Possible Solutions to the IR35 problem


I have recently been considering the alternatives to IR35, having concluded that the present rules are long overdue an overhaul as they are essentially impossible to apply fairly across the targeted businesses. But doing away with IR35 means that solutions are needed, and here I consider in some depth one alternative suggested by members

The IR35 rules as written require complex decisions to be made about the business which parallel the employment status considerations used outside IR35.

Continued...

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Comments

Third Way, No Way

BelGrant | | Permalink

I agree with the two commentators below. There is already a third way of working - self employed sole traders (or freelancers). We don't need a second 'third' way.

Mainly because a new 'third way' of working is bound to disadvantage contractors that currently benefit from IR35 compliant working arrangements.

I'm also tired of hearing 'third way' protagonists wheeling out the same tired arguments about how complex the IR56 tests are to understand - hence the necessity for a 'third way' solution. If it's that difficult to understand, after 10 years, it's because the legislation has been poorly communicated in the media - something I'm attempted to address myself on a selection of contractor websites - by writing clear, concise articles to explain these tests in a more accessible format.

The IR56 tests are really not that difficult to understand. Too many of those that don't understand them don't want to understand them because they realise that if they did they would have to wake up to the ghastly reality that they're probably caught for most, if not, all of their engagements. Therefore, it's easier for them to sink into denial and 'delude' themselves that they are already IR35 compliant or blame their unwillingness to face up to reality by blaming the complexity of the IR56 guidelines to promote a third way solution. The appalling stats that illustrate how many contract reviews take place demonstrate that.

Two Questions That Might Be Asked

thomas34 | | Permalink

(1) Due to the uncertainty of question 6 on the P35, should we be adding a "contingent liability" note to the accounts of limited company employers to the effect that the company considers itself to be IR35 compliant but cannot guarantee that outcome in the event of a challenge?

(2) Is it ethical to advise "service company" clients to keep reserves to a minimum for the reason in (1) above in order to mitigate potential losses?

We already have a seperate classification for freelancer

AnonymousUser | | Permalink

There is no need to create a seperate setup for freelancers because we already have one. A Self-employed person can pay a reduced set of National Insurance payments and move from client to client.

The problem is not one of tax, but one of classification. A person who is notionally self-employed can still drag a client/employer through the ET/EAT to claim employment status. In addition the tax office can contest the status and drag both worker and client through the courts

For the vast number of people currently caught in IR35 the reason this route is not open to them is because of the 1978 Classification of Employees Regulations - which requires Agencies to charge PAYE when placing workers with a third party unless there is an intermediary. This is what eventually became Section 134 ICTA 1988.

Unless there is agreement from the IR, the worker, and the client that the worker is freelance a new structure will not work any more than the existing one and we will still have clients who insist on the dubious safety of an intermediary.

Perceived Avoidance

MikeBellisimo | | Permalink

IR35 was as we know trying to avoid a perceived Tax loophole that was created by old legislation attempting to close a different perceived loophole.

The RIA made some predictions about how much new tax would be taken by IR35 but we've never seen anything that suggests that IR35 has actually increased the tax take.

Given the cost of chasing down and identifying noncompliance or non-agreement on interpretation of employment status for tax purposes one has to wonder if the whole thing actually has a net positive impact on Tax.

Of course, getting rid of it might generate headlines that no goverment wants and that's really the issue. Still, as the dole queues swell they might find a way.

We don't need *another* category, do we?

ChickPea | | Permalink

To create yet another category of worker is not the ideal solution- apart from anything else, it would conflict with various European initiatives that the government has signed up for.

If the issue is "abuse" of the dividend system, the solution is clear- get rid of NIC and roll it into PAYE. Unfortunately, this would give the lie to the claim to have one of the lowest tax rates in the EU, and make it clear that we're actually among the highest.

Let's be clear about this though: it was the government's meddling that made contractors incorporate in the first place, because agencies wouldn't touch SE contractors after they introduced the "chain" rules that made *them* responsible if the contractor did a runner.

RebeccaBenneyworth's picture

My preferred solution

RebeccaBenneyworth | | Permalink

As I outlined in my article IR35 - time to go? my preferred solution which is nearer to reality is to create a thrid category of person - a freelancer. This type of person would be part way between an employed and self employed individual (or company) and bear less tax and NIC than an employee. The engager of a freelancer could bear a surcharge - a bit like employee NIC but you could tweak the rate if you thought it necessary.

The trouble with this is it introduces yet another definition but this might be the opportunity to draw some clear lines between the three categories of person.

