IR35 controlling persons rules: A step too far

The government’s attempt to deflect criticism of senior civil servants using personal services companies to avoid tax symbolises why the UK tax system is so chronically complex.

“As if IR35 is not complicated enough, they need to introduce another layer of complexity to deal with controlling persons,” said ICAEW Tax Faculty chairman David Heaton at the Wyman symposium on tax simplification on Wednesday night (18 July).

Heaton, a tax partner with Baker Tilly who specialises in employment, explained that similar rules were rejected when IR35 was first proposed back in 1999, “But I doubt anyone’s still around from then,” he said.

Personal services companies exist because clients don’t want to take on the extra risks of hiring employees or run the risk of status enquiries. And the differential treatment of dividends and earnings only served to encourage the practice. Instead, Heaton argued that a lot of the problems IR35 is designed to deal with would go away if dividends in close companies were taxed at a higher rate.

“Higher NICs would discourage people from forming limited companies,” he said. “Then you could repeal IR35 and drop this controlling persons nonsense.”

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  • Is it possible to achieve simplification?
  • Speech highlights from Robert Maas and John Whiting
  • Simplification manifesto

Continued...

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should_be_working's picture

'Fairness' and Tax - Here we go again.

should_be_working | | Permalink

"the Maas argument that simplicity and fairness were pulling the law in different directions" - why? Fairness is a subjective concept, simplicity is not.

Take the clawback of personal allowances for incomes over £100,000 - an instance of extra complexity apparently to achieve 'fairness' - yet if someone is to pay a marginal rate of 40% on every extra pound earned, why should they not get back 40% of every pound relieved - in my book that is fair.

Mirrlees

adiaz73888 | | Permalink

So, why ask for a report if you are going to ignore it?

 

 

mr. mischief's picture

Oh My God    4 thanks

mr. mischief | | Permalink

We can put a man on the moon, work out the age of the Universe and that there are more stars in it than grains of sand in the Sahara.

But we can't simplify the UK tax code.

Bunkum!

P45s all around.

 

Come on now,    4 thanks

Roland195 | | Permalink

mr. mischief wrote:

We can put a man on the moon, work out the age of the Universe and that there are more stars in it than grains of sand in the Sahara.

But we can't simplify the UK tax code.

Bunkum!

P45s all around.

 

You don't really believe that we put a man on the moon do you?

 

afairpo's picture

Well, for those working for govt, they have simplified it:

afairpo | | Permalink

Internal government documents indicate that freelancers working for government through personal service companies and getting more than £220 per day will have to operate IR35 or lose their contracts: employment status be damned, apparently (http://www.pcg.org.uk/cms/index.php?option=com_content&view=article&id=8...)

johnjenkins's picture

How can you put a man on something that is made of    1 thanks

johnjenkins | | Permalink

cheese - come on!

They could simplify the tax system quite easy and then adjust the basic rate if they need more money and we can actually see which government is giving us VFM. . However that negates all the stealth taxes and underhanded ways of filling their coffers.

Lunacy?

leon0001 | | Permalink

Roland195 wrote:

mr. mischief wrote:

We can put a man on the moon, work out the age of the Universe and that there are more stars in it than grains of sand in the Sahara.

But we can't simplify the UK tax code.

Bunkum!

P45s all around.

 

You don't really believe that we put a man on the moon do you?

 

 

Who's we?

Locutus's picture

Tax doesn't HAVE to be taxing

Locutus | | Permalink

mr. mischief wrote:

We can put a man on the moon, work out the age of the Universe and that there are more stars in it than grains of sand in the Sahara.

But we can't simplify the UK tax code.

Bunkum!

P45s all around.

 

Quite agree.  Astonishing when you think about it.  The tax system is a man-made creation, yet we seem powerless to radically simplify it.

Ironically, as HMRC used to say, tax doesn't HAVE to be taxing.

Simplification    3 thanks

dmmarler | | Permalink

If National Insurance were absorbed into tax rates then there would be no need for IR35 at all.  I said this to John Whiting and his colleague when they were first appointed.  It would save a whole raft of civil servants - both those in the National Insurance team and the liaison staff in HMRC - and save a lot of complexities around the different applications of tax and NI rules.  Accountants could then concentrate on helping businesses become more profitable.

Locutus's picture

Agree Income Tax and NI should be merged    2 thanks

Locutus | | Permalink

But what I find most difficult to grasp is that even the most blindingly simple things to simplify the tax system aren't done.

If for political reasons you can't merge Income Tax and National Insurance, why for instance, can't Class 2 and Class 4 National Insurance be merged?  A very small step but also surely a relatively easy one.  There are lots and lots of other small steps that can be taken if the big steps are too difficult at the moment.

Simplification - almost but not quite    1 thanks

ThornyIssues | | Permalink

 

dmmariner's reply has a valid aproach but doesn't scratch the surface.

