IR35 – time to go? by Rebecca Benneyworth


I have been discussing the future of IR35 with a large group of practitioners. They expressed concern about how best to advise clients potentially affected by IR35, but a sense of injustice was also clear. How on earth do we move forward with this?

In attending a residential conference at the end of last week, I met with a number of practitioners from smaller practices in discussion groups.

Continued...

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Nick Graves's picture

Me too.

Nick Graves | | Permalink

I act for a four-director company that employs many sub-contractors and some permanent employed staff. It has grown in pretty much the same way; a natural evolution of four "contractors" in a very specialised area.

The contradictions over holiday pay/employees rights/etc and other issues below shows that IR35 is exactly as QQ describes; an asinine and downright nasty tax.

It's not just the tax that should go; those behind it have revealed how detached form reality they are.

Not all are one-man bands.

ChickPea | | Permalink

"I don't support the view that contractors are a inferior sub-set of the rest of the business community just because they're one-man bands. "

For one thing, some of us aren't. We are (and have been from inception) a two-man company (briefly three, for a few months). We also use sub-contractors from time to time.

I know people who have started out as contractors and grown to employ tens of people. For anyone with any plans for growth, IR35 is a serious speedbump on the road to success; it makes it difficult to retain profits for future projects.

Tax Breaks?

BelGrant | | Permalink

"There is no social reason why contractors should receive a tax break. And the same goes for the self-employed. The only reason for tax breaks for businesses is that they create jobs for those who can't create their own."

I can't agree with you, I'm afraid. Contractors are small businesses in their own right - micro-businesses, just like any other and should be clearly understood as such. Many of them do create jobs, inadvertently, by providing critical knowledge-based 'expertise' to larger companies, enabling them to thrive and expand. These are high value flexible working contributors to the economy, not skills based workers that are currently taxed at a higher rate under IR35 anyway.

I don't support the view that contractors are a inferior sub-set of the rest of the business community just because they're one-man bands.

Loan Based Schemes

Anonymous | | Permalink

Kumar,

I am aware that, for a time, it was possible to use a UK based Employee Benefit Trust to have the effect that you state. However this has been closed down and is no longer possible. I think someone quite famous went through the commissioners system to defend this arrangement – perhaps one of the mobile phone companies?

The current loan schemes depend, as far as I can tell, on flaws within the corporation tax legislation to achieve their end. These schemes - and the flaws - have been disclosed to HMRC (years ago now) by multiple providers and yet HMRC have not closed them down. I find this very strange. But then, as I say, I do not know the full details.

Perhaps you should talk to some of the providers of these schemes – they are very open with their information and methods. A search on Google will reveal many of them all desperate for clients.

Loan based schemes

indiajack | | Permalink

Alan,

Thanks for your time.

I think we are at cross purposes. Let me try and explain where I am coming from.

I had a agent stating that his temp/contract/interim personnel use an offshore loan-replacing-most-of-salary scheme administered by some companies via an umbrella company format.

I had thought this had been closed and any such in existence would be evading tax. From the various postings, I was wondering whether I was wrong in my understanding

Contractor "rates"

ChickPea | | Permalink

@NeilW

Suggesting that the agency should have to employ the contractor directly is missing several points.

1) I'm not a contractor because I can't get a job: I'm a contractor because I don't /want/ a job. I work as a contractor, through an agency, but I also work fixed-price for several other clients, and I sell AV products, ADSL, hardware etc, including to domestic customers. I don't want this replaced with a series of short PAYE engagements. And the agencies won't do it- they'd have to carry you on the payroll and pay you sick pay etc.

2) The usual permie assumption is "oh, that contractor gets £1K/week, so that's the same as £52K salary". No it's not, for a number of reasons.

i) The cost of employing a permie is close to 2X the salary cost.
ii) The "rate" received by a contractor is subject to lots of costs: all the expenses come out of it in most circumstances, there's 2 lots of NIC plus PAYE on any salary drawn, and then there's CT if you somehow manage to make a profit. Also anything like sick pay, holiday pay, accounting fees etc all comes out of the same pot.