I floated the surcharge on dividends idea as there is still some indication that Govt / Treasury/ HMRC policy regards the extraction of profits as dividends with low salary as objectionable. This would be a sensible way to deal with it if there are plans to do anything - lets face it anything is better than the NCD debacle!

Our real problem (meaning those who seek change to IR35) is interesting anyone in taking action. It is difficult to see the benefits to Govt in grasping the nettle as even with IR35 working badly they collect some revenue from it. It needs a reforming platform - one which has real desires to sweep away a load of rubbish that small businesses and their advisers have to deal with year in year out. But coming forward with proposals to reduce the tax burden on some workers without suggesting how that revenue might be replaced is naive. I'm really interested in a solution that works practically, is transparent, easy to enforce and recognises the benefit to the economy of a flexible workforce of specialists - without distorting the tax base.

Without Nigel Rees ...

mikewhit | | Permalink

@Martin Foley:
"You can quote much more concisely like this"

Change just continues the essential injustice

AnonymousUser | | Permalink

Changing the rules around IR35 will continue the essential injustice at the heart of IR35 - that is a person who is not employeed, pays the taxes of an employee. That someone who does not enjoy any of the benefits of being employeed still pays for them.

IR35 is the wrong answer, to the wrong question. Just as the 1978 Classification of Employees Regulations which in essence force most Contractors to go the limited company route (otherwise the agency has to pay them PAYE, and they would then gain all the rights of an employee) are also the wrong answer.

The problem here is that rules invented for when the border between employer and employee were fairly black and white are ill suited to a world which includes employees who are also employers.

Nor is the Umbrella the answer. Umbrella's provide a service - undertaking much of the administration of running your own company. However those who use them still pay tax as an employee, yet when the contract money runs out they find themselves out of work. The expenses route often used by more unscrupulous umbrellas is not an answer - for an expense to be claimed, it must be incurred and more so - for business reasons. The existance of a dispensation also is no answer. The dispensation lies with the umbrella, not the worker and the expense must still be incurred for business reasons lest the worker find themselves under investigation.

Until the taxation of this third group is dealt with IR35 will always be an injustice. Those who operate as freelancers also are not afraid of some quid pro quo either. Loss of certain benefits being one potential one (although in reality what happens is the benefit office often require the company coffers be emptied before benefits can be claimed, leaving the erstwhile freelancer with a problem - they must pay an CT due on money so need to justify it to the benefit office, difficult when you have little idea of trading conditions in future).

The only way this can work is to formalise this third group - but treating them as employees is not it.

It can only be a matter of time before a client who essentially says - I have an employee without the cost finds themselves facing a very expensive bill from the Employment Tribunal - on the other hand IR35 investigations can go back 6 years and take an average of 2-3 years to conclude. Employment claims have to be in 3 months. Chalk that up as yet another injustice of the regime.

we are getting.........

martinfoley07 | | Permalink

...some wishful thinking here, I fear.
Unless folk can get a much wider audience / momentum going than those "caught" by IR35 (and again, this is much wider than IT contractors), the Govt will not be remotely interested in changing the underlying IR35 matters raised here (other than the revised extra tax takes proposed, which I am broadly not in agreement with)
This lack of Govt interest / action includes not accepting that employment for IT purposes has to marry with employment for other legal purposes.

I have never heard a lawyer suggest or agree such an approach is a runner. So, happy to hear of QDOS position. Quote However, it is heartening to see Qdos announce that they will actively seek a judgment in the ET for any of their clients found to be caught by IR35. unquote. BUT let us be crystal clear here ; QDOS only take on potential "IR35" cases where they are of the clear view the IR35 provisions would not apply in the first place!!! And I'm not sure HMRC would take such a case to that limit (although they have taken some surprisingly "weak" cases in the past, so who knows). So QDOS stance (assuming it is so) is less of a potential sigh of relief than might be hoped (that is not an implied criticism of QDOS at all)
So quote I believe that this alone is the first major step to destroying IR35 unquote may, I'm afraid, be optimistic.

Employee or Business?

Anonymous | | Permalink

Let's get back to basics on the business side of the question:

Freelancers exist because they serve a market need. They can charge higher rates because of their flexibility which incurs a higher risk of being without work. The higher rates are not a "compensation" for being without employment rights, it is a simple supply and demand equation. Most people choose lower rates (salary) with a lower risk of being out of work.

No doubt many are thinking, during a recession, is the risk that different? Well, yes the relative risk is still higher for freelancers, it's just that the absolute risk has increased for both.

Freelancer's also face another risk: That of Big Company contract terms and conditions being onerous, unbalanced and unfair, especially in a recession.

