IR 35 - what do YOU think?

The Institute of Directors has had its say, now it's our turn. Rebecca Benneyworth offers the Office of Tax Simplification some suggestions on how to reform the small company taxation regime. What points would you like to raise?

The Office of Tax Simplification has made a review of IR35 one of the key planks of the review of small business tax; indeed the review of IR35 was identified as part of the review of small business taxation by the Treasury when the office was first set up.

In setting up the OTS, the government indicated that it would seek to replace it with simpler measures intended to prevent tax avoidance, but which do not place undue administrative burdens or uncertainty on the self employed or restrict labour market flexibility. The task the office must set about in reporting on IR35 has also been specified by HM Treasury:

  • identify and provide evidence of the complexity and uncertainty created by IR35
  • consider alternative legislative approaches that would be simpler and create certainty while ensuring that, where intermediaries are used to disguise employment, any income that is effectively employment income is taxed fairly; and
  • consider the scope for tax avoidance and the extent to which alternatives to IR35 would affect it.

The focus of this work should be exploring alternatives to IR35. However, the government will be interested in issues in relation to the structure of the tax system and the employment status test more generally. This may have a bearing on wider issues about employment status and the boundary between employment and self-employment, including the impact on larger businesses.

Our response
Responses so far seem to indicate that uncertainty is the real issue with IR35. That practitioners and clients alike cannot decide whether they are genuinely “caught” by IR35; they do all they can and then have to leave it to the fates – which is an unsatisfactory solution for businesses.

Complexity (for the adviser) is not the real issue in dealing with the fall out from IR35, but most are not experts in employment status, and even then the courts seem to manage to come up with new angles almost every time. I would go further – in view of recent decisions by the courts, most contractors working through an agency cannot correctly determine their IR35 status without sight of the agency contract with the engager, which they do not have access to. So ultimately the courts have made the legislation practically unviable.

Coming up with alternatives is a difficult task, as my article of about 18 months ago shows. So maybe rather than viewing the task as re-engineering small business tax as a whole (indeed we have had some recent suggestions along those lines), maybe we can focus on a solution designed to meet the specific issues addressed by IR35.

Let us know what you think. I’m looking to prepare a formal report before the end of this month.

Continued...

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Maybe consider the length of the contract....

justsotax | | Permalink

...so if the contract is say for less than 1 year he/she falls outside of IR35  (as long as the contract states this - with no tie in etc) - but say if the contract continues with the same contractor (with no breaks for working with other contractors - excluding associated companies...) for over 3 years it is then deemed to be IR35...

there is no one great answer to this, but the more simple it is made the more it will highlight issues for certain groups (look at the child benefits) so simplicity itself will not help this position....

 

mydoghasfleas's picture

OTS IR35

mydoghasfleas | | Permalink

Perhaps OTS should start by calling NIC income tax and then there is only one regime to simplify rather than pecking at little bits here and there.

I suppose the response would be "not that simple, stupid!"

Nick Graves's picture

Excellent table!

Nick Graves | | Permalink

It nicely demonstrates that IR35 is a nasty, punitive and very vindictive tax.

Furthermore, it demonstrates that any discussion of 'disguised employment' is pure sophistry & a CWOT.

What is required is to eliminate the lie that is NI by merging it into the tax rate. That would eliminate the issue along with swathes of pointless duplicated legislation. It also would level the nonsensical division between 'investment' and 'earned' income, which is arcane.

It might even put a few accountants and a lot of politicos out of work. How's that for simplification?

 

 

 

IR 35 and small business taxation

simagnus | | Permalink

 I came across the easiest solution to the "tests" and "classification" issue a few years ago with a client working in Finland:

Every individual has to pay National Insurance on minimum of 50% of their taxed income.

Solves all the problems of who is self employed, employed or contracting. Easy to calculate and police.

People with unearned income may not like it too much but it passes the "fairness" test every time!

 

SIM

Can't solve the unsolveable

davechaplin | | Permalink

I don't think IR35 is solveable in terms of defining a new test that achieves all the required objectives. Recently we designed and released an online test for IR35 - it has 53 questions over 10 sections, covering all the usual factors like control, substitution and so on. We then score people ranging from 1 to 11. The algorithm was tested extensively on real life cases.

After thousands of people taking the test the results cover the entire spectrum, with many falling in the borderline areas of pass or fail.

What's clear from this experience is that we don't really need a 53 question test to establish if someone is a definite IR35 fail. And it's also fairly clear when someone is a strong IR35 pass.

The problem we have is in the middle with all these "intermediate forms" which we are trying to classify as pass or fail. Tax advisors and HMRC can spend years debating each one on a case by case basis.

It reminds me of the taxonomy debates for classifying species, and in particular the famous picture of the ascent of man (picture of the monkey on the left, evolving slowly into upright man). So what are these forms in the middle??

I think to be practical we just need some rules to capture the very naughty monkees, and then just leave the rest alone.