IR35 and a whole raft of issues would disappear if true and irrefutable employment status was binary - either an employee or not - is implemented. With "deeming" removed from HMRC's toolchest, IR35 and every other "disguised employee" complication is removed. This would free up HMRC to monitor employees PAYE/NIC via employer (RTI) and simplify non-employee compliance checking.

Debating with a loaded deck    1 thanks

chEEK | | Permalink

Fairness is a subjective issue. To me it is unfair that some people pay more tax as a pure £ amount than others. Whereas other people seem to be swallowing the line that 'the rich should pay more'.

 

The fact is that in working on percentages they already pay more by earning more - so why should the amount they pay suddenly be hiked to an even higher percentage from around £40k upwards? And since when was £40k "rich" in any sense of the word?

 

Some aspects of simplification are easy e.g. if EE NI were absorbed into income tax. However that leaves ER NI, which is the major hit for the IR35-caught. You cannot absorb a business tax on employment into a personal tax on income, so at 14% throughout one's income, ER NI is the real problem. IT would need to abolished and paid for by cuts to the public sector, since there is no sensible place to redirect it.

 

And it has to be said that it is a very bad idea anyway - a tax on British-based workers in a global economy makes the British worker far less competitive with other countries, as if things were not bad enough anyway.

But don't get me wrong - I'm in favour of doing those things. To hear the guy tasked with simplifying the tax system accepting a rather weak argument that it isn't really possible is... worrying to say the least.

 

Next time you get Whiting in a room, ask him to explain para C25 of his OTS forum's report on IR35 which (wrongly) states that those caught by IR35 are in broadly the same position as employees. This is demonstrably incorrect to an enormous degree. Why would a Chancellor change IR35 when he gets a report that essentially says "Deemed employees are taxed the same as 'ordinary' employees"? That clearly tells him that there's no need to do anything. Why was this not challenged by the so-called experts in that forum? Where were the PCG, the supposedly representative body while this was being put forward in the draft of that report?

 

Of course, one might be forgiven for noticing that the forum members all have a vested interest in retaining IR35 (insurance sellers, contract reviewers and even... representative bodies).

 

To be honest, I'm not convinced that Whiting is up to the job - or his processes/conclusions are not as entirely free from political influence as one might hope.

johnjenkins's picture

One thing is    2 thanks

johnjenkins | | Permalink

certain. It should not be up to HMRC to decide status (that's where it all goes wrong). The only reason HMRC get involved in status is to maximise tax, and when you have that sort of mentality you will naturally get the other end of the scale, which is to minimise tax. If government want more money they should increase basic rate tax, then we all know where we are. Since GB there has never been such a devious amount of ways HMRC have come up with to increase the take. "Carry on at your own peril". Pity Brian Rix isn't about he would have loved this farce.

tonyaustin's picture

Simplification    1 thanks

tonyaustin | | Permalink

I don't know why I'm suggesting this as a tax consultant but if companies above a certain size have to have their accounts audited and those accounts show a true and fair view of it's results then why not just charge 30% tax on the disclosed profits? If you really want to be picky, they could pay a separate levy of 30% on entertaining expenses.

That just leaves small companies and individuals to simplify...make small companies transparent and have a flat rate for individuals.

Now we need to invent something complicated for accountants and HMRC staff to do.

Fairness    9 thanks

robert.horner | | Permalink

It is all about fairness. Lets assume you have two tax inspectors - husband and wife. Between them they earn £80,000 per year. They have two sets of tax allowances, lower and basic rate bands. They have flexible working, predictable working patterns, kids at nursery and generous pensions on top of their salaries. They also have child allowance becuase they are not higher rate tax payers. Contrast that with a woman who runs an engineering company. She earns £80,000 a year with no pension she works long hours and needs to travel all other the country/ Europe to keep her business going.  Becuase her hours are uncertain and homelife is complicated, her husband gives up work to look after the children. She decides to split her earnings via a company to utilise two tax allowances and keep their child benefit. Our two inspectors are suspicious of this and think it is wrong - they want to apply the settlements legislation against this "tax dodger". They also want to put NIC on dividends to really bring her and her hapless tax "evading" family to book.

She canot afford a pension, she employs 20 people in her business who rely on her to pay their wages and she exports all over Europe helping the economy and helping to pay our tax inspectors in the public sector.

What is fair?  Who do we really want to incentivise in this scenario?

People lose sight of those the tax system should encourage.

 

 

 

 

 

tonyaustin's picture

fair and simple

tonyaustin | | Permalink

What Robert has suggested would be fair on the lady running the company but what about the sales rep working the same hours with the same travel for the same money? The reason the tax system is so complex is because it tries to hard to be fair. We stopped husbands and wives being taxed on joint incomes because it wasn't fair on the lower earner and now it's not fair taxing them separately compared to a single person on the same income.