The fundamental question is: Should freelancers operating through their own Limited Companies be treated as employees of Big Co plc, or as employees of their own limited companies?

Whatever the answer to the previous question, the answer ought to be the same in Tax Law as it is in Employment Law, and have an end to 'deeming'.

Who should pay more tax?

TC1 | | Permalink

The IR35 question is, as many have commented, only part of the total tax picture. And I am amazed that anyone is talking about MORE taxation on small companies and individuals, rather than focusing on why large companies don't pay more.

Or rather, to misquote Alice, "how can they pay MORE when they aren't paying anything?" I seem to recall that an article recently highlighted the fact that only 3 out of the top 10 UK companies pay any tax at all. How do they manage this? I assume it's because, being big, with associated companies, overseas investments etc. etc., it's possible for them to move money around and show no profit.

What can a small, single company do? Our accounts can be investigated from top to bottom in a few days, and there's nowhere to hide. Small and large company tax rates are converging, and yet the small ones have to pay tax on every penny of their real profit. No wonder they try to avoid NI.

I'm voting for Philip Roberts' Radical Rethink. Get rid of NI as a separate tax and most of the ducking and diving will stop.

@steve h

martinfoley07 | | Permalink

It DID need new legislation if HMRC were to open the lid on employment status issues where an intermediate company was inserted, rather than the subbie being self-employed.

The way "IR35" legislation got written was changed from the original intention (which would give the result you, I and everyone else on this board, by the look of it, think more appropriate) so that the "subbie" was caught and not the contractor/employer (instead of it being the contractor/employer, as is the case when no intervening company is involved).

IR35 was introduced precisely BECAUSE the taxman had no power otherwise when an intermediate company is inserted. Of course, if there is no company, as per your case, then the bill goes to the putative employer, not the "subbie". 'twas ever thus.

But they already have the powers

Anonymous | | Permalink

William Stevenson's first suggestion is not so crazy, HMRC already have the power to investigate the client's employer status. It happened to me - a few years ago they investigated the status of a self-employed subcontractor of my company and could (if the result went that way, which fortunately it didn't) have decided that he was in fact a disguised employee and could have ordered me to pay not only employers NIC but also his income tax. It didn't need IR35 or any other new legislation - just a sensible application of the powers they already had. IR35 simply needs to be scrapped - no replacement needed. But of course my company itself is only a micro company (oops, that's yet another undefined category of company!). Maybe different rules apply when you're big.

Transient Deeming

MikeBellisimo | | Permalink

@Stoker et al.

I think it is the deeming duplicity that irks for people more than the uncertainty.

For tax purposes someone can be deemed to be an employee - to maximise tax take when in contract. The moment the contract ends either naturally or by termination then all of a sudden one is deemed to be self-employed and not eligble for any benefits.

But even more bizarre than that is the fact that you can be classed as a deeemd employee for one contract whilst simultaneously having more than one income stream into the business.

Naturally for SSP and everything else one is deemed to be both employed and self-employeed since IR35 has basically classed all the income as salary and that could leave no money at all to pay SSP et al.

Even the PCG agreed that the first draft of IR35 did have some logic to it. The Big Co. friendly version that went to statute has always been a legal and philisophical mess.

What irks even more these days is when we see the legislators of this mess somehow seem to think that things like a bath plug and Sky TV and a Washing machine are business expenses.

Anyway, this is all 10 year's old and it's easter for some so party on!

The wrong approach?

lpwcs | | Permalink

I have to say ithat this looks like an accountant's solution. Trying to resolve the issue with taxation changes controlled by more sub-definitions of tax-paying entities and rates is not the way forward. The solution has to come though employment-related definitions; if you are an employee for tax purposes you do PAYE, if not you choose the most appropriate commercial vehicle.

For most freelance contractors - the primary target of IR35 remember - that would be normal self-employed. That means losing both IR35 and S44-7 (S134c as was) and establishing exactly what an employee is (and, incidentally, who their employer is).

It's time we recognised there are three ways of working - employers, employees and freelancers, and set the rules appropriately.

Solution must satisfy HMRC

Andy3T | | Permalink

The 'accountant's solution focuses on how to maintain the tax take while simplifying the system so that it functions efficiently because that is the only type of solution that the Govt (i.e. HMRC) will accept. Arguing for 'fair' solutions, or those which involve other govt departments is missing the point - you might as well argue that the divorce court approach on splitting income should apply to tax, it might be more fair, but HMRC would never accept it.