Dave Chaplin

CEO, ContractorCalculator.co.uk

IR35 unfairness

mfwiniberg | | Permalink

For me, as a contractor only recently gone back to that status after years of employment, the essence of the problem is twofold:

1 It is impossible to tell whether you fall within the IR35 remit as there is no clear guidance or ruleset.

which leads to the second aspect, which is where the unfairness creeps in:

2. If you do get caught, you pay more tax/NIC than you would have done as an employee, but without receiving any of the corresponding benefits (eg sick-pay, pension rights, employment protection etc).

I do genuinely trade through my Ltd company: I employ others, we work for multiple clients, and yet I still feel that I cannot reply yes to the 'are you a service company' question - even though that is how I would describe our operation - because it potentially puts me at risk of being deemed in contravention of IR35.

Simplification is the obvious answer, but only if it can be made fair - one possible alternative would be to make the amount of tax/NIC you have to pay the same regardless of how income is derived - that would, of course, be very unpopular, but it's hard to argue that it isn't fair!

The current regime would seem fairer if the 'employer' got caught as well - they had to make up the employer's NI etc that had been avoided, and if they were also covered by employment law should IR35 be deemed applicable. However, at the moment, the entire setup is biased entirely against the contractor, with the contractee having no liability, eveb though they must have colluded in the avoidance...

 

 

 

only real solution is to combine NI and Income Tax

ringi | | Permalink

A simple test that may work in real life could be based on the “work” being found var a regulated employment agent. If this lead to less usage of employment agents, so much the better!  (Combined with rules on having the some single customer for to long)

 However we all know that the only real solution is to combine NI and Income Tax and stop pretending that paying NI provides any benefits.

What goes around...

Vaughan Blake | | Permalink

The problem isn't just IR35 though, is it?  It is also low salary, high dividends and income splitting.

Why not zap them all in one go by resurrecting a form of Investment Income surcharge.  This could apply to all close company dividends in excess of say £5000.  The % would be set to make the the salary/dividend choice not so tax driven and use different rates at different income levels.  Even maybe set the rate by overall company profit levels rather than the individuals marginal rate.

The old legislation could be dusted off and updated in no time!

A few other points

uninet | | Permalink

I am a Ltd company contractor and the idea of removing minimum wage exemption from all company directors would be a reasonable step, nobody likes to pay extra tax - but it would be a simplification of the present rules and unambigous.  If it was thought to be too onerous maybe a small companies directors minimum wage could be introduced with a view to bringing it to parity with the minimum wage at in a suitable period of time. It sounds more complicated than it is as it would just be rate to be applied to earnings.

IR35 has another incredibly unfair aspect to it, in that the burden of proof and penalties lie with the "disguised employee" and not the "disguised employer".  So the instead of the medium to large corporate being on the hook for penalties and back tax it falls on the individual employee.

Leopards and spots!

ThornyIssues | | Permalink

"So maybe rather than viewing the task as re-engineering small business tax as a whole (indeed we have had some recent suggestions along those lines), maybe we can focus on a solution designed to meet the specific issues addressed by IR35."

No, no no! Sticking plaster solution! The accountancy profession cannot be allowed to prevent one of the most significant opportunities to sort out the tax system for the benefit of not only small businesses but the benefit of taxpayers in totality. Any attempt to protect work and income though continued support of the obfuscated and carbuncled monstrosity will be seen as just that.

Why not go very simple

NeilW | | Permalink

 Is there any particular reason in a modern flexible economy why all individuals can't be taxed on a straightforward profit basis?

The idea that employees are somehow looked after by employers is rather quaint but not really realistic in the modern world, and there is absolutely no justification for self-employed people to be taxed less than employees. They add nothing more to public purpose on their own. The benefit to society only accrues when they employ third parties - and the tax benefit, if any, should reside there.

The tax system should not recognise the difference between individual's status - the free market will do that for you. If giving up employee benefits and a more free lifestyle has value, then that will be reflected in the rates the individual can charge. Tax is then just a percentage of that.  There is no distributional issue to deal with here. Avoidance is dealt with by employment law, not tax law. Once you get beyond tax, then a 'declaration of self-employment' becomes workable

The problem is that the system you are messing around with is simply not fit for purpose. Grafting on a 'patch' to this system will simply result in more emergent behaviour due to the unnecessary complexity of the system. The more you mess with it, the worse it will get.

If you introduce another category, then you will have another bunch of people trying to be something else to gain a tax advantage.

At what point is somebody going to recommend that the old system is scrapped and a new one designed. In the systems world I generally work in, that happens all the time. There comes a point when old code, old wiring and old structures are too spaghetti like to try and fix.

It is time that employees could offset their student loan interest against their earnings, much as buy to let landlords can with loans to fund their investments. 

Once we get away from the idea that status affects taxation, then people can get back to using the correct structures for their businesses. 