When the tax system stops trying to encourage certain financial behaviour, it can be simplified. If things are still unfair, it won't be tax it will be how people get their money and how much they get. Apart from those on low incomes, scrap all allowances and reliefs and bring in a flat rate of tax for everybody.

Fairness

robert.horner | | Permalink

The sales rep works hard but wotking hard is not enough. My point is we need to encourage the entreprenuer and often lose sight of this when simply trying to be "fair". Fair seems to mean we all need to pay the same rate regardless of the benefit to the economy. Understanding the social cost/risk of founding a business and adeqatuely compensating this through the tax system is vital and has been overlooked for many years.

The NI myth    1 thanks

adbanks | | Permalink

NI used to bring entitlement to benefits and pensions, but does no longer, so there is no justification for keeping them seperate.

Class 1 Employees NI could be merged into income tax, and (with a bit of aligning of thresholds) employment income taxed at 0%, 32%, 42% and 52%/47% plus the other clawback scenarios.

This doesn't affect Employers NI or non-employment sources of income.

And whilst they are at it (as suggested before) merge Class 2 and Class 4 to create a self-employed income tax - for simplification align with employment income tax [yes, I accept this is a big step, effectively increasing the Class 4 rate by 4%, whilst abolishing Class 2]

 

OK, none of this relates directly to the IR35 tax situation, other than adding clarity to the calculations.

 

As for "fairness" - the only "fair" system is a flat rate... the more you earn, the more you pay.  Increasing rates only makes tax unfairer, IMHO

Agree with Robert

Mallock | | Permalink

I think Robert makes very valid points about the unseen costs, stress and risks of running a business which are no longer recognised at all or in any way compensated for.

I have a real problem with IR35 full stop. However its application only to personal service companies is (with the exception of the few very public cases recently such as the head of the SLC) seriously flawed in my view.

Why should someone who is, say a computer consultant, get caught by IR35 when another one man company who is say a manufacturer's agent can split his company between him and his wife, pay dividends and save a fortune in higher rate tax and NI? In reality I see nearly no difference between the two businesses.

Perhaps a cap on the percentage of distributable reserves a close company can distribute might  mean that those that abuse the system the most at the moment would be forced to take salary as well as dividend and in some way redress the balance by paying NI if he/she wanted more income than the dividend cap allowed.

I think the fairest idea of all though is to find a way of amalgamating NI into tax. I have always believed that tax should be paid by those making profit and not those who employee people.

 

johnjenkins's picture

This begs the question    1 thanks

johnjenkins | | Permalink

Why should high earners pay a higher rate? I do not see any justification for it. By virtue of higher earnings they automaically put more in the pot. When bonuses are issued all they do is gross up the amount they want to receive so higher rate taxes for the higher earners do not make any difference to their take home. But it does to those earning around £50k

johnjenkins's picture

@Mallock

johnjenkins | | Permalink

Sorry, but making sure your business pays as least tax as possible is not abusing the system. If you're paying for goods at a high price you are allowed to switch suppliers. So setting your business up to pay as least tax as possible is sound management. 

Wrong word

Mallock | | Permalink

Abuse was the wrong word (unless you are an Inspector). I agree that organising one's affairs to minimise tax is sound management but I was trying to take a step back and look at the whole picture where I do believe that some people are able to take advantage of arrangements and minimise tax whereas other taxpayers don't have the same options open to them even though their circumstances might be very similar.

I would also like to see a flat rate of tax but in reality I think the best we are likely to see is a slightly less steep incline.

Entrepreneurs    4 thanks

Romanista | | Permalink

Entrepreneurs have flourished in every society irrespective of the tax rates.   JK Galbriath made the point in his book "The Culture of Contentmen" that those who were high earners often talked about how hard they worked for their money implying that people who performed menial jobs involving long hours of backbreaking labour did not.  I detect some of the same attitude in the arguments put forward to suggest that Entrepreneurs need to be given incentives to encourage them.

simlification    2 thanks

Colin Parker | | Permalink

here's the thing.

NI is a fiction - it doesn't pay for the health service - it's general taxation. On top of that it's a tax on the employed and employment.

My aunt has lived her whole life off the dividends on her investments. She has not paid 1p of NI her whole life. She just took treatment from the NHS costing £50,000

Abolish NI

1. ers NI paid by the government - abolishment will reduce government spending

2. ers NI paid by private section -  20-25% will come straight back in higher profits therefore higher corporation tax take. Make up the rest by increasing Corporation tax

3. ees NI increase income tax to compensate, but because now you are taxing ALL income the increase would not be as high as the rate.

Benefits -

attract French industry to the UK (well all foreign investment but the French adds a bit of spice)

forget about IR35

scrub a whole raft of legislation, rules, checks and enforcements - how many civil servants less?

my aunt pays for her NHS treatment the same as people who have to work for a living!