HMRC requires micro companies and the self-employed to pay tax in order to protect its income from the employed (which is where the money really comes in for the sector in question), they produce CGT, IR35, and all sorts of other oddities to try and prevent people who are employed, from changing their situation to avoid tax. They have a tax approach to the problem, because they see the problem as inherently a tax point - employment rights are simply not their concern. You can bet that if employment tribunals started regularly ruling that HMRC's targets were not employed, HMRC would simply impose another 'tax fix' to deal with 'the problem' of people 'avoiding tax by incorporation'.

A surcharge on dividends to remove the tax advantage of incorporation would be quite simple to operate the SA system - even a surcharge that took account of NIC. It would be quite easy to flex the personal allowance, tax bands, etc to keep the overall tax take the same. So same income at lower cost for the government - which is what it wants. If the system was simple we would all benefit (except accountants who make money on IR35 advice of course).

Another simple approach would be transparency for close companies and close cell companies - the tax due would then be exactly the same for people who are self employed. You would need some patch for employer's NIC to be charged on payments to a transparent entity to get a proper balance, but that should be do-able.

Personally I'd like some way for the self-employed to be able to have limited liability which is still a key driver to incorporate - with all the attendant costs and baggage of the separate legal entity. 'My name is Bob Jones, I have a liability cap of £x insured with y' - why not? Only those people in industries which demand incorporation (IT being the obvious example) would then need to struggle with the extra paperwork - and if the tax benefits vanished for the 'employer' they might stop demanding incorporation of the contractors, even in IT.

As to whether small companies should pay more or less tax, I'd say that we should all be paying less - but until some constraint is placed on government spending to make it easier for the govt to save costs rather than simply raising more revenue that's a pipe dream.

paymatters's picture

IR35

paymatters | | Permalink

We operate an Umbrella Company (PayMatters) for contractors caught by IR35 and not wanting the hassle of setting-up and running their own limited company.

The feedback we receive from contractors (who become our employees) is that they are happy with this type of arrangement.

They still maintain their freedom and benefit from receiving reimbursement for costs they incur in performing their duties tax free. HMRC have just relaxed rules governing scale rates for subsistence.

The contractors we speak to understand that there is no reason why they should expect to pay substantially less tax than an employed person doing the same job and this does seem fair?

Accountant's solution

IANTO | | Permalink

@ Alan Watts

I quite agree that this looks like an accountant's solution to the problem. As I see it, accountants are mainly interested in two things, making more money for themselves and ensuring they don't upset the establishment.

If I'm correct, then both of these issues would set them diametrically opposed to the interests of contractors. I've said before that I have first hand experience of accountants advising clients to "pay up" under IR35, mainly I believe so that they don't create hassle for themselves but also so that they can charge more for dealing with the contractor's finances. I work directly with a colleague who has been advised this way. On every controversial issue, I direct my accountant how to handle the issues.

I also agree that the issues surround the employment status arguments, and as such these issues should be decided by the ET and not the tax Commissioners, who in my opinion have a vested interest in finding in the main for HMRC.

However, it is heartening to see Qdos announce that they will actively seek a judgment in the ET for any of their clients found to be caught by IR35. I believe that this alone is the first major step to destroying IR35. Clients who are subject to such action will begin to complain to HMG and hopefully, IR35 will be consigned to the rubbish bin, where it belongs.

As long as the current situation continues, this threat of action in the ET is the best form of attack on IR35.

I can imagine

mikewhit | | Permalink

@William Stevenson:

Don't be too sure about the "phoenix solution" - on past record I can easily imagine HMRC "looking at the reality of the situation" and "deeming" that a single "deemed" company was in fact contracting with the big client, despite different "sham" companies being contracted on paper ... followed by an amendment to company law to cover this the next year.

Bill,....

martinfoley07 | | Permalink

no chuckles or lid-flipping at all.

The entire issue is the cynicism by which the IR35 legislation (which after all is clearly and transparently an employment status matter from the very start to the very finish) guns were re-directed from the putative employer to the putative employee.
Tax may not be fair or rational, but this re-direction was, and remains, a scandal.

Put IR35 back where it was originally intended as the first step.

Then we can address the wider debate about the employment status point in the 21st Century.

billgilcom's picture

and just to be mischevious.......

billgilcom | | Permalink

why don't all IR35 operators just do a "phoenix company" operation annually so that HMR&C are forced to go for the person that is there from year to year- the large employer - and that caused the problem in the first place.