Why is small company taxation so low. What is the public purpose of it? Higher taxation and larger capital allowances actually encourages investment. Low taxation encourages the pillaging of coffers by dividends. 

If the public purpose of small companies is third party employment then target that. Small companies can only access the corporation tax regime when they employ unconnected third party employees. Until then they should be transparent for tax purposes - taxed as limited liability partnerships are.

It all feels to me as though government has no idea what the whole point of the different tax rates are from a public purpose point of view, and is simply responding to lobbying from various groups that their group should pay less tax than everybody else. Until we get somebody who can rise above the lobby caterwauling, we'll get nowhere.

 

 

Spot on

ThornyIssues | | Permalink

"At what point is somebody going to recommend that the old system is scrapped and a new one designed. In the systems world I generally work in, that happens all the time. There comes a point when old code, old wiring and old structures are too spaghetti like to try and fix."

Spot on Neil.

Accountants and system design

NeilW | | Permalink

Interesting that accountants are trying to do system design here.

Yet if system designers do their own accounts, there would be cries of operating outside spheres of expertise.

 

 

Employer's NI

Psyche | | Permalink

I think the most unfair thing about IR35 is that the contractor is liable for deemed PAYE, employee's NI AND employer's NI! Why not hold the deemed employer liable for the deemed employer's NI? That would make the system much fairer, and remove the incentive for employers to "hire" staff disguised as contractors. After all, it is the client who writes up the contract, not the contractor -- the contractor has no choice to go to their client and say "Actually I would prefer to be paid as an employee". They just get stung for all the tax and NI.

History lesson

ThornyIssues | | Permalink

"IR35 has another incredibly unfair aspect to it, in that the burden of proof and penalties lie with the "disguised employee" and not the "disguised employer".  So the instead of the medium to large corporate being on the hook for penalties and back tax it falls on the individual employee. "

That was the tennet of IR35 Mk1 and which was quashed by through successful lobbying from the large "body shop" outsourcers and suppliers to HMG.

Accountants!

mfwiniberg | | Permalink

Despite the name of this site, not all of us in here are accountants!

That doesn't stop us having an interest in accounting matters though, especially (as in my case) I'm responsible for both implementing and maintaining accounting systems, and directly affected by things such as IR35...

8)

 

We just need a clear definition of 'employment'

malisajama | | Permalink

Surely, it is not beyond the wit of man to devise a clear and relatively simple definition of employment that would apply both to employment taxes and to employment rights and benefits. It is vitally important that every person working for someone or something is classed as either an employee or a contractor, and not something in the middle! Also, it should not matter what form the supplying entity takes or its size: be it sole trader, partnership, LLP, LLC, PLC, etc.

The second major change should be to make the ultimate employer liable for employer's NICs and the employment rights and benefits of all its 'employees'. This would, at a stroke, greatly reduce the number of personal service limited companies, which contractors are often forced to use by their clients.

What I am most worried about is that a replacement to IR35 is devised that catches truly independent businesses. For example, I know a very small company (two directors and one other employee) that develops its own software and sells licences and related services to various customers. In this case, a limited company is necessary for commercial reasons. It is difficult enough for this company to compete with bigger players in the market; it wouldn't survive if it also had to cope with a higher tax burden.

Mark Gleeson

Finland

ThornyIssues | | Permalink

"Every individual has to pay National Insurance on minimum of 50% of their taxed income."

The issue here is that without a simpler and more deterministic tax system, there is scope for "taxed income" avoidance. Perhaps the tax system in Finland is just that!

 

Use a two year one client only test

jeremyprocorporate | | Permalink

 Another variation on a theme:

Once a contractor operating via a PSC has, for a period of two years, derived 80%+ of their income from just one client then from that day onwards they must pay taxes on that income as if they were an employee of that client.

A gap of six months not working for the client would reset the clock to zero.

This formula is relatively simple and helps to maintain the desired flexibility in the labour market.

Spot on again

ThornyIssues | | Permalink

"We just need a clear definition of 'employment'

Surely, it is not beyond the wit of man to devise a clear and relatively simple definition of employment that would apply both to employment taxes and to employment rights and benefits."

One of the major issues with IR35 is that the TAX liabilities are determined using EMPLOYMENT law. This simply should not be and is yet another reason why the remit of the OTS should be extended.   

Another unlevel playingfield

ThornyIssues | | Permalink

"Once a contractor operating via a PSC has, for a period of two years, derived 80%+ of their income from just one client then from that day onwards they must pay taxes on that income as if they were an employee of that client.

A gap of six months not working for the client would reset the clock to zero.

This formula is relatively simple and helps to maintain the desired flexibility "

Nope. This just continues yet again, the unlevel playingfield that exists for companies of varying sizes. Why should a micro-company be penalised for maintaining a long client relationship? There are many medium sized companies who service a single client for longer than two years without draconian penatlies and in fact, some medium and large sized companies are specifically formed just for that reason.