Drawbacks

Can't think of a thing to say

 

simples!

see my post for similar thoughts on NI

Colin Parker | | Permalink

we seem to be lone voices - could we start a Campaign?

SIMPLIFICATION

AWebbie | | Permalink

How about changing the Tax year-end to a month-end ... anything would be better than starting on 6th of a month!  That has only been pending since Britain adopted the Gregorian calendar for everything except tax in 1752

Controlling persons

robwillett281 | | Permalink

Why?

 

Why add to ir35 another layer of obfuscation?

 

The likes of Ed Lester are clearly Ir35 fodder, why not simply apply IR35 retrospectively (6 year) just as the HMRC would do if chasing an IT contractor.

 

Why make new rules when the current legislation can be used.

 

I smell corruption, Ed Lester had his 'arrangements' agreed by HMRC, does anyone think an IT contractor could get the same deal?

 

 

@Colin Parker

chEEK | | Permalink

While I have always said that ER NI should be abolished, the right arguments/solutions need to be put forward.

Abolition (*cough* at risk of being pedantic, there's no such word as 'abolishment') of ER NI would not reduce government spending since ER NI is paid from departmental budgets which are funded from the Treasury and, once paid as NI, the funds go from the hiring department via HMRC straight back into the Treasury (i.e. back into the government coffers). Therefore the net effect is zero, the only effect is on departmental budgets/costs.

However, revenues would be lost from private sector ER NI. Some of this may come back due to CT on increased profits, but just how much is not easy to quantify, which makes me wonder where you came up with a figure of a 20-25% increase. It seems a stretch to say that a 14% reduction in one tax would lead to a 20-25% increase in another (however it's not unreasonable to expect to recoup in CT 20% of the 14% you gave back).

So although it's difficult to know for certain, we would expect a loss of revenue which would need to be made up by a reduction in government expenditure. But... that's fine. As long as we're clear that that's what we are advocating and realise that the well-organised bleeding-heart brigade on the left will cry blue murder about the loss of "services" etc.

Without, of course, ever specifying just exactly which services we need and how much of them we should have. At the moment, so-called  'austerity' is only rolling the size of the State back to around 2007 levels and we got by just fine then. Actually, we could easily roll the size of the State back to 1997 levels, when once again we got by just fine, and save a lot more money.

However, getting it to happen is another matter. Abolishing ER NI is the right thing to do, and reducing expenditure to achieve it will be necessary - but in these days where every change has to be explained (and supposedly "costed") to an increasingly socialist electorate...  it seems unlikely that any party that has any chance of being in government will have the political courage to actually do this.

Agree - NIC should be

matt pennifold | | Permalink

Agree - NIC should be amalgamated with Income Tax. The existing cap on the percentage of distributable reserves should remain (i.e. no more than 100%).

Oh dear!

ThornyIssues | | Permalink

robert.horner wrote:

It is all about fairness. Lets assume you have two tax inspectors - husband and wife. Between them they earn £80,000 per year. They have two sets of tax allowances, lower and basic rate bands. They have flexible working, predictable working patterns, kids at nursery and generous pensions on top of their salaries. They also have child allowance becuase they are not higher rate tax payers. Contrast that with a woman who runs an engineering company. She earns £80,000 a year with no pension she works long hours and needs to travel all other the country/ Europe to keep her business going.  Becuase her hours are uncertain and homelife is complicated, her husband gives up work to look after the children. She decides to split her earnings via a company to utilise two tax allowances and keep their child benefit. Our two inspectors are suspicious of this and think it is wrong - they want to apply the settlements legislation against this "tax dodger". They also want to put NIC on dividends to really bring her and her hapless tax "evading" family to book.

She canot afford a pension, she employs 20 people in her business who rely on her to pay their wages and she exports all over Europe helping the economy and helping to pay our tax inspectors in the public sector.

What is fair?  Who do we really want to incentivise in this scenario?

People lose sight of those the tax system should encourage.

 

While that is a reasonable illustration of the modus operani of HMRC and their inbuilt politics of "greed and envy" fortunately, thanks to the PCG, the settlements legislation (I assume you refer to S660A as was) is no longer an issue. What is more worrying is that you seem not to be aware of this! On the plus side, it clearly illustrates why the tax system needs radical simplification.

 

Deemed employee for tax law versus employment law    2 thanks

ThornyIssues | | Permalink

robwillett281 wrote:

Why?

Why add to ir35 another layer of obfuscation?

The likes of Ed Lester are clearly Ir35 fodder, why not simply apply IR35 retrospectively (6 year) just as the HMRC would do if chasing an IT contractor.

Why make new rules when the current legislation can be used.

