the coming months.
Yes, also there are a good number of remote roles coming up offshore.
There are loads on the IoM (Not sure how that works for IR35) but there are also quite a few in Europe willing to allow you to work remotely from wherever you fancy.
I know a few contractors working for clients on mainland Europe outside IR35 who have not left their houses for the duration of their contracts, its the clients decision as to whether they are inside or outside IR35 and when asked the client said "Que?".
As a contractor I paid around 35K of VAT, 20K of corporation tax and around 6-10K of personal tax a year.
As a permie I now pay 41K of income tax, 5.5K of NI and my employer pays another 15K of NI
So the best HMRC is doing is breaking even. On average they're losing around 3-4K now that I'm a permie. Yes, I'm paying more income tax, but they've lost a stack of other tax. And they don't get to make me pay income tax on account as they have done for the past several years.
What's the end result? I earn 1.5K less a month, HMRC gets less tax and my employer lost a bit of flexibility. I'm honestly not sure if anyone has "won" here.
Exactly, though the numbers are different (<joke>you either earn more than me or I have a better accountant.</joke> ) but it works out similar for me.
Should I go back into a perm role HMRC will make less in tax than I pay in CT on average (That's without factoring in Personal Tax and VAT).
The thing to remember for everyone, is that it is VERY unlikley that a contractor will go into a perm role with a gross Salary anywhere near their gross contract rate.
As an example, where I live dev roles are around £45k-55k on average but contract roles at the same level gross £77k (Assuming £350p/d and 4 weeks holiday) so when most contractors go permie the % tax they pay goes up but the ££ goes down.
The only way for HMRC to win on this is for contractors to remain contracting but go inside IR35 and as the article shows this isn't happening on the scale that HMRC expected and once the dust settles the private sector will get its act together and do what the public sector did and start issuing more watertight outside IR35 contracts - You only have to go on the GOV gateway to see how many outside IR35 roles are being advertised now (Even working for HMRC themselves).
> As a contractor I paid around 35K of VAT, 20K of corporation tax and around 6-10K of personal tax a year.
> As a permie I now pay 41K of income tax, 5.5K of NI and my employer pays another 15K of NI
> So the best HMRC is doing is breaking even
No, because VAT doesn't come into it (*). Your client paid it to you, and you paid it on, but your client deducted it from their own VAT liability, so the net VAT take from your contract is zero. VAT is collected along the chain as the difference been sales and costs (the "value added"), and in your case you were a cost to your client. Ultimately all VAT is paid by the retail customer at the end of the chain.
Therefore, the HMRC tax take has gone from 26-30K to 61.5K. That's exactly what they were trying to achieve.
However, if the rules have also resulted in 10 more positions like yours being outsourced to India, then the net effect will be profoundly negative for them.
(*) Unless your client was not VAT registered, which is very, very unlikely.
I think he's referring to the government receiving that money, even though it is no cost to yourself, it is still a tax received by the government even though the contractor doesn't see any of it.
If he goes perm, that VAT is lost. and then it comes down to they would be a larger profit in corp tax, no there isn't because you've just employed them permanently so they can wipe out the cost of employing you against their corp tax profit then add on holidays, training, sick pay, payroll and pension write off costs so they've effectively wiped that out so HMRC will receive less at the end of the chain.
It doesn't matter if VAT is something that is passed on, what you're not thinking about is that the end client i.e. the government wont receive it anymore and all other profits against corp tax are effectively wiped out because of employing somebody permanent.
I did these calculations myself too. even not taking VAT into account and getting a good salary in London,, without VAt it kind of broke even, with VAT added, they loose approx £25k in tax a year.
Actually not at all unlikely, all the retail banks are not VAT registered, retail banking is not a "trading" activity under HMRC definitions, and therefore they cannot reclaim VAT that their suppliers are required to add onto their invoices. Therefore any VAT a contractor charges a retail bank is passed onto HMRC and is a gain for the treasury, not a zero sum like it would be if a contractor was working for a VAT registered company.
It is an unfortunate coincidence that the Chancellor introducing these IR35 measures has a father-in-law who is a founder and now chairman emeritus of Infosys, a large Indian multinational specialising in outsourcing - who might expect to gain from work that would otherwise have been awarded to contractors with PSCs.
I think I'm right in saying that IR35 only applies to UK tax residents? (Been in Spain a long time now) - with all the crap going on, and most work being remote, if you haven't already, now might be the time to find a friendly nearby country that will happily repatriate you, several are english-speaking, and after establishing there (usually 180 days), being no longer UK tax residents, IR35 can no longer apply, even if you continue to work for UK clients, as I understand it.
The other side of this is that IR35 reforms do not apply to contracts with companies outside of the UK, as long as they do not have any presence in the UK, since UK law cannot compel the actions of non-UK companies. You also have to look at agencies however, as the reforms talk about the chain between the contractor and the end client. If the agency also has no UK presence then the IR35 determination falls to the contractor (as today). If the agency is UK based, or has a UK presence, then the agency has the responsibility to determine the IR35 status.
What's not clear however is the definition of a UK presence. A division of the non-UK company operating in the UK, is obviously caught, as would be a UK company operating a non-UK division. What about separate companies in UK and non-UK, but one owns the other? What about if both are owned by the same (separate) entity? What about if there is a chain of ownerships that can be drawn between the two companies? I've not seen any clear rules about that, and at the same time it's easy to see that any clear rules that are set would make for a very easy workaround to the legislation, so long as the work being done is for an offshore company.
If these numbers are even close to accurate it pisses all over the governments projections of a 6bn increase in tax because (and I know this is controversial) but contractors pay more ££ (but lower %) than they would do in permanent employment.
My CT alone this year is almost double my PAYE for my last year in perm employment.
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