One of the most iniquitous parts of IR35 is the derisory 5% "expenses allowance" - 5% may be possible for Global Megacorp PLC, but it's tough for a small business to do. I wouldn't mind so much if they only taxed the money you *do* take out of the business, but they want to tax the "deemed" amount, which has no basis in reality.

I've had no contract for 7 years, until now- I've survived on the basis of my other activities, plus retained funds. That's an option not open to those "caught" - you pretty well have to shut down after a few weeks, as you've no money retained to pay the broadband, the office insurance..... or the accountant!

Not all offshore trusts use loans

Anonymous | | Permalink

Kumar,

I think you are confusing loan based schemes and the scheme that section 58 attempted to close down. The offshore trust scheme that s.58 FA 2008 targets did not involve replacing a salary with a loan. Nor did it involve employment. HMRC are not treating it as evasion and are not using criminal sanctions nor are they seeking penalties.

My client does/did not use a loan based scheme and my knowledge of these it not such that I could confidently advise you.

You refer to the loan based schemes as, from what I can gather, a “sham”. HMRC have the power to close down shams and yet they have not [yet] done this with the offshore EBT/BBT/FBT [loan] schemes. As they are aware of these schemes and appear to have done nothing to shut them down, I doubt that they would fall into your category of “evading tax”. Perhaps you have some evidence or knowledge of this? As I say, I do not know.

Perhaps Harriet Harman’s court of public opinion would come to a different view to that of HMRC !

Some facts on contractors using Ltd companies

indiajack | | Permalink

We agree qq;

I think that it is asymmetrical and unfair that temp workers are forced into a position where they have to pay both employer and employee NI. The system was designed with idea that employers paid employers' NI. This, to me, smacks of unfair and discriminatory practice that is against EU legilation.

I do understand the distinction when temp workers come in as consultants, although I am unsure about the situation if the temp was being classified as a contractor. In my view, this does not imply a schedule D case 2, especially if the doctrine of look-through were used.

What are your views on this?

Offshore trusts and loan-based schemes

indiajack | | Permalink

Alan,

I do understand that offshore trust schemes per se are unlikely to involve tax evasion but one where offshore initiated salary is not remitted to the employee but instead he is given a loan drawn on an offshore institution smacks blantly of being engineered specifically to avoid tax.

There have been a number of tax cases since 2001 where a scheme is devised with the primary intention of avoiding tax to be deemed to fall within the realms of evading tax.

I would appreciate clariication or a reference that I can research if HMRC has specifically agreed to the operation of the receipt of credit from an appropriate offshore entity while drawing a minimal or small salary from employment.

Offshore trusts and loan-based schemes

indiajack | | Permalink

In response to Alan's comment, this type of offshore trusts and loan based schemes are very risky as they are prima facie tax evasion.

I used to be paid a low salary with a high credit card limit at a Cyman based bank in the old days, which is the same format. This, I believe, has been closed down and is too risky anyway.

With reference to ohn Williams and Steve H.,

yes, in many cases contractors do not have a choice but to use umbrella companies and the 2006 Finance Bill has effectively relegated IR35 to the boondocks as only certain expenditure is allows and is capped. However, having recently been in conversation with a govenment designated HMRC officer, they do realise that they are not applying the critria on allowable expenses in a strict manner

They were going to apply it in 2008 prior to abolishing the use of umbrellas in the future (iprobably because they needed tax revenue) but decided not to do so because of the financial crisis.

Therefore, contractors are subject to potential and quick loss of job without employee protection which offers a higher rate. However, this is reduced down by employer NI and Class 1 employee NI. Some may say that a class 4 may be used to optimise money received but this is actually a short term and pro risk stance as it reduces the safety net if one experiences any long period lacking in obtaining a contract.

As such, when comparing PAYE against umbrella based remuneration, the latter has about an average 3% disadvantage after all and full capped allowances now available , if one plays safe. The ones who benefit are the agencies and the client ("employer").

I do wish there was an easier way out other than a combined united stance against using umbrella companies and at least reducing te use of limited companies so that agents cannot insist on them or lobbying the government.