I smell corruption, Ed Lester had his 'arrangements' agreed by HMRC, does anyone think an IT contractor could get the same deal?

 

Sorry? Let us not apply IR35 at all. How about removing IR35 and the ability of HMRC to "deem" employment status in the first place. Did Mr Lester sign a contract of EMPLOYMENT? No, I don't recall seeing that he did. He did sign a contract to supply services though. He is not an employee and should not be deemed as such. HMRC should not be allowed to deem employee status for the purposes of tax law and the victim not be deemed and employee under employment law. That is what is wrong.

IR35 and before it...    1 thanks

adbanks | | Permalink

Ed Lester was *not* IR35 fodder... IR35 didn't even come into it.

He was, without doubt, an Office Holder and therefore the various pre-existing provisions relating to NI and Office Holders (should have been) applied.

But as with so often with Tax Law (and others) it is easier to add another law than to understand what is already in place.

Fairness and employment or not    1 thanks

adbanks | | Permalink

Other posters have made the observation of "fairness".

Whatever the merits or otherwise, and the intention of the parties or otherwise, the ultimate "unfairness" (IMHO) is that:

  • You can be an employee for employee-tax purposes, but not for employee-benefits purposes
  • If you are retrospectively assessed as a "disguised-employee" then the "disguised-employer" gets off Scot-free

In many (most?) cases (including, it appears, the BBC), contractors are engaged as a means of massaging headcount, and to avoid the overheads of employing people - the cost of having employees is too great.

The only way of levelling the "fairness" field is to have a single "employee not employee" test that applies to all aspects.  This half-way-house "worker" (one or the other, but not both) is a mess.

johnjenkins's picture

The way of fairness

johnjenkins | | Permalink

is to take HMRC out of the equation when it comes to employment status. There are workers who are quite happy with PAYE and there are others who like the excitement of being able to choose. There are some in the middle who can be manipulated to suite. However at the end of the day it is the employer who has to take the risks on what work to take on and how it should be completed and that will include costs. Banks make huge profits because they can charge what they like (they are not in the market place). Whereas normal business have to take many factors into account. I think most of us would agree that after a personal allowance, no other allowances or reliefs should be given and then a flat rate tax applied. So the more you earn the more you contribute.

I think you're missing Rob's point    1 thanks

chEEK | | Permalink

ThornyIssues wrote:

robwillett281 wrote:

Why?

Why add to ir35 another layer of obfuscation?

The likes of Ed Lester are clearly Ir35 fodder, why not simply apply IR35 retrospectively (6 year) just as the HMRC would do if chasing an IT contractor.

Why make new rules when the current legislation can be used.

I smell corruption, Ed Lester had his 'arrangements' agreed by HMRC, does anyone think an IT contractor could get the same deal?

 

Sorry? Let us not apply IR35 at all. How about removing IR35 and the ability of HMRC to "deem" employment status in the first place. Did Mr Lester sign a contract of EMPLOYMENT? No, I don't recall seeing that he did. He did sign a contract to supply services though. He is not an employee and should not be deemed as such. HMRC should not be allowed to deem employee status for the purposes of tax law and the victim not be deemed and employee under employment law. That is what is wrong.

You seem to be missing Rob's meaning. He is not discussing whether or not IR35 should be repealed, he is simply pointing out that if there's anything to be done about Lester's case then IR35 legislation should be applied, there is no need to invent new laws. And he's right.

One thing that most commentators seem to have missed, however, is that the fact that they're not applying any kind of existing law to the Lester case is more sinister than meets the eye - the key thing about failing to do so is that back taxes are not being sought. If they applied IR35 then Lester would pay up to 6 years back taxes, by inventing a new law, they are letting old Ed off the hook (as long as it doesn't apply retrospectively of course, which I'm sure it won't).

Unfortunately the laws related to office-holders are as full of exceptions as any other law of this sad and sorry land - if he, for example, were to provide his service through his Ltd Co to any other form of work then the position is muddied.

Finally, repeal of IR35 is simply not an achievable goal, even the ineffective PCG have admitted that much. Employees NI (EE NI) is designed to be paid by working people, it is in all but name income tax these days, therefore repeal will not happen "for fear of a move to mass incorporation" as the Chancellor put it in the Budget speech on the matter. The realistic end-game objective is to have a case deemed to be Inside IR35 have a possible outcome of 'self-employed' and as a result pay the self-employed (Schedule D) level of taxes. At present, when assessing whether a situation is employed or self-employed, the somewhat bizarre reality is that it is not possible to have an outcome of "You're self-employed".