Come back MSC's

Hope this sends you all off to bed chuckling
regards
bill@wamstaxltd.com
http://www.wamstaxltd.com

billgilcom's picture

Put the blame where it truly lies.......

billgilcom | | Permalink

of course the truth of all this is that the problem was caused mainly by large companies trying to reap as much profits as possible by ensuring that they did not incur the costs of having employees when they could make do with the less costly "sub" contractors through the agencies that gratefully received their share of the cake. Then when HMR&C perceive that they are not getting their fair share they go for the little man by engaging the large companies in providing "evidence" that the sub contractors were employees after all.

Let's put this IR35 to bed (in the dustbin) and put in it as place a new tax called "Large companies subcontrator tax" where the "employer" is required to engage with HMR&C - as opposed to the present farce of HMR&C pandering to large employers - and take an "employer status test " where they truthfully monitor each person engaged and itf they come to the conclusion that the person engaged would be an employee if their evidence was believed then they pay up the tax, Employers NIC and Employees NIC in addition to the rate for the job already paid to the "worker".

Of course you will all think that I have flipped my lid and should stop posting idiotic items in a serious forum.

And let us not forget HMR&C's role in all this in that they join with the large employers - once again - in letting the big guys go scot free while penalising the small guy and spending loads of our money in doing it......

Pensioners and switching NI to income tax

philrob | | Permalink

In answer to Graham Ward's point, under my rather fanciful suggestion, the decision on whether pensioners are liable for the 'replacement NI' rate of income tax would be a political one - I doubt that any would allow it to happen.
That said, I am sure a combination of changes in personal allowances and judicial selection of where the tax bands sit would mean that those on the lowest incomes (irrespective of age) would benefit and those on the highest (again irrespective of age) would get caught.
To be avoided if possible would be 'class A and class B' income tax - that would just give the revenue mandarins and politicians an opportunity to make the system complex again.

Phil

@ Graham Ward

AnonymousUser | | Permalink

Any major overhaul of the system will produce winners and losers, and the change will inevitably be unwelcome to the losers. Different proposed changes will simply shift the burden onto different categories of losers. The question I would put to you is: is there any political or moral reason why a pensioner on £20000 income per year should be taxed either more heavily or more lightly than an employee on £20000 income per year? In all likelihood the overheads of the pensioner will be lower (no kids, no mortgage) so that if the affordability of the tax should be a guide (and I am not saying that it should be) then if anything it would argue in favour of taxing the pensioners more heavily.

Personally I favour abolishing NIC. It is nothing more than a stealth tax, the proceeds of which are not ring-fenced but go into the general pot, that gives headline-grabbing politicians an opportunity to obscure the reality of their policies by focusing on whichever head of tax is more politically expedient, a process in which lazy press officers are happy to collude.

Never going to happen, of course.

One odd solution we surely don't want

grahamatgward | | Permalink

Phillip Roberts suggests abolishing NI: as his step 2 he says
"Rename Employee NI and call it income tax (which it is already for higher rate tax payers), adjust the rate and again apply it to everyone."

Can I say how very unwelcome this would be to those with incomes that are not from employment, such as pensioners. They are not all paupers, but this would certainly move a few in that direction.

AccountingWEB's picture

The Alternative? Emigration!

AccountingWEB | | Permalink

Your suggestion of FURTHER taxation is exactly the wrong way to go. It is because of unfair taxation (taxing small company operators as akin to employers's PAYE rather than a variant of self employment) that the problem arises in the first place. The small operators we are talking about here are flexible enough to throw in the towl altogether, and either emigrate or look for a contract opportunity overseas which makes them non-resident for a period of time during which historic non-distributed earnings are extracted. Higher levels of PAYE/NI/dividend surcharge may well result in less tax being collected, not more.

If tax levels were fairly set, people would spend less time and effort circumventing the rules and the higher earnings in the hands of more entrepreneurial people would enable investment and growth. The tax take may increase at the same time - do I think the government has the imagination to perceive this? No, sadly not.

compensation for employment rights

MikeBellisimo | | Permalink

Neil:

Your arguments would be equally valid as a reason for abolishing Class 4 NICS and presumably the CIS fudge so I await your comments on those as well!

Radical Rethink is Required (but it will never happen)

philrob | | Permalink

The suggestions don't go far enough. While IR35 is a complicated mess, the fundamental problem is the differing National Insurance treatment of self employed, small private companies drawing part remuneration in dividend, and fully employed.

As NI (mainly) funds current expenditure it is current tax, pure and simple.

Step one - Abolish Employer NI - Move this to a lower rate (to get the same take) and put it on personal income tax. That way the following is achieved. (May need to legislate for the necessary salary increases so employee take home is the same)
a) it gets everyone - equally
b) it encourages companies to employ more people

Step two - Rename Employee NI and call it income tax (which it is already for higher rate tax payers), adjust the rate and again apply it to everyone.