Some facts on contractors using Ltd companies

c3seltd | | Permalink

Kumar,

The reason why agencies insist on Ltd companies is because
of the *law* . Otherwise the contractor is an employee of :

1. the client
2. the agency

Either way the contractor is not liable.

#1 is the real reason that Ltd companies are used.
Because of the IR35 of the 1970s, when contractors operated
as sole traders.

Then (as now) , the taxman deemed there was disguised employment.
But, rather than now, they placed the tax burden on the client.
Which is of course the morally correct thing to do.

IR35 is a purely political animal.
Driven by tax/economic morons, ignorance, pathetic class-warfare,
and outright hypocrisy.

The only mistake they made was thinking that their target is as
stupid as they are. Witness their pathetic attempts to define things
like PSC, "service company" etc while attempting to evade/avoid :

- giving a statute definition of employment
- breaking EU tax law (unfair targetting of one specific industry sector)

Thin end of the wedge

Anonymous | | Permalink

Kumar,

The offshore trust scheme was emphatically NOT tax evasion. Tax evasion is illegal and could result in you spending time in prison. The offshore trust scheme that I referred to was fully legal and in compliance with UK law. It was fully declared to HMRC (in 2001!) who accepted the use of the structure by some taxpayers.

The scandal is that HMRC have tried to go back and rewrite the rules after the event (ie in 2008). The government are completely isolated on this issue to the extent that members of the opposition parties have now signed the petition. Be in no doubt that if the government get away with this then it will be the thin end of the wedge – other legal avoidance strategies such as “income sharing”, salary/dividend income split will also be retrospectively outlawed. How many clients will your practice lose if that happens?

http://petitions.number10.gov.uk/RepealSection58/

You also mention loan based trust schemes. They tend to be offshore employee/family/business benefit trusts and make loans and so avoid UK tax, in some cases even “benefit in kind” tax. They are more aggressive than the s58 scheme. It is expected that once the JR has been settled the government will retrospectively close down these schemes too.

IR35 was just the beginning...

Service companies

IANTO | | Permalink

@ Martin Foley

"The hoo-haa about "Service Companies" is ALL about the very fact that they are NOT defined - by anyone !! Let alone by Parliament or the Courts"

Thanks for confirming that. I guess that HMRC wouldn't like to test the matter in Court either and so depend on intimidating people into answering the way they want.

@ John

martinfoley07 | | Permalink

Well, do not overlook Taxes Acts for legal definitions!!
Blimey, I would think there must be more legal definitions in the Taxes Acts than any other field.

The hoo-haa about "Service Companies" is ALL about the very fact that they are NOT defined - by anyone !! Let alone by Parliament or the Courts
HMRC's own attempts to "define" them have been totally chaotic.
This all started last year with some woolly wording, and we were promised it would all be much sharper this year.
As you can see from the debate, it is not.

But the reason for the lack of clarity of course is "straightforward", just as "solutions" are anything but. It is of course precisely parallel to the underlying issue - the Govt consciously refuses to clearly define "employment" for the purpose of taxation.

Close companies

IANTO | | Permalink

@ Martin Foley

Thanks for the reply. I assume that as a close company is defined in an Act of Parliament, albeit in a financial sense, then it is a legal definition. I was looking for a definition in the Companies Act. So is a "Service Company" defined in any Act of Parliament, or is this really an HMRC definition?

I assume the reference is to an HMRC definition.

martinfoley07 | | Permalink

Not sure why, John.
David had already given the specific statutory reference.
The whole of Part XI of the Income and Corporation Taxes Act 1988 (aka ICTA) is devoted to "close companies".
Section 414 (aka S414) of Part XI gives the definition for all the special provisions that apply to close companies.

Close companies

IANTO | | Permalink

@ David Kirk

I assume the reference is to an HMRC definition. Is a close company defined in Company Law, i.e. is there a statute covering it, like a PLC and LTD? If it is only a HMRC definition, has this been challenged/upheld in any court?