If only freelancers had a representative body that understood that (preferably about 10 years ago) they might have got somewhere with IR35 - mind you, as Philip Ross points out, the representative body were taken over quite a long time ago by a political wannabee class who simply use it as politics training and have little interest in resolving the situation since that would probably see their membership plummet. Otherwise they might have done a better job of putting forward the real case, as above, when tasked to do so in the OTS Forum along with al the other vested interests.

johnjenkins's picture

IR35    1 thanks

johnjenkins | | Permalink

in anyway shape or form should not exist. It is there as a testament to GB's destruction of SME's and ultimate destruction of HMRC. GO should realise keeping it will cause more chaos than its worth.

If a case of IR35 is proved, ie. the status should have been one of PAYE, you have a situation whereby the limited company (go between) cannot have PAYE applied to its income, but there is no law that says the director/shareholder has to receive a certain salary. So IR35 cannot exist.

Hold-up:Back to the beginning !

kiwilondon99 | | Permalink

All  started with Mr Lester. But if his fees were and contract were deemed in / outside of IR35.  So we allthink that he was caught inside IR 35 - then if he paid div, he got it wrong and deemed salary payments shoul d have been PAYE/ NI and thats the end of it if HMRC get to work.

 

Any other co-temp contracts he had, or NED roles etc would be 'viewed' within there own merits also.   So get a set of his accounts and see if the divs were taken.   At least having Civil servants setup this way - saves min 14% pension and we should get shot of them  without 'Compensation' 

If the jurnos actually researched & understood the issues before they scribed their public inflaming rhetoric [a crime now ? or negligence in factual  reporting] then there would not be an issue, except the ill briefed politicians - but who listens to them...

So this takes us back to these other irritants from the THINK TANKS & school of disjointed dots..from our cival service and paid for advisors - which have encumbered small business along the lines recently of 

**BUSINESS ENTITY TESTS +

**Controlling Persons +

**ESC19 changes....... and for good measure

** between LTD CO contracts the individual  is Still not able to claim 'benefits' is there?

 

It would be easier to revert to the controlled and managed environment - where there was an element of entrenuership in all who have setup in business, and were prepared to take some risk [ being other than a regular £salary or Benefits on a given day each month, with pretty good secruity of tenure,a pension ,  no PG's to support staff way of life!,  and paid holidays and ++++ ] and let them get on with making money to fund the excesses of those covered by the last brackets!

 

OFTS great team and concept bu t please do not become the political sounding board for Govt and bullied by HMRC 

 

Marginal value    1 thanks

mikewhit | | Permalink

@johnjenkins:

"Why should high earners pay a higher rate? I do not see any justification for it. By virtue of higher earnings they automaically put more in the pot"

However, you could make a converse case to say that on the basis of marginal value, people on low wages should pay a lower rate of tax. So the original statement arises as a consequence.

Incidentally, John, you should take a look here: http://begthequestion.info/

worried....

robert.horner | | Permalink

ThornyIssues wrote:

robert.horner wrote:

It is all about fairness. Lets assume you have two tax inspectors - husband and wife. Between them they earn £80,000 per year. They have two sets of tax allowances, lower and basic rate bands. They have flexible working, predictable working patterns, kids at nursery and generous pensions on top of their salaries. They also have child allowance becuase they are not higher rate tax payers. Contrast that with a woman who runs an engineering company. She earns £80,000 a year with no pension she works long hours and needs to travel all other the country/ Europe to keep her business going.  Becuase her hours are uncertain and homelife is complicated, her husband gives up work to look after the children. She decides to split her earnings via a company to utilise two tax allowances and keep their child benefit. Our two inspectors are suspicious of this and think it is wrong - they want to apply the settlements legislation against this "tax dodger". They also want to put NIC on dividends to really bring her and her hapless tax "evading" family to book.

She canot afford a pension, she employs 20 people in her business who rely on her to pay their wages and she exports all over Europe helping the economy and helping to pay our tax inspectors in the public sector.

What is fair?  Who do we really want to incentivise in this scenario?

People lose sight of those the tax system should encourage.

 

While that is a reasonable illustration of the modus operani of HMRC and their inbuilt politics of "greed and envy" fortunately, thanks to the PCG, the settlements legislation (I assume you refer to S660A as was) is no longer an issue. What is more worrying is that you seem not to be aware of this! On the plus side, it clearly illustrates why the tax system needs radical simplification.

 

 

I said they "wanted" to apply the settlements legislation, not that they could. I am sure the Revenue would still love to apply it or amend the legislation to ensure it would work in the future.  Are you genuinely more worried about whether I am familiar with the Artiic Systems case than whether the tax system is fair?  Now that really is worrying. Or perhpas, even more worrying, that I called HMRC "the Revenue" when they haven't been called that for years... 

 

Steve-EBL's picture

Virgin

Steve-EBL | | Permalink

Close HMRC and contract tax collection duties to Virgin, Richard Branson will simplify it all no problem.

 

johnjenkins's picture

@mikewhit

johnjenkins | | Permalink

So you owe me a £1m. Now prove that you don't.