At this point it doesn't matter whether you take your income as full profit (self employed), some profit (dividends) or just employed - provided the whole lot is reported (either PAYE or tax return) then everyone pays the same.

The benefit of the small company becomes 'capital growth' for which we have the capital gains tax and associated relief on sale and the limited liablity.

I am not sure how possible double taxation problems with corporation tax and dividend credits could be resolved, but expect that overnight people would be paying the 'rate for the job' with the dividends being a true reflection of business performance and future cash requirements. This will be self regulating - Owner managers are not likely to kill the goose...

If I were being really ambitious step 3 would be to raise the personal allowance to 10k (tweaking rates/thresholds to pay for it) At a stroke this would help those on lower incomes; encourage working for a living (you keep what you earn); and ideally get rid of some of the mandarins needed to tax the poor and subsequently pay them tax credits)

Shame the chance of implementation is zero it would make life much simpler and fairer.

Possible Solutions to the IR35 problem

pamelalewis | | Permalink

How selfish is your recommendation. It assumes that "contractors" are the main stay of small businesses in the UK.

I don't know how many small limited companies there are in the UK and I do not know what proportion of them are contractors who are are affected by IR35, however, what I do know is a broad based number of people, including myself , who run small businesses creating and selling real products and providing services to a varied number of clients.

They are not involved in limited liability companies for tax reasons nor indeed are they trying to avoid "employment" legislation- they are involved because they offer "limited liability" and protect the individual against an increasingly litigious world.

Why would you want to impose a tax regime on those people who are actually contributing to the economy in a real sense in importing, exporting, manufacturing and providing goods and related services. Many of these companies employ somewhere between 5 and 10 people. The tax burden of National Insurance and the cost of collecting tax for the government (PAYE and VAT) and every now and again the cost of dealing with VAT and PAYE inspections (and often seen as easy pickings) and adherence to employment law is already a very heavy burden. Why would you want to do anything that would further increase their tax burden.

Pamela Lewis

Hypocrisy or what?

ChickPea | | Permalink

"quote IR35 was clearly a political tax. It has been reported that Cherie Blair was overheard to say that she deplored the level of remuneration that IT contractors could command. If this is true, then IR35 clearly is a spiteful Socialist political tax and not an economic one. unquote"

And that from a senior barrister? Oh, the irony.

The *original* conception of IR35 was fairly pure in spirit: to protect those being forced into unwanted S/E or incorporated status to save tax for the employer. It would have penalised the "deemed employer" for any infractions, and ended the "Friday-to-Monday" scenario. But big business kicked up, and the big consultancies lobbied, and the onus was switched to the "deemed employee".

So it went from being a "socialist" measure to a "business as usual and sod the small man" measure.

Small companies taxation

NeilW | | Permalink

Another approach is of course to increase the tax rate on small companies so that it is *higher* than the large company rate. So you have a company rate that starts at 45% and slowly decreases as profits increase to 25% (or whatever).

The rational for this is straightforward - smaller companies should be encouraged to invest (and therefore take advantage of the generous 45% tax relief on offer!) to grow their profits rather than drawing them out to 'reward' shareholders.

In short make the tax rate high for the smaller company, and extend the reliefs for doing 'good' things like investing and taking on staff.

Neil

compensation for employment rights

NeilW | | Permalink

Contractors are 'compensated' for employment rights via the higher rate they charge. There is no reason why the state should subsidise them, since they provide nothing to anybody else in return.

The solution to IR35 is to require that agencies and employers employ people that they use in an employee like manner. The tax consequences then follow. And it has the advantage of eliminating a lot of companies from the register and a load of cost from the economy.

Of course referring this question to a bunch of accountants is very much like asking turkeys about christmas. In many cases they make a tidy living from these companies - another cost to the economy that could be eliminated.

Why not keep things simple

Anonymous | | Permalink

I generally agree with what Rebecca says, but why not just get the company to pay the surcharge over via a CT61 return when the dividend is paid. You could exempt dividend payments made to other companies, etc (eg a dividend paid by a subsidiary to its parent undertaking). This seems a far simpler idea to me......

When we come out of a recession, it might even encourage some companies to retain profits to expand their business.

Engager wins others lose

MikeBellisimo | | Permalink

Since the intiial days the problem has always been that the Engager receives a risk-free labour source and the worker or service supplier carries the risk.

IR35 is bizarre inasmuch if employment is deemed for tax purposes then it is the deemed employee who falls liable for the employers NI on the income.

Somewhat creatively the Engager is deemed to have handed payroll management over to the worker or service supplier.