What is the purpose of the small profits rate?

charles.underwood | | Permalink

The declared purpose of the small profits rate is to encourage small companies to retain profits to finance expansion.  Does it actually have that effect?  In my experience, very rarely.

The abolition of the small profits rate allied with a retention of the AIA at 100,000 would assist those companies genuinely retaining profits to expand.  For the rest it would largely remove the benefit of trading as a limited company compared with being self-employed.  Then the government could abolish IR35 in its entirety.  Traders could make the choice for commercial reasons.

IR35 - unfair - NIC reform required

xpistos | | Permalink

IR35 was a knee jerk reaction to tax avoidance by high paid individuals (such as newsreaders I seem to recall) so as to avoid NIC, which 95% of the population have to contribute to under PAYE.

The unfair element is that avoidance is still happening to avoid NIC whilst the uncertainty of IR35 persists . As a PAYE employee, I end up paying more NIC than others who are fortunate enough to arrange it otherwise. Note from your table that for some NIC is zero. This is morally unfair.

Similarly the regime for small business NIC class iv is also unfair by being wrong the otherway, by paying a higher value of NIC without proper benefit.

I endorse any effort to create a level-playing field for NIC contributions as the 'benefit' to all individuals participating in it (with the exception of contracted in pension elements) is the same.

The Government should make it NIC neutral irrespective of soletrader/ltd co/employee. If this was so engineered, not only would it be simple but all the IR 35 issues would disappear.

The original prime reason for a Limited Liability company was to 'cap' the liability of the shareholders who put the capital up as risk. Tax Allowances are in place currently to encourage  risk/venture taking . The hi-jacking of the use of company status primarily as a tax avoidance shelter is inherrently non value-added to GDP and therefore should be made socially uneconomic by the current Government. No-one would then have any need to question IR35 .   

cfield's picture

Are we creating even more loopholes?

cfield | | Permalink

Very interesting ideas but I can think of even more loopholes and grey areas even as I read them.

Rebecca's table is very revealing but ignores the fact that most contractors will negotiate a higher rate than they would have done as an employee since they could argue that they are liable to employer NI instead of the client. Therefore the income levels between these groups are not strictly comparable.

The idea of having a separate class of workers called Contractors is only going to lead to more blurring at the edges. For example, when do you become enough of a "proper business" to avoid contractor status? And what about the Fridays to Mondays? Should they pay the same tax as genuine contractors?

This 7 out of 10 rule sounds plausible but in practice would be easy to get round. I'd imagine it would include things like VAT registration (can be voluntary), PI insurance (loads of cheap deals around), employing other people (like their wives or mates or each other - who is going to check what work they do?), having other clients (ditto). This sounds like a tickbox approach which the courts currently reject in favour of looking at a situation in the round, for the very good reason that each case is different.

Applying the minimum wage rules to directors worries me. This law was brought in to protect vulnerable workers being exploited in sweatshops for £2 an hour. It should not be used as a tax grabbing weapon. What you really mean by this is minimum tax. By all means charge companies a minimum tax if you like, but what about all those making losses with no cash to pay the tax?

Length of contract is a non-starter. It's far too easy to manipulate. Contracts would simply be limited to one year and there would be plenty of scope for arranging other contracts during breaks, perhaps on a reciprocal basis with other contractors.

I rather like the Finnish idea of making all income subject to NI, but even there you could save a packet by taking dividends instead of salary, as people will exploit the variances between tax and NI rates/thresholds. Retained profits would also become more tax efficient, unless you brought in the kind of tax rules for close companies we had during the 1970s that so hampered re-investment.

I still like the simplicity of restricting IR35 to the Friday to Mondays. Forget all the others, let's just focus on them as they were the catalyst for IR35 in the first place (or so we were told at the time). I disagree with Rebecca that employers could easily get round this with group companies. It would be easy to legislate against that. Just look at the NI holiday rules. They anticipated enough loopholes there. They could easily do the same to stop employers forcing staff into artificial schemes to avoid NI. And the best thing about this is the social function it would serve too - it would stop people being coerced into giving up their employment rights, as was happening in the late 90s.

We just need to make sure that the tax rules are aligned with employment rights, so that clients pay employer NI for ex-employees who would also continue to receive redundancy rights, sick pay, etc. The only exception should be retired staff (over a certain age) doing a bit of consultancy work. They should be exempt from NI anyway but shouldn't retain employment rights, provided they accepted retirement voluntarily as required by the law now.

Chris

why replace it ?

andytaxx | | Permalink

why does everyone automaticly assume ir35 HAS to be "replaced"? just scrap it!! . has no-one considered that or is it in the accountancy proffessions interest to keep some form of it going ? why single out individuals setting up  their own business just because they might have left permanent employment voluntarily or otherwise? its more to do with hmrc and gov't greed, not dealing with tax avoidance which as everyone knows is perfectly legal.