If there is no statute and there is no case law then the question has no validity in law, which is exactly the same point I make about a "Service Company".

If more and more people understood their rights under the Law, then no official body, e.g. the police and HMRC would get away with the bullying that they inevitably engage in.

Most people just roll over when challenged and so perpetuate the bullying.

Contractor remuneration

IANTO | | Permalink

@ Neil Wilson

"If they aren't getting a higher rate then they should go get a proper job"

I'm afraid Neil your viewpoint is naieve and simplistic. There are many of us like myself who would gladly take a permanent post. However, if like me you are over 50, actually I'm 61, then the chances of getting a permanent job are zero, especially in South Wales where I live.

I was made redundant from an IT manager's post at 49, so what chance would I have of getting something at that age, especially with my dynsosaur skill set (IBM mainframe, HP3000 and Cobol/Assembler/PL1)? There are many more like me. I had no choice but to go contracting and again I had no choice but to set up a Limited Company because the agency that I dealt with demanded this.

So if the system forces me to work like I do, then the system should bear the penalty, i.e. lower tax return from me. In any event, when travelling and lodging expenses are taken into account, I'm earning less than I would have been if still employed in my old job but certainly more than most of the semi skilled PC based jobs that are available in South Wales.

So please, do not cast all contractors in the same mould.

Employment rights compensation

NeilW | | Permalink

Contractors are compensated for the temporary nature of their engagement by the higher rate they get. If they aren't getting a higher rate then they should go get a proper job.

There is no social reason why contractors should receive a tax break. And the same goes for the self-employed. The only reason for tax breaks for businesses is that they create jobs for those who can't create their own.

Very simply what we need is a level playing field between employees, self-employed and contractors with no exceptions. Business tax breaks should be focussed on third party employment and effective capital investment.

NeilW

Close company?

Anonymous | | Permalink

Rebecca -
It could apply to close company dividends
But the immediate effect of this would be just like with IR35. Not disguised employment, but "disguised close companies" - a lot of tiny companies with sufficient independent shareholders to push them over the barrier. IMHO the same rules should apply to all companies - so if you're going to tax dividends, then you should tax all dividends. This will also be a way indirectly to extract tax from the many big companies that escape the corporation tax net.

simple ways and means

c3seltd | | Permalink

1. Employment law

If there is disguised employment, there cannot be a disguised
employee without a disguised *employer* .

2. Real business relationships

Either there is a real business relationship between contractor and
client, or there isn't. No rubbish about "hypothetical" contracts etc.

3. Call a spade a spade on dividends

They are a tax avoidance mechanism (NIC) , regardless of the reason
they are paid out.

#1 is simple.

Back to the 1970s.
If disguised employment is discerned, the employer is liable for employer
NIC. And not only for tax, but also employee benefits (sick/holiday pay
etc) .

Similarly a contractor cannot claim for travel/accommodation to/for
place of work. Real employees cannot.

Set a tolerance period (say 1 year) .
No harm will come to contracts with duration up to this length.
After that, disguised employment and consequences thereof for both
parties. Much akin to the "2 year" rule on contractor expenses.

#2 puts the agency in their right place.
In the business relationship, an agency is a party who introduces
supplier to client. And is paid appropriately.

For the supplier, the agency may be acting as a payment factor.

So formalise all of this in law.
The contract of work is between supplier and client.
The contract between agency/supplier/client must reflect the realities.
X% of supplier rate is being charged as introduction fees.
Y% is being charged as payment factoring.

Restraint/exclusion periods defined for both client and supplier.

If the client don't want to pay Y%, they agree to pay the supplier
direct, and pay the X% to agency separately.

#3 is merely about fairness.

Something discussed is the notion of a dividend ratio.
Which is the amount of dividend that can be paid per salary.
Set a sliding scale to increase the ratio as salary increases (just as
used to be done with pension contributions per age band) .

But one law for all, small fry or big fish (or fat cat) .

IMHO #1 would mean that clients cannot keep contractors forever.
Nor can contractors become "permie-tractors" . There are cost
implications for both parties now.