I'm sure people would be a lot less upset about the situation if the Employer's NI wasn't in the loop. It is this aspect coupled with asymmetric risk. that makes it inequitable. A client can say one thing to HMRC and another to the worker without consequence. HMRC will always believe the client.

No-one has yet worked out how it is possible to make a sensible tax detemination if contracts say one thing and then at a later date a client's HR department may say something entirely different to HMRC upon being questioned. Normal rules of contract law do not sem to apply!

After 10 years 1000's of small companies are expected to be able to make informed decisions on rather complex areas of ever-changing tax law. There would be a lot less incentive to do this if every £10 gross from a client was not subject to Tax, Employers NI, Employees NI. These three can easily be over 50% of the gross before travel and other business expenses are taken into consideration.

RebeccaBenneyworth's picture

Engager issues

RebeccaBenneyworth | | Permalink

I absolutely accept the point made that the engager is the winner all round. He saves employer NIC and the cost of employment rights.

One might take a view on this - mine is that it reduces people to the status of a labour commodity - which in my view is unacceptable / immoral. But it remains Government's choice to accept or deny this to engagers, and IR35 perpetuates the view that the engaged should pay all ways up. Or to put it less politely to be screwed by both the engager and the tax legislation (aka the Government). To bore you once more - if Gov't thinks this is a good idea it needs to think of a better way to sort the tax out. The current system is chaotic and unfair. (in that some pay and some don't - not commeting on the overall tax burden - sorry John W)

Employment status

IANTO | | Permalink

@ Rebecca

"you seem to suggest that the courts should "force" employers to recognise contractors as employees"

Not at all. What I'm saying is that it should be the Employment Tribunal that decides employment status, whatever that status may be and the Commissioners' Courts should only decide tax issues. If those tax issues are decided as a result of a status decision from the ET, then that's fine. However, if this situation were adopted, then IR35 would become redundant, because any individual would either be genuinely in business (as the EAT has already decided that I am)/self employed or are a fully fledged employee. I can't see that it's fair to tax someone as an employee (and more) and deny them employment rights.

silicondale's picture

Clobbered by both clients and HMRC

silicondale | | Permalink

Rebecca -

If costs to businesses are driven up surely it would mean less work?

In other words, you accept the reaility that client businesses are getting contractor work on the cheap. In other words the contractors are NOT being paid sufficiently extra to compensate for lack of employment rights, or the requirement to pay employer's NIC, and so on, by comparison with employees of similar qualifications and experience. How can it be right then that the contractors also get clobbered by HMRC ?

But what is the "IR35 problem" ?

mikewhit | | Permalink

The "original problem" was allegedly one of exploitative employers coercing employees to become "Friday, employee - Monday - contractor".

This, as others comment, appears to have been revised to achieve a political agenda.

The "problem" as discussed in this article is purely one of implementation - how to avoid the difficulties in deciding status, without addressing whether there is a legitimate "problem" worthy of expending so much effort in the first place.

There is clearly a problem in the area of MPs' expenses in that the expenses are not treated as a BIK, they are on top of any salary (rather than in business or IR35, coming out of the same pot) and there appears to be remuneration for what are purely personal items that are not "wholly, necessarily" etc.

But the premise of the "IR35 problem" seems to be that a certain sector, who are "doing nothing wrong according to the rules" (quote from Geoff Hoon's expenses press statement) are perceived by some of those MPs or Treasury officials as not paying "enough" tax, by some unacknowledged yardstick. (Maybe Simon Sweetman's tax nspector who thinks “I know there's a fiddle here, I just have to find it”)

Quite why this should so preoccupy government is a bit of a mystery, especially when other people are able to pay their non-domiciled spouse living in Monaco a dividend of £400 million, thus avoiding £150m in tax, which is probably 1,000,000 times the average amount per disputed case, brought in by IR35, not including admin costs to the taxpayer.

"Bang per buck" should surely be a criterion for Govt and HMRC when going after more tax, apart from anything else ...

@ John

martinfoley07 | | Permalink

quote IR35 was clearly a political tax. It has been reported that Cherie Blair was overheard to say that she deplored the level of remuneration that IT contractors could command. If this is true, then IR35 clearly is a spiteful Socialist political tax and not an economic one. unquote

Well, the debate has to rise higher than that, John !!

In any event, each and every tax is 100% political by its very being.

The underlying sense of grievance (not of course restricted to IT contractors, by the way) mainly (and justifiably) arises from the cynical decision to lay the tax** bill at the door of the "employee" contractor rather than the putative employer.

