Workers at risk over limited companies misuse

Growing numbers of workers risk being caught in anti tax avoidance legislation as they are being misled into using limited companies to get work, say tax campaigners.

The Low Incomes Tax Reform Group (LITRG) wants HMRC to pursue organisations that wrongly force people to use personal service companies (PSCs) to get work.

Earlier this year it emerged that the head of the Student Loans Company was paid through his own company and last month the BBC said it paid thousands of presenters through PSCs.

HMRC is consulting on proposals to tighten IR35 compliance by requiring organisations engaging controlling persons through PSCs to deduct income tax and NI from fees paid to their companies.

Continued...

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Comments
johnjenkins's picture

Time for everyone to realise

johnjenkins | | Permalink

that working through a limited company is not tax avoidance. It is a perfectly legal way of working. IR35 is illegal because it takes the rights of company trading away without legal status.

frustratedwithhmrc's picture

Many employees...    1 thanks

frustratedwithhmrc | | Permalink

Many employees prefer working through Limited Company structures, because despite the overheads, bureaucracy and IR35 risks they are able to retain more of their income than under PAYE and are able to offset costs of working that PAYE only employees are prevented from claiming (tax deductible in most countries).

Although there are complexities to such operations (i.e. temporary workplaces rules, etc.), Limited Company contractors have far greater flexibility than PAYE workers.

IR35 was put in place not to limit exploitation by large employers seeking to exploit workers (although that was the original claim), but to prevent PAYE workers from seeking the freedoms of "self employment" and the greater ability to exploit their own efforts as this would have led to a reduction in tax revenue.

The real crime here is that PAYE workers are effectively penalized by the government in comparison to Limited Company contractors undertaking the same effective role.

The main issue at heart here is Employers NI, whose tax incidence is exclusively upon the worker although the non-chargeability of Employee's NI on UK company dividends is also a factor. Time and again the worker is being penalized for being a worker.

johnjenkins's picture

Legally

johnjenkins | | Permalink

there is nothing stopping PAYE workers from starting their own Limited company as long as the work giver agrees, but then expenses would be really limited.

frustratedwithhmrc's picture

Pure obfuscation...    1 thanks

frustratedwithhmrc | | Permalink

johnjenkins wrote:
there is nothing stopping PAYE workers from starting their own Limited company as long as the work giver agrees, but then expenses would be really limited.

Freedom of establishment prevents any such barriers, but there is a big difference between being allowed to establish a company and being able to enjoy the full fruits of your labours without being subjected to unwarranted interference from HMRC and draconian seizure of profits so generated.

This has been the basis of the continual fight over IR35 and given that >98%++ go against HMRC, it would suggest that HMRC interpretation of the law outside the strict Friday-to-Monday contractor scenario is fundamentally flawed.

I have no axe to grind in the IR35 debate, but would prefer a situation where there is equity in tax treatment of workers (regardless of PAYE or IR35 status) and the current situation is far from equitable!

Either Limited Company contractors should be charged more or PAYE workers should be charged less, but the current situation is divisive and must be addressed properly, legally and with due consideration for both the rights of individuals to free contract and the rights of PAYE workers not to be treated as milch cows for the purposes of taxation.

Locutus's picture

I don't recognise the comments by the LITRG

Locutus | | Permalink

I have never come across anyone that was "forced" to set up a limited company - they were all freelancers that did so of their own free will.

I think the idea that there are, say, tens of thousands "disguised employees" reluctantly working through limited companies and wishing they could be employees is a complete myth.

But there are hundreds of thousands of freelancers that chose to set up their own companies living in fear of IR35 and wishing that IR35 would go away.

DMGbus's picture

Limited companies definitely forced on workers

DMGbus | | Permalink

0103953 wrote:
I have never come across anyone that was "forced" to set up a limited company - they were all freelancers that did so of their own free will. I think the idea that there are, say, tens of thousands "disguised employees" reluctantly working through limited companies and wishing they could be employees is a complete myth. But there are hundreds of thousands of freelancers that chose to set up their own companies living in fear of IR35 and wishing that IR35 would go away.