The only certain way for all to avoid #1 is for contractors to be treated as
real businesses (well defined work/deliverables and not bums on
seats etc) , and for contractors to accept real business risk (payment in
stages, on delivery etc rather than the usual hours per week etc) .

#2 could improve the market significantly.
No IR35 "hypothetical" contract rubbish. No hiding of agency rates
from supplier and client. No asymmetric terms (exclusion periods etc) .
Everything transparent. Everything enshrined in law.

Close companies

davidkirk | | Permalink

The close company definition is in S. 414 ICTA. If you try to get round it you will lose control of your business and probably your money as well.

Proposals for a "fair" system

IANTO | | Permalink

@ q.q

Dream on!

Clients want to control contractors like employees but without having the attendant employee costs. Most clients are large companies and it is these organisations which influence HMG. So the situation will not change until someone caught by IR35 goes to the ET and gets awarded employment rights. Then we will begin to see real commercial arrangements between client/agency and contractor, which clearly would invalidate IR35.

Close Companies

IANTO | | Permalink

@ Rebecca

Have close companies been defined in Law? or is this another attempt by HMRC to make rules without the backing of statute?

Increasing the tax take

IANTO | | Permalink

@ Rebecca

"we could increase the tax take from the contractor sector without imposing the full burden of employment taxes on them"

but what about compensating for the loss of employment rights? It seems once again there is a one sided view of the contracting community!

I remind you that IR35 attempts to tax contractors as employees but denies them employee rights. Furthermore, as I understand the issue, anyone "caught" by IR35 would pay more taxes on any particular income than any other individual or organisation would pay on the same income. That can't be fair can it? So why should the contracting community suffer further increases in tax take?

RebeccaBenneyworth's picture

Definition of a close company

RebeccaBenneyworth | | Permalink

I don't think that contractors could get outside the close company definition. I haven't studies it for a while but here's the essence - a company controlled by five or fewer participators. So how many outside shareholders would you need, and how many shares could your contractor hold not be outside the definition? Doesn't sound practical to me even if you wanted to. Remembering that immediate family holdings are treated as grouped in one. There were good historic reasons to set the definition up to catch pretty much everything (I remember apportionments) and even on the vaguest memory I know I would not put my own business in such a position. And my rule is if I'm not prepared to do it myself then I'm not going to recommend it to my clients.

will await you article

Anonymous | | Permalink

It just seems to be an easy way to sort out a number of problems that will be easy to administor.
It would catch all with dividends, but it is still more tax efficient than salary. There can be maximum ni caps etc still in place so not all will suffer hugely.

Alternative tax - a supplement on divis

Anonymous | | Permalink

I did some quite serious work on this as a discussion paper a couple of years ago.
I'll do some work updating the options I looked at and look at in a feature shortly.

From memory the tarriff on divis only needed to be quite modest to swing the pendulum the other way. No where near 11%. (or indeed 12.8%). It could apply to close company dividends but would of course also hit everyone not caught by IR35 presently. It would address income shifting a bit too.

NI

Anonymous | | Permalink

Could there not be a small say 5% NI on Dividend income. so those utilising the small salary /divi route through their own company still pay some NI and tax man gets more.

Friday-to-Monday simplification

mikewhit | | Permalink

If the Govt was truly only 'concerned' about abuses of "Friday to Monday" employee-to-contract workers, it should only need to apply IR35 tests to contract workers who had formerly been employees of the same company or group.

Now that would simplify things ...

No change then

mikewhit | | Permalink

If you're correct "m"alcolm, then M Assive and his cronies will always prevail - there is no pressure except from the minnows (who can be ignored), to sort out IR35, and no quid pro quo (ie. reciprocal obligation on the client or agency) for being 'caught': in fact it's probably doing OK for the Govt in the sense that it keeps those tax-dodging contract people quivering in their desks and makes a bit of dosh for the insurance companies and lawyers, while letting Logica, CCL, EDS and the other big boys get on with their work unhindered and unchallenged.