25% corpration tax

Andrew C | | Permalink

The simplest way to solve the problem, like the 5% levy but simpler all small companies benefit from being able to pay dividends instead of salary. Then scrap IR35 rules and make tax simlpe

in favour of

The Black Knight | | Permalink

80% income from one client rule,where this is distributed by dividends = additional tax/or NI on dividends, unless additional staff (non family members) are taken on within 1 year of taxable year using a rebate of tax. Additional tax does not have to be punative rate. Perhaps leaving nasty old IR 35 and the Law to deal with abusive arrangments.

We need practical to work with not more wishy washy law that the courts take decades to sort out.

Not in favour of nat minimum wage idea, many co directors work very long hours while building the business for no salary (or profits) are you really going to saddle a start up with £18K of losses to start with, who would finance this. (60hour week no profit ?) Two directors £36K ?

The self employed should pay less tax it is their reward for taking risk and we need more than ever to encourage entreprenuers.

The tax advantages of the dividend route play an important part in leaving resources available for growth which if encouraged properly will reap its rewards in the employees tax later.

Rebecca , please don't let them kill the goose.

We must remember the problem is false self employment, not small companies.

Reinvestment

The Black Knight | | Permalink

If a small company does make £40K profit, that profit may still not be available for distribution but may be required for investment .  Do you pay the directors their nat min wage and leave the company begging the bank for finance ?

Another unlevel playing field

mfwiniberg | | Permalink

Indeed, my company's largest (but not only) contract has a MINIMUM term of 5 years.

Yet it would be hard to argue, even though that company does provide a large percentage (>80% at times, but not constantly) of my company's income, that I am an employee of that third party:

I am not the only employee of my ltd company that works on the contract.

MY company provides all materials, and specifies what hours are spent on the contract, subject only to on-call demands for support, which are given priority over other work.

Both I and my other employees are free to (and do) work on other projects at any time.

None of us engaged on this particular contract are based in (or even near) the main contractee, and we only attend on site when needed as part of the work.

The work done on the contract is billed by the hour and at differing rates depending on who has been tasked with the work and the nature of it.

We have a number of different clients, and also operate a small retail business.

Yet despite all that, we undoubtedly do provide a service to that contractee, and yet I still answer 'no' to the question "Are you a service Company"  - as advised by the company accountant - to avoid the risk of falling arbitrarily within the IR35 legislation.

The trouble is that, like most legislation produced in the past few years, IR35 was thought up by someone with no business experience, sitting in an office miles away from anyone with any real-world knowledge, and under pressure from ministers, Treasury etc to come up with something quickly - hence the total mess that it is.

IR35 needs (and is now hopefully getting) a complete rethink. It seems to allow those who were able to afford to evade tax before to continue to do so, whilst catching many others. like myself, who are simply trying to run a business!

 

silicondale's picture

Replacing IR35 unfairness by NMW unfairness?...

silicondale | | Permalink

... is a non-starter. While letting current IR35 companies off lightly, it will hit those very small companies which are innovating - which are likely to be those that need every spare penny for R&D (including paying real employees).

"It does require a bit of extra record keeping for directors of “normal companies” as they will need to estimate their hours worked"

Absolutely - more than just a "bit" of extra record-keeping, too, for those who simply do not record their hours worked (as they have better things to do with their time). It is an encouragement to fraudulent fiddling of figures (under-estimating hours). It's the edge of a very nasty slippery slope, too, for HMRC to dictate to a company how much it must pay its directors. The next step will be a deemed market rate as was suggested when income-shifting legislation was proposed. Apart from anything else, if the company does not have enough in its bank account to comply with such a rule, will HMRC then be instrumental in putting it into insolvency?

There are some possible solutions to IR35 unfairness - but since IR35 is just a symptom of gross unfairness in the tax/NIC system, I think the only sensible solutions require wholesale reform. Roll NICs into income tax, and increase it if necessary to allow employers NIC to be abolished altogether. Provide compensating age allowances so that post-pension-age employees are not disadvantaged. Tax dividends equally with all other sources of income. Not just close company dividends (unfairness again) but all dividends received by private individuals, family trusts, etc. This way, there is no need for IR35 or anything similar. As for income-shifting between husbnad and wife - this should be actively encouraged as meeting one of the social objectives of the government, supporting family values!

- sd

KH's picture

Tax avoidance is so easy for the mega rich,

KH | | Permalink

not to mention profitable. So why not let the less well-off also have a few tax avoidance schemes. As it is, if you are seriously wealthy, you can afford to pay the least tax of any class of citizen, so why all this brouhaha over a load of not particularly wealthy individuals getting on the bandwagon by using small LtdCos to trade through, and taking most of their income via dividends? Likewise husband & wife companies, using income shifting. This is small fry compared to billionaires using a miniscule part of their wealth to avoid paying tax. And even smaller fry compared to letting banks rule the country.