 

I have had many dealings with clients who have been told "you will get no work unless you are trade through a limited company".

The power of the multinationals enforces this rule to isolate these multi-national companies from employment obligations and costs, passing the costs down to their workers.

In many (but not all) cases the level of income meant that trading via a Ltd Co resulted in a lower tax/NIC bill for the worker (subject to contingent liability for NICs and appeal costs arising under IR35 - a risk as HMRC sometimes DO win IR35 cases making it an uncertain risk for workers).   In quite a few cases at lower income levels workers were forced into a Ltd Co format and incurred costs that exceeded the tax-saving benefits.

 

IR35 came about after the Top 200 (or was it Top 100?) companies made representations to the Government of the day probably saying something like "we are very important - you must do what we say - we are influential - you must pass the buck from us to the contractor - we know that you will see the sense in this - remember we are rich and powerful and influential - and don't forget as multinationals we could move our head offices elsewhere - you really must see the sense in what we are saying - in short you will do what we want or else".  So the original proposals to put obligations on the multi-nationals (disguised employers) to deal with disguised employment were shelved and IR35 brought in as the alternative which pleased very much the Top 200 companies - a burden on the workers.

Locutus's picture

What I intended to say

Locutus | | Permalink

What I intended to say was that I have never come across any people that wanted to be employees of Multinational Plc being told they had to form a limited company.

I agree with you, in that if you are a freelance consultant wanted to do project work for Multinational Plc you will almost certainly be told you need to trade through a limited company rather than as a self employed schedule D1 consultant, otherwise no work.  Multinational Plc doesn't want the risk of the worker deemed as being an employee and having to subsequently pay PAYE and NI on everything.

I also agree with you originally the burden of IR35 was going to be placed on the engager.  However, the Government at the time caved into them and decided to place the burden onto the little personal service company instead.

johnjenkins's picture

@0103953

johnjenkins | | Permalink

That's why IR35 cannot work and is illegal.

You cannot take away Limited Company status then make that same limited company pay employers nic. If it ishown that the relationship between subbie and contractor is one of PAYE then the contarctor has to be liable - end of.

As we all know, though HMRC will cling on to anything that might bring them in a few bob.

it is unfortunate

justsotax | | Permalink

that actually IR35 just picks on the 'little people', as DMGbus eluded to, IR35 was 'invented' to satisfy big business so they were not hit by any liability.

 

 

johnjenkins's picture

Gordon Brown

johnjenkins | | Permalink

was so easily hoodwinked by big business.

frustratedwithhmrc's picture

IR35 was NOT 'invented' to satisfy big business

frustratedwithhmrc | | Permalink

justsotax wrote:
that actually IR35 just picks on the 'little people', as DMGbus eluded to, IR35 was 'invented' to satisfy big business so they were not hit by any liability.

IR35 was NOT 'invented' to satisfy big business.

In the original proposals the enforcement of compliance and ultimate liability lay with the engager. In this original form IR35 was both balanced and workable.

It was only after significant lobbying by big business that liability was changed from  the engager (typically big business) to the "little people".

The Inland Revenue (as it was at the time) didn't overly object as they didn't foresee the rise of the PCG, Accountax, QDOS, etc and thought the "little people" would be an easy target.

sorry I will rephrase

justsotax | | Permalink

it....IR35 'the final draft' was effectively invented for big business (yes it didn't start off life like that....but that is where we are now)...as for HMRC unable to foresee what would happen, they obviously weren't listening to the key points when big business explained that there needed to be changes....

 

 

johnjenkins's picture

Of course it was invented for

johnjenkins | | Permalink

big business in cohorts with HMRC, otherwise it would never have got anywhere. Gordon Brown was persuaded because he saw loadsamoney for HMRC to pay for his incompetance.

 

Controlling persons ...

vstrad | | Permalink

The proposed Controlling Persons regulations will be a nightmare to operate and impossible to enforce. They are also completely unnecessary.

As usual, Government's reaction to a problem (in this case the Ed Lester problem) is to invent more regulation instead of simply enforcing the existing regulation (in this case IR35).