And all the MSC legislation did was to clear out a bit more empty space between the large and the small players, so that was an ill-informed waste of effort too (probably lobbied for by M Assive &c ?)

abelljms's picture

simon is right

abelljms | | Permalink

all these fantabulous 'ideas' to "reduce burdens on business" i.e. jack up taxes whilst pretending to do everyone a favour, are similar.

Try the luvverly onslime CIS system. It's great if you're M Assive Builder plc with a sophisticated finance function, but a real hassle for the small boys in their tatty trannies. The regulatory effect is to drive out of business the small boys to the benefit of the big companies.......who funnily enough were the ones consulted in the first place about the wonderful 'enhancement in order to increase fairness' blahblah........

As i said we need to come up with a workable proposal to thrust in the floppy drive of HMRC systems PC to sort out IR35

In the old days - on the web ?

mikewhit | | Permalink

Do you have a link to that original formulation, Simon ?

Backdating

mikewhit | | Permalink

In that case why don't they just backdate IR35 to 1950 - get loads more tax that way !

Oh, and the removal of both the married couples' allowance and the additional personal allowance that happened under Maggie (?Major) - backdate that too !

in the old days

AnonymousUser | | Permalink

When the IR35 legislation was originally announced, it was the big client companies that would have had to do the donkey work and deal with the PAYE. But the Big 4 muscled in and persuaded HMRC it would be easier to harrass the little people. Twas ever thus.

Section 58 - link to IR35

Anonymous | | Permalink

Around 2,000 people who were unsure of their IR35 status (or were caught, or did not want to risk the uncertainty) used a scheme that was marketed by several providers that involved an offshore trust.

The scheme worked and HMRC accepted the use of the scheme by some individuals.

However, most user’s tax returns were left in limbo for up to 8 years. Finally, in 2008, the government changed the law in an attempt to thwart the scheme. That would have been okay, but they back dated the legislation to around 1950.

There are now challenges against the UK government under both UK Human Rights Act and in the European Court of Human Rights (this because a senior HMRC officer stated that he would ignore the UK courts if they found that the retrospective legislation went against the Human Rights Act).

The large UK accountancy organisations have condemned the governments response to this scheme.

Section 58 ?

mikewhit | | Permalink

For those mystified even after following the link to the No.10 site, there is some info here - http://www.freshfields.com/publications/pdfs/2008/nov08/BTR.pdf

It's all (apparently) to do with taxation of foreign trusts - but I can't see any connection with IR35 !

Alternatives to IR35 also cause problems

Anonymous | | Permalink

Rather than deal with the problems of IR35, the government are trying to patch up the problems it creates. Have you seen the petition on the No 10 website?

http://petitions.number10.gov.uk/RepealSection58/

Devil in detail - like with unlike

mikewhit | | Permalink

by receiving a higher rate than they could earn as a permanent employee

By all accounts this is not strictly true - they may be paid more than the client employees doing similar work, but that does not mean that they should be compared with those employees in terms of experience and seniority, since at least in the IT and 'interim management' sectors, they are considerably more experienced, and part of the reason for using their services is to both "hit the ground running" and to use their knowledge to produce quick turnaround or "knowing the big picture" solutions.

Their comparable "employee grade" in terms of experience might well be departmental manager or above.

PS to Steve H. - a quid pro quo of IR35 inclusion ought to be e.g. de facto opt-in to the Agencies Regulations, but as you say, at the moment it is a one-way street, leading to HMRC's bank account !

IIS

kdbr | | Permalink

I've often thought a reintroduction of Investment Income Surcharge would be a nice, simple and administratively cheap solution. It could even be restricted to dividends on unquoted shares if it was thought that those with large portfolios of bank stocks might not like a hit, though I guess that might be redundant now.

... What tax benefits?

Anonymous | | Permalink

Ross - the whole problem with IR35 is that it penalises contractors by comparison with permanent employees. It adds insult to injury. Not only do they not have the benefits of employment, they are also slugged with extra tax - employers national insurance - which permanent employees don't pay.