The more I look at the IR35 problem, the more I dislike IR35 and its total unfairness. As long as the government wants many different tax regimes in place, then there are bound to be loopholes for the wily. It's a bit like slugs and snails .... there's no point it fighting them to the point of exhaustion, just learn to live with the problems (I grow rows of "sacrificial" lettuces purely for the little slimers ... they love it!). The more slug pellets you put down, the more toxic your garden becomes to all the other forms of wildlife we are trying to protect. The analogy might be bonkers, but it's not that far off when compared to the knock-on effects of IR35 legislation .... it's invariably the good guys who get clobbered.

I don't think there is viable way of patching IR35. Scrap it, and invest any tax savings on making all the other tax legislation more watertight.-- KH

Incentivising the contractor, not screwing the last penny from h

irwins | | Permalink

Speaking as a long term contractor who contracts mostly overseas but brings the revenue back into the UK within a UK based Company I would say that not all contractors are trying to fiddle the tax system by incorporating, and that we make an important contribtion to the Exchequer as well as UK balance of payments. 

I was encouraged to incorporate by the last Conservative government, and my close company has been my best and longest employer ever since.  I find that incorporating allows me to build up profit within the company that provides security of income during quieter moments and that is a real relief considering the alternatives.  It also provides a degree of protection in case the work that I do leaves me open to litigation even though I have indemnity insurances for that.  I have long term customers - that's just good business - not dsguised employment.

Given the scale of the unemployment likely to be generated by the CSR over the next few years, the country needs to be encouraging an entrepreneurial spirit and getting more folk with flair and ideas to start up in business without the complexity there currently is. Barriers to entry as well as running complexity need to be reduced to make the process of self employment as simple as possible.  The more folk working, the less you have to worry about overall tax avoidance.

I have found the IR35 regime stressful as it leaves you in the situation of fearing the HMRC knock on the door, inspite of gaining opinion from taxation professionals etc.  Certainty is the real need here, but at an affordable price.  I currently pay out money for professional opinion and investigation insurance which is not adding value.  I find that following the employment status laws are a nightmare and constantly changing by micro decisions by the judges - I should not be having to divert my attention to complex tax law to stay HMRC safe. 

Thus I do not think the answer lies in employment status law.  Nor does the answer lie in determining an IR35 test else we get son-of-IR35.  No, I in my opinion I think there needs to be a voluntary tax regime that close companies can subscribe to.  Close companies are well defined in tax law.  If you are a close company you can subscribe to a new tax regime whereby income paid from the company to the close director is per normal income tax rates, director's employee NICs can be paid up to the higher rate threshold along with employer NICs, remaining profit is taxed at  either small company rate or new close company rate, dividends can only be paid to close company directors once higher rate tax is achieved in that year and is easily monitored through self assessment regime.  This opens up the option for a close company to reclassify itself, pay itself good wages, allow it to retain profits, and allow it to distribute profits as it thinks fit.  Reclassifying itself would as part of the deal to remove the threat of IR35, which could still remain on statute to tackle those who didn't reclassify but tried to avoid and failed.

I'm sure the accounting folk can think of a lot of reasons why this wouldn't work, but at the end of the day we need a tax regime for contractors that is accessible, incentivising, understandable and transparent.  Dividend payment to close-company directors only after reaching higher rate tax level provides that balance between tax take and incentive.

OK fire away....

IR 35 - an alternative approach

guy talbot | | Permalink

Fascinating that so many people  are keen to see abolition of NIC.  Clearly this is the simplest and most radical solution.  There are relatively few benefits which are contribution based, and eligibility for these could be retained by a requirement to have had certain minimum levels of income either taxed as employment or self-employed.

 It is possible that abolishing NICs would be a step too far for the Government.   It is widely accepted that "low salary/high dividend"  is an  appropriate remuneration strategy for shareholder/directors.  This gives double benefit to people operating through limited companies compared with sole traders - not only do they enjoy limited liability but they have reduced tax as well!

 To balance up this situation I have long thought that the way forward is to insist that any payments to a shareholder/director should be treated as salary up to the higher of the Upper Earnings Limit  and the amount paid to the highest-paid non-director employee.  Anything over that threshold could be then paid as dividend.  This rule would also need to apply to the spouse of a director  as well as to Shadow Directors.  In fact, for a  close company, it might be necessary to apply it to all shareholders.  For the relatively rare situations where there is a genuine investor in a small business (the Aunt Agatha situation), a specific exemption from this requirement might need to be claimed following a signed statement that the person concerned played no part in the management of the business.

A rule such as this would not only obviate IR 35, but it would also mean that the settlements legislation would no longer be required and would discourage incorporation for purely tax driven reasons.

AnnaKournikovasKnickers's picture

PAYE Regs 2003

AnnaKournikovas... | | Permalink

Can anyone tell me what the "PAYE Thrshold" which is repeatedly referred to in the  2003 No 2682 regs, specifically at Section 9 (1) but does not define what it is, viz is it some sort of monetary de minimus or what?