What a shower of no-hopers!

johnjenkins's picture

We are in an

johnjenkins | | Permalink

"economic war" and alls fair, as they say. Be prepared to see endless crap coming out of Government and HMRC in the next few months. The walk out in EU countries will be nothing compared to what's going to happen over here if DC doesn't get a grip.

PSCs and umbrella limited companies - two different issues

martin hesketh | | Permalink

It is important to get the terminology right in this area in order to avoid further confusion for politicians and policy makers.  The 'limited companies' that the majority of low paid workers are using / being forced into are not personal service companies but 'umbrella' limited companies.  The issues are very different and should not be confused. 
The key issues with personal service companies revolve around the employment status of the owner and whether they are paying the right amount of tax.  The IR35 legislation is obviously key here and HMRC have recently implemented their new education and enforcement approach on this.  Also, the controlling persons consultation and the new public sector 'required assurance' policy are also relevant.  But, in my experience, the use of psc's is not significant in terms of low paid, vulnerable workers.  Many clients do require genuine freelancers and contractors to work through their own limited company when working direct.  This is to manage the employment and employment taxes risk.

The 'limited company' issue in relation to low paid, potentially vulnerable workers, which I think the LITRG are raising, is a different one.  There has been increased publicity of late around the number of lower paid workers being forced into working through recruitment businesses or umbrella limited companies using questionable salary sacrifice, travel and subsistence and National Minimum Wage schemes.  Also offshore umbrella businesses have been highlighted.   
In a number of these businesses, workers have clearly been completely oblivious to the way they are working and also much of the tax saving delivered appears to be being taken by the businesses themselves rather than the workers.  Undoubtedly, enforcement action is needed to both ensure the relevant law is being complied with and, equally importantly, to ensure low paid potentially vulnerable workers are not being exploited.  
 

frustratedwithhmrc's picture

Two points about this...

frustratedwithhmrc | | Permalink

martin hesketh wrote:
Many clients do require genuine freelancers and contractors to work through their own limited company when working direct.  This is to manage the employment and employment taxes risk.

Also forced to do so by the UK Agency Regulations

martin hesketh wrote:
Also offshore umbrella businesses have been highlighted.

This is actually a larger issue, it would appear that at least one offshore umbrella has effectively said "give us your entire payroll by value and we will manage all of the staff, expenses and remove all employee, PAYE and payment risks". This allows the virtual outsourcing of HR and payroll for zero additional cost to the employer / engager.

The catch here being that as a non-UK resident company (Jersey as I recall), they were able to take the 13.8% employers NI incorporated within the payroll value and treat that as an effective gross margin, as unlike the UK based engager, they weren't liable to pay that portion to HMRC as the Jersey company had no UK permanent establishment or branch.

johnjenkins's picture

Firstly

johnjenkins | | Permalink

there is no such entity as an umbrella limited company. This is just HMRC speak. Secondly offshore is totally different to UK co's. Starbucks and Costa are proof of that.

IR35 has nothing to do with any of this. It is HMRC saying we will decide employment status and if you don't like it we will legislate so workers have to comply. That is no way to run things and if it carries on will ultimately see the destruction of our economy. Short sighted strategy.

Workers using Limited Companies etc

Mickyfigs1 | | Permalink

Are the numbers of workers switching to limited companies etc rising? Doesn't this give further administration problems for HMRC even with the introduction of online filing. There are more options now for workers to supply their services other than through straight forward employment and most of these are being driven by the organisations engaging them. What may have first started with IR35 has now moved on in the real world. This problem for HMRC is going to continue to grow no matter what further "tests" designed to strongly favour their argument HMRC come up with. The trend away from direct employment will continue if the workers are given "options" where they are better off in pocket. The only reason the "flood" hasn't started is most employees and employers arn't aware alternatives exist.

johnjenkins's picture

The harder HMRC

johnjenkins | | Permalink

push to get money in from whatever source the harder the workforce will push back. The Government have to come up with a simpler way of raising money than the quagmire we have at the moment.