Just because in theory their clients should pay them enough extra to compensate for all of this - loss of benefits, employers NIC liability - doesn't mean that's what actually happens (and I think the fact that you put "should" in quotes indicates that you understand this point!). One of the problems of IR35 is that it only affects one party, not both. If it were a condition of IR35 that the client (and not the contractor) had to pay the employers NIC, this would go some small way towards fairness. But it's not, and IR35 remains a very blunt instrument by which HMRC can attack the underdog - the contractor who is usually without the resources to mount a serious defence.

abelljms's picture

let's confer

abelljms | | Permalink

The range of comments on Rebecca’s timely question show that coming up with an answer to IR35 will be difficult.

A few of us mixed with the ‘great & good’ at the Corp. Tax System review conference hosted by HMRC in January (brilliant timing!). This type of forum is an ideal place for the warring sides to meet on fairly neutral ground under Chatham Rules, and speak freely.
It was clear at that meeting how little understanding HMRC have of the world real people live in. It was however great to speak directly to a bunch of ‘suits’ and explain the real problems.

IR35 is readily dealt with by abolition, and then being replaced with a modest set of rules to ensure that if an ‘employee’ works through some sort of service company, that the contract makes it clear to both sides that using this procedure removes an enormous raft of employee benefits, and that the ‘employee’ is willingly signing these away. Perhaps in the statement the ‘employer’ could also state if a PAYE alternative was available, and £much?
The problem is that service companies benefit the economy by providing real flexibility, and opportunity for those using them, but HMRC is grumpy that ‘employers’ save money by paying out less than they do with real employees in overall costs of employment e.g. massive holiday pay, sick pay, pension costs etc…., and less tax goes to Gordon.

Service cos. WORK in the real world because ‘employers’ get CERTAINTY of cost and contract, which is not available to them via employees. They want to hire 3 geeks for 6 months to write Windows ver.4888. At end of the contract they want a clean finish with no whining about “you said xyz abc, so I'm off to strip you bare at an Employment Tribunal” etc….Also the plcs want to ‘lie’ about their headcount by pretending they don't employ people whilst using their services. Resisting Canute-style these realities is silly, the amended rules should allow reality to be legal whilst pragmatically maximizing Gordon’s £ound of flesh.

k.bonney2's picture

Abolish NI

k.bonney2 | | Permalink

I agree the abolition of NI would make the IR35 problem go away. In an ideal world this would be the solution.

But in the real world this ain't going to happen.

It is difficult for the big international groups operating in the UK to avoid NI on their payroll costs because their employees are relatively immobile.

But it is relatively easy for them to avoid corporation tax on their profits because their profits are mobile.

So the solution of abolishing employer's NI and increasing rates of corporation tax and income tax isn't going to work because it will produce extreme winners (international groups) and extreme losers (people living in the UK). Politically unacceptable.

This really is a tough one.

dialm4accounts's picture

Let's make it simpler

dialm4accounts | | Permalink

I posted on my blog recently about just how complicated the UK employment payroll system is. The full article is here http://askm-videos.blogspot.com/2009/03/does-it-have-to-be-that-complicated.html

I think that Bobbob... and Steve H are on the right track.

Here's what I'd recommend should be abolished:

- NIC
- Working Tax Credit
- SMP / SPP / SAP and Children's Tax Credit (go back to family allowance and pay a set amount for each child)

And then adjust the rates of income / corporation tax accordingly.

Much simpler and easier to administer. Remember the winners of University Challenge couldn't work out tax credits correctly? What hope have most of our clients got?

M

Unfairness

Anonymous | | Permalink

Yes, IR35 is indeed a grossly unfair tax regime. However, replacing this problem by another (a different NI regime for close companies) only moves the affected 3% to a different affected 3% - and paves the way for artificial avoidance measures (such as adding unrelated shareholders to avoid a company being classed as 'close').