Unfortunately the HMRC website link is broken (no change there then!) and the alternative source cannot be navigated

Why not keep the statuses separate ?

plega | | Permalink

Many people think that the economy benefits from job flexibility and the end of the old "job for life" regime. So why shouldn't the tax system encourage that ? Higher taxes for those who benefit from the employment laws, lower taxes for those who contract and are genuinely *not* covered by employment laws. (We might need concomitant changes to the scope of the latter, of course.)

I suppose someone would object that people could "buy" their way out of their employment rights :-(

IR35 simplification

Ian_mcdonald | | Permalink

I have a bit of a problem with this tax simplification thing - the tax experts are in the best position to recommend simplification - but simplification is surely going to reduce their collective income so I am not confident we will achieve a satisfactory outcome - sorry!.

As a non-expert payer of taxes I would like to see:-

1. All forms of NI scrapped and merged with tax.

2. One flat rate tax for everyone (Ltd Coy, self-employed, employed, etc., etc.).

3. No allowances, exemptions, concessions, etc.

4. Collect the flat rate tax at source wherever possible.

-- Ian McDonald IML Interim Management Ltd Finance~Accounting~Systems http://www.i-m-l.org

fao guy

irwins | | Permalink

great minds think alike!

Nichola Ross Martin's picture

How about a levy on the end client?

Nichola Ross Martin | | Permalink

Scap IR35.

Introduce an engagers' levy. This is paid by the end client per head of manpower of temporary/subcontract manpower. This totally removes the need to reclassify or work out employment status. Easy to operate and administer.

If the engagers' levy is set at an equivilent rate to NICs then it will make the cost of employment more similar for the end user. Indeed now that new employers in the regions have a NICs holiday, you may find that it makes more start up businesses take on employees rather than subscontractors.

Obviously might prove a tax unpopular with banks who are major engagers of contractors (well, they used to be),

and gov't departments Nichola

The Black Knight | | Permalink

like the MOD, or are they all now using umbrella companies and encouraging the claiming of excessive amounts for home to work travel and lunch !!

Back to Basics

Paulsoper | | Permalink

This problem arose in the first place because HMRC or IR as they were then were unwilling to use their existing powers to attack the abuse.  That was a person working for an employer, resigning on the Friday, forming a company over the weekend and purporting to return to the same occupation on the monday through the medium of the intermediary.  However the interposition of the intermediary would usually be a sham and an "instruction to pay my company" has no more legal significance than "pay my bank" or "pay my building society".  If there is, in reality, an employment relationship then simply enforce it.  Disregard the sham.

Of course the current 'solution' is ideal for the engager who hires the employees services - they are specifically released from all liability by the legislation.  I wonder how that one wasn't spotted. Hmmmm.

If the intermediary is engaged through the second intermediary of an agency then use the existing agency rules to the same effect.

The second problem arises because of the wholly unsatisfactory nature of employee taxation when compared with the self employed caused in 1924 when employment was fisrt taxed as a source using the taxation rules for holders of offices both public and private.

Please don't tell HMRC but the exemption for directors from the NMW only applies to the amount they receive as an office holder and not their quite separate legal relationship with the company as employee in an executive capacity.  Oh yes there have been many cases where the courts have held that persons can have several separate "hats" - one as shareholder, another as director, another as employee, and the legal significance is to determine which hat is being worn.

So - ditch IR35, it's not working, don't look for a substitute or you might get what you wish for.  HMRC go back to applying the existing rules properly which they were too lazy or unwilling to do.  It may cause them to recruit more manpower - provided the tax they collect exceeds the cost of the manpower this is quite justified.  If the manpower costs exceed the potential revenue steam it is not efficient use of government resources to persue sums that don't justify it.  Reform the necessity rule which causes so many problems for employee expenses and allow larger expense claims provided the expense passes the duality test of wholly and exclusively.  Apply NMW to all employment income including that of directors.

silicondale's picture

Sorry, Nicola, it won't work

silicondale | | Permalink

It will just create a vast new grey area. Where does the line get drawn between engagement of a contractor (levy payable) and commissioning of consulting services (levy not payable) ?

The whole IR35 problem arises because of the complexity and inconsistency and unfairness of the IT/NIC/CT regime. Nothing short of wholesale reform will fix it without creating new problem areas.

 

silicondale's picture

NMW again

silicondale | | Permalink

Paul Soper - I go along with much of what you suggest. However, I have a problem with your last sentence.

"Apply NMW to all employment income including that of directors".

For the reasons I gave earlier, this is simply not viable and is an invitation to petty fraud.

It could just about be workable however, with one simple change to NMW regulations: giving a director the right to waive his/her NMW rights, in the event that he/she considers this in the best interests of the company. A director has obligations under the Companies Act which could otherwise come into conflict with tax law and place the Director in a position of acting unlawfully whatever action he/she takes.