I'm not a believer of averages, marginal values, etc.etc.

Up until the last reccession things were fairly stable, but the finacial institutions moved the goal posts. Now basically it's every man for himself. Even the farmers are having a pop. If anyone thinks the ........ (sorry I don't want to run the risk of the brandied boys coming after me) is going to run smoothly, think again.

Come back common sense and flexibility.

Rate versus amount (of tax)

chEEK | | Permalink

mikewhit wrote:

@johnjenkins:

"Why should high earners pay a higher rate? I do not see any justification for it. By virtue of higher earnings they automaically put more in the pot"

However, you could make a converse case to say that on the basis of marginal value, people on low wages should pay a lower rate of tax. So the original statement arises as a consequence.

Incidentally, John, you should take a look here: http://begthequestion.info/

Well, you say that "...you could make a converse case to say that on the basis of marginal value, people on low wages should pay a lower rate of tax." but then you don't actually bother to make that case, you leave the unsubstantiated assertion hanging in the air!

 

I don't think you can make a case for a lower RATE of tax for the lower paid - perhaps for a lower AMOUNT of tax, but that is a totally different argument and comes about from the fact of earning less and therefore paying less (even if a flat-rate tax is in operation). This is also the IMF's take on tax rates - all should pay the same and those who need it are given specific, targeted reliefs as necessary. For example, the 10p tax rate that was touted as being "to help the poor and needy" when it was introduced... actually benefited all taxpayers, not just the needy.

---------------------------------------------

However, I certainly don't agree with johnjenkis' earlier statement that "IR35 should not exist in any shape or form". The basic idea was that working people should pay NI - and that is very hard to dispute. When they were taxed with both forms of NI that's when people had a problem with it. Had they simply applied the same rules as for employees/self-employed (11% or 8-8% employees NI) then freelancers would probably have put up their hands, said "It's a fair cop, guv" and moved on. IR35 should exist in THAT form, but not in its actual form.

johnjenkins's picture

@chEEK

johnjenkins | | Permalink

How can anything exist if it's not valid. You cannot just say "ok if this is the situation we will take that away" with a total disregard for the rules and laws that apply. If someone is "deemed" employed then it is up to the employer that the "deemed" employment is with to make PAYE deductions.

Limited Compnies have existed for a long time and it is only the incompetance of GB that we are now in this mess.

Richard Branson

adbanks | | Permalink

And just how much tax does the esteemed Mr Branson pay in the UK?

AIUI he owns nothing, and Virgin is controlled by a set of BVI Family Trusts

Blowing in the wind

mikewhit | | Permalink

"you leave the unsubstantiated assertion hanging in the air!"

I leave this as an exercise to the Googler - it's not an unknown topic in discussions regarding Flat Tax and the like.

This is an accountancy website and a basic familiarity with issues in taxation is to be expected.

Not the real issue(s)

ThornyIssues | | Permalink

chEEK wrote:

mikewhit wrote:

@johnjenkins:

"Why should high earners pay a higher rate? I do not see any justification for it. By virtue of higher earnings they automaically put more in the pot"

However, you could make a converse case to say that on the basis of marginal value, people on low wages should pay a lower rate of tax. So the original statement arises as a consequence.

Incidentally, John, you should take a look here: http://begthequestion.info/

Well, you say that "...you could make a converse case to say that on the basis of marginal value, people on low wages should pay a lower rate of tax." but then you don't actually bother to make that case, you leave the unsubstantiated assertion hanging in the air!

 

I don't think you can make a case for a lower RATE of tax for the lower paid - perhaps for a lower AMOUNT of tax, but that is a totally different argument and comes about from the fact of earning less and therefore paying less (even if a flat-rate tax is in operation). This is also the IMF's take on tax rates - all should pay the same and those who need it are given specific, targeted reliefs as necessary. For example, the 10p tax rate that was touted as being "to help the poor and needy" when it was introduced... actually benefited all taxpayers, not just the needy.

---------------------------------------------

However, I certainly don't agree with johnjenkis' earlier statement that "IR35 should not exist in any shape or form". The basic idea was that working people should pay NI - and that is very hard to dispute. When they were taxed with both forms of NI that's when people had a problem with it. Had they simply applied the same rules as for employees/self-employed (11% or 8-8% employees NI) then freelancers would probably have put up their hands, said "It's a fair cop, guv" and moved on. IR35 should exist in THAT form, but not in its actual form.

 

I think that the main issues of IR35 aren't that they suffer both NICs because that is "adjusted" when IR35 applies, in that ER-NIC is refunded and the whole pot - 5% "deemed" as PAYE with consumate EE-NIC. The main issues are that this inevitably means higher rate and also more importantly, the victims will then pay far more than the equivalent employee in EE NIC but win no benefits of an employee (holiday pay, sick pay, pensions etc) nor were the able to claim dole should they find themselves without work.