Surely the real answer is a true simplification of the tax system where household income is assessed (at the taxpayer's option) so the question of income-shifting doesn't arise; all dividends (and I mean all!) are taxed at the taxpayer's marginal rate; and employer's NI is abolished (as Bobbob... suggests), so that IR35 is made unnecessary. Indeed, NIC is an outdated concept and really should be rolled into income tax. Adjustment of income and corporation tax bands and provision of age exemptions would mean that nobody, including HMRC, need lose out. Without the complexities and uncertainties of IR35 and the still threatened income-shifting rules, pretty well everyone would know where they stand and would be paying the right amount of tax. Is there any problem with that ?

Straightforward answer

NeilW | | Permalink

There is a straightforward answer. You require anybody operating as an employment business to employ directly on a contract of service the individuals they place, and anybody using an employment agency to employ on a contract of service the staff they hire via that agency. Any attempt to circumvent these rules will be invalid, with the employment agency/business being the deemed employer by default. The contract of service for an employment business will be a minimum acceptable contract as agreed with the TUC and the unions.

If you ensure that the contracts are consistent with the reality of the situation (ie large employers want disposable employees), then the tax consequences flow from that and there is no need for special rules.

NeilW

Abolish National Insurance

Anonymous | | Permalink

Surely the simplest and most radical solution would be to abolish National Insurance and replace the lost revenue from other taxes, mainly income tax This would hugely simplify the tax system, deal with numerous other avoidance issues and provide better transparency. Yes there are a few minor issues that would need sorting but of these would be of little note compared to the benefits that would be seen.

If only someone had the political will!

IR35

Paul Male | | Permalink

If a sensible definition of a service company could be found then some of the problems with IR35 could be solved. Namely a suitable corporation tax rate could be applied to service company profits thus enabling the directors of those companies to determine the optimum salary (CT allowable)/dividend (non CT allowable) split. The HMRC/Chancellor should be happy as they will have determined the "fair" IR35 CT rate. This system would also assist with income shifting in that the profits to be shifted by dividends will have been charged to the "fair" IR35 CT rate and therefore there will be less tax "lost" to the exchequer. The main stumbling block will be defining a "service company" but this has to be easier than the various shades of grey that arise when dealing with status issues!

It strikes me

kencurran | | Permalink

that the problem lies not with sub contractors but with the contractors who engage sub contractors to avoid their employer responsibilities but also NIC in order to increase profits.

The target of the legislation IR35 is the sub contractor. A complete cockup in my view.

The legislation needs to be amended and new legislation put in place that shifts the consequences onto the contractor.

If someone is truly self-employed then problems don't arise and contractors should have no grounds to be concerned. If they do have concerns it may be as a result of grey areas. Which leads on to HMRC lacking the resources to provide a properly manned service which enables certainty as to a sub contractor's status as opposed to that ridiculous status tool. If someone is really an employee then the contractor should accept that. Of course they could then redirect their focus on employers NIC which is in part a tax on employment. Perhaps in these current times the level should be reconsidered by the government.

As for the service company question in the P35 and the tax return; at present I would like to ignore it. I consider it irrelevant to the calculation of the tax liability and that HMRC are acting outside their scope of responsibility by asking it. At the same time they are not being honest and upfront about why they are asking it. However, it is obvious, to me, that they will in due course investigate those persons who have ticked the box.

As the burden of work shifts to agents so does power. At some point agents may withdraw their good favour and where will the system be then? If every agent refused to answer the service question and put a white space note to the effect that it is irrelevant to the tax liability what then?

The problem needs to be resolved and the symptoms e.g.IR35 and the service question etc need to be corrected..

IR35 looses tax revenue and practice revenue

Anonymous | | Permalink

Many contractors are working through limited companies and carefully checking engagements against the IR35 provisions. However, a large number are saying “Why risk it” and are moving to offshore trust based schemes that pay them by loan based schemes. So far, from what I have heard on the grapevine, HMRC have been unable to find a way to attack these schemes. Some have scheme reference numbers, others don’t.

HMRC and the government do not appear to appreciate that IR35 is loosing them money both from the contractors and from the accountancy practices that did their books.

The tax that a contractor pays IS fair given that they do not get the employment protections and benefits that NI paying employees get.

It’s time for the government to recognise that IR35 is a grossly unfair tax and should be repealed in its entirety.

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