- sd

Tom 7000's picture

Easy answer

Tom 7000 | | Permalink

Abolish small companies rate of CT...problem solved and also the UK govt not bust any more.

It solves it, but if it happens, personally I shall breakdown in tears...or relocate to ireland

 

tom :o)

 

Let's get real with this "small business" propoganda

adbanks | | Permalink

I'll be slated by the Brotherhood, just as I was every time I suggested this within the PCG forums, but most contractors (I say "most" not "all") are not "small businesses" at all... they are agency temps that just happen to use a limited company as a means of getting around s134 ICTA1988 (now part of ITEPA).

Few contractors understand why they have a limited company, other than their agency required it.

The loophole that allows agency workers to be paid gross if via a company, but only net if PAYE is the problem.

That is not to say I support IR35 - far from it... but focussing on the tax tail, rather than the employment status dog will not solve the issue. HMRC are right to refer to "disguised employment" but it should be the "disguised employer" who is penalised, not the worker.

Until employers face the full impact of their actions, true self-employment (whether incorporated or as a sole-trader) any rearranging of the deckchairs is a waste of time.

NMW

richard.snape | | Permalink

The problem of the effect abolishing NMW exemption might have on lossmaking companies, could be easily solved by stating all directors must be paid NMW before any dividends are paid.  Loss making companies shouldn't be paying dividends.

Finnish System

Cleaver Accounting | | Permalink

I think that the Finnish idea of applying NI to half of all taxable income would be a lot easier than trying to implement all sorts of other more complicated sticking plaster ideas.   Or you could have minimum/maximum income levels instead of applying it to half of the income to bring it more into line with the current NI system.

It would also cover the directors who take dividends instead of salaries, as dividends are taxable income, even if the tax has been deemed to have been already paid!

Seems to be a very simple, workable solution to what has been a horribly complex problem, and would level the playing field all round.   But then I have always been a fan of "Keep It Simple Stupid"

nogammonsinanundoubledgame's picture

A couple of points of principle

nogammonsinanun... | | Permalink

(1) As mentioned earlier in this thread, IR35 Mark 1 had a lot going for it, and it was only the spinelessness of the government to cave in to the large company lobbyists that scuppered it.  Put the obligations back on the end client where they belong.  Same thing happened with CIS, of course.

(2) One of the main bitching points of those caught by IR35 was the disparity between the true commercial risks and rewards of employment status compared with the deemed risks and rewards imposed by IR35 with the taxing rules that ensue.  Bringing these issues in synch, so that someone who is taxed as an employee has full employment rights (outside of the tax system) should be a priority.

With kind regards

Clint Westwood

AnnaKournikovasKnickers's picture

PAYE De Minimus

AnnaKournikovas... | | Permalink

Well! thanks guys. You really know how to help a young lady in distress don't you. All engaged in this high level rhtoric and all I wanted to know was at what point would a company have to register a PAYE scheme.

 

Well, I've looked it up for myself at considerable opportunity cost when I should be selling life insurance.

 

I trawled through the PAYE Regulations 2003 and it says under Rule 7 (determination of PAYE threshold) effectivelt that unless (or until) pay (as defined) reaches 1/52 of the personal allowance (as defined) no PAYE (scheme) is necessary.

There you are guys! Missed the chance of getting inside my pants.

 

 

silicondale's picture

NMW again - again?

silicondale | | Permalink

Richard Snape writes: all directors must be paid NMW before any dividends are paid

I think I'm correct in interpreting this as a suggestion for a general rule - i.e. not just for loss-making companies which of course wouldn't be paying dividends.

I reiterate that IMO this is unworkable. As a director of my company, I may say that I am working just one day a week.  How is HMRC to know how true this is, or whether I'm really working 3 days or 5 days or 7 ?

For any rules based on NMW to be credible, they must be based on objective and enforceable time-keeping documentation. Who is there to enforce it? This is what I mean by an invitation to petty fraud.

Let us say also that my wife is a non-executive director. She works zero hours for the company. If I put all the shares in her name, then she takes the dividends without having to receive any NMW pay. In fact, there's no problem in her doing quite a few hours work, as directors fees up to £5715 don't attract tax or NI.

But of course once the principle is established that directors must pay themselves for time worked, HMRC can argue that the worth of such work is much more than the NMW, and that they should 'deem' that a real 'market value' salary ought to have been paid. 

Ah, deeming that a salary has been paid - where have I heard that before? Ah, yes, IR35.

PAYE Threshold

Paulsoper | | Permalink

The threshold is set by the government (this year £97 per week) to be the same as the basic state retirement pension - pay less than this figure and no PAYE records need be maintained.  The regulations referred to (actually Reg 9 not Reg 7) determine how the threshold is applied in circumstances where a number of payments are made within each pay interval to attempt to avoid the application of the threshold.

I suspect that had this been in a separate thread rather than one about IR35 it may well have been answered promptly.

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