** well, it is of course all about the NI bill. Given the quantum of Govt revenue NI raises, it's not an issue that is going to go away.
Nor is the "obvious" solution of merging NI with IT going to happen politically ; it is staggering the number of employees/voters who do not realise they are paying 33% (or 31%) tax rather than 22% (20%), let alone that their employer pays 12.8% of their gross income for the privelege of employing them.

RebeccaBenneyworth's picture

Tax Burdens

RebeccaBenneyworth | | Permalink

The problem remains that it is the Government (voted for by the electorate) that ultimately makes decisions about tax policy and decides who pays how much tax to fund public expenditure. Whether accountants agree with that or not is a matter for them at the ballot box. My premise is that having set that agenda and allocated a tax "burden"to be shared by all, the execution of that is flawed in that IR35 is very difficult to apply fairly; I am not dealing with whether the tax burden in itself is fair or not as this is a matter for the politicians. My suggestions look at restructuring to achieve the tax revenue stream required in the simplest way possible without providing too many distortions.

I remain of the view that one of the fundamental problems is that IR35 is rooted in the 20th century view that there are employees and there are businesses, and contractors are "really" employees and should be taxed as such. In the 21st century businesses want a flexible workforce which is a hybrid of the old employed/self employed model. As such, I postulate that it should be taxed differently which recognises the benefits to the economy of such a flexible arrangement but targets an appropriate tax burden on contractors of any sort. To continue with the outdated model leads us into the difficulties we have in practice.

John you seem to suggest that the courts should "force" employers to recognise contractors as employees. It may be technically possible, in fact some cases seem to indicate that that is the way we are moving, but what would happen in the market? If costs to businesses are driven up surely it would mean less work? I reiterate - if Government thinks a flexible labour market (i.e. no employee rights) is a "good thing" then it should take the bull by the horns and make the tax system applying to it easier to apply with certainty. Not necessarily less tax, just easier to apply and therefore clearer to all concerned.

Two "Systems" here

AnonymousUser | | Permalink

John, your comment that the "system" requires IT contractors to be ltd companies, therefore the "system" must pay the price, rather misses the point.

The "system" that demands ltd companies for workers is the IT industry, The "system" that has to pay the price is the taxpayer.

Thus by your own logic the system that makes demands should be the same system that bears the cost.

I still do not see that the tax system should have to compensate for the absence (note not "loss" as this is not new) of employment rights.

That is not to say that I agree with IR35, as I do not. I do agree wholeheartedly with moves to simplify tax and remove as many grey areas as possible. IR35 is both grey and unnecessarily complicated (these things always go hand in hand!).

I do agree that we need a level field such that similar sized incorporated and unincorporated businesses pay roughly the same amount of tax. Clearly at the moment they do not and an investment income surcharge/NIC on certain dividends could be used to rectify the balance and be simple(ish) to administer. A new "even closer" company could be introduced to target the rules if need be.

IR35 is part of a much larger issue encompassing "income shifting", the distortions created by incorporation and the taxation of small businesses generally. We cannot therefore look at IR35 in isolation. The best answer would lie in a coodinated joined up well thought out reform of the taxation of small businesses. Nope, I can't see it happening either!

Solutions to IR35

IANTO | | Permalink

IR35 could be left as it is. However, employment status should only be decided in the Employment Tribunal, where the Tribunal should have no intrinsic or political interest in determining an individual's employment status. I believe the same cannot be said of the Commissioner's Courts.

Clearly whichever way the ET decided, the tax position would automatically be decided and the individual would pay no further taxes. Note that if you are caught by IR35, the issue of dividends doesn't arise.

Furthermore, anyone caught by IR35 would pay more tax than any other individual or organisation would on the same level of income. So abolishing IR35 would necessarily mean that those individuals would see their tax go down and not up. So would those paying more outweigh those paying less? - a complex question.

IR35 was clearly a political tax. It has been reported that Cherie Blair was overheard to say that she deplored the level of remuneration that IT contractors could command. If this is true, then IR35 clearly is a spiteful Socialist political tax and not an economic one.

I'm still a little suspicious of the Accounting profession as most of the suggestions concerning IR35, including yours, are all based around increasing the tax take from contractors, those of the IT fraternity being the examples that seem to be targetted. I see no suggestions for increasing the tax take from sole traders or the self employed. So in a way, your profession is spreading the propaganda that IT contractors should be taxed more. Clearly I am opposed to this ideology.

IT contractors in the main are forced to work through limited companies as the agencies will not deal with us unless we trade this way. So if the system demands we work in this way then the system must pay the penalty, i.e. reduced tax take from IT contractors.