 

Valid means what?

chEEK | | Permalink

johnjenkins wrote:

How can anything exist if it's not valid. You cannot just say "ok if this is the situation we will take that away" with a total disregard for the rules and laws that apply. If someone is "deemed" employed then it is up to the employer that the "deemed" employment is with to make PAYE deductions.

Limited Compnies have existed for a long time and it is only the incompetance of GB that we are now in this mess.

In case you haven't noticed, I am suggesting that IR35 should be adjusted such that it becomes "valid" (in a natural justice sense of the word).

What is invalid is the assertion of the repeal brigade that they should be able to do away with IR35 and go back to a situation where they could decide how much NI they pay (usually they chose to pay... none - surprise, surprise).

The government can define anything they like as the law of the land and as such is is "valid" from a legal standpoint although it may be questionable from a moral one. In order to win the moral argument (and the ensuing public support that might catalyse a change of heart from government) the other side need to be able to show injustice - and in the case of IR35 that is the fact that both forms of NI are paid in the Inside IR35 case. It is certainly not a winning moral argument to try to assert that having to pay the same NI as the rest of the working population is in any sense "invalid", which is effectively what the repeal brigade are trying to do.

Google?

chEEK | | Permalink

mikewhit wrote:

"you leave the unsubstantiated assertion hanging in the air!"

I leave this as an exercise to the Googler - it's not an unknown topic in discussions regarding Flat Tax and the like.

This is not Wikipedia where all assertions need to have citations !

LOL That's a new one on me - you expect people to Google your argument whenever you make an assertion? I don't think so.

This is not kindergarten where you can say "Is is is" or "isn't isn't isn't" and expect to have any credibility - if you have something to say then YOU need to say it, I'm afraid I don't have time to Google every spurious thing you ever say, mate and I doubt if anyone else does either.

johnjenkins's picture

@chEEK

johnjenkins | | Permalink

I think you have missed the point. The reason why IR35 is invalid or doesn't work etc.etc, is because it is a creation born out of GB's need for more money (to cover all his costly mistakes). If government would have wantd employment status cut and dried it would have done so. The grey areas are there for a purpose and worked very well until GB's tamperings.

 

Paradigm Shift.

androo235 | | Permalink

 

The Neo-Classical Economic (NCE) consensus underlies and calls into being not only our current complex tax system but those of the rest of the rich and emerging world too, notably that of the USA. Tax systems are dysfunctional and resist reform and simplification everywhere for the same reason, the dominance of the NCE.

Until this is understood dialogues about simplifying the current system will result in very long discussions, such as this one, that go nowhere and serve mainly to illustrate the difficulty of reforming a system that is built on a distorted economic paradigm.

Mason Gaffney - The Corruption of Economics - http://homepage.ntlworld.com/janusg/coe/!index.htm

I urge you to read Henry George's Progress and Poverty, first published in 1879, which advocates a land value tax. This Best Seller (though now almost forgotten - see Gaffney) brought into being, among other things, a singletax movement. These people believed and argued for an economic system based upon one tax alone, a land value tax. A shorter introduction to LVT, though much less powerful than George's work, can be found at landvaluetax.org (I particularly like the contributions to that site of Henry Law which can be found under the link to the LVTC blog - http://www.landvaluetax.org/the-lvtc-blog-by-henry-law/).

Now I don't know whether or not a single tax level of purity and simplicity could be achieved in the modern world - clearly the resources of a civil service would be needed to study its feasibility properly. However, the British Civil service of the early 20th Century must have thought the idea had legs as the UK would have had an LVT introduced then were it not for the House of Lords and the First World War.

A modern implementation would have to keep sin taxes (alcohol, tobacco, carbon, whatever it is that society thinks sinful and to be discouraged) and, personally, I think the retention of a flat income tax on very high earnings tolerable.

Abolished; NI, perhaps all income tax, VAT, Stamp Duty, Corporation Tax, Capital Gains Tax, Inheritance Tax, others that I can’t think of at the moment and of course Council Tax and NNDR the abolition of which seems the most promising route to introducing LVT.

I say perhaps all income tax as, fundamentally, I agree with the singletaxers insofar as, if LVT can raise sufficient revenue to run public services then why have another tax.

Of course all this will mean much less work for tax accountants and tax lawyers and it would devastate the business models of the (at least British) tax havens too. However, I am encouraged by some of the posters above who seem to think that accountants proper role is advising business in the creation of the greatest possible economic surplus from its productive activities. Perhaps we could get back to that – though there probably would be fewer of us, lawyers and tax inspectors. I can see few mourning the decline of any of those professions. Local authority valuation departments would likely expand though.

I also like Steve Keen and his other Jubilee as well as positivemoney.org – but that’s monetary and banking reform so although related is strictly speaking off-topic here.

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