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is it really a worry?
I don't think I need to worry about this. IR35 is pretty much dead in the water in terms of how HMRC has been going with its cases. My clients at risk of IR35 all have tax protection insurance, they are all keeping diaries of when the contractor treated them differently from the employee folk, and so forth.
So I simply say to the muppets at HMRC - bring it on!
So, we're all getting back onto the same IR35 merry-go-round...
I don't think I need to worry about this. IR35 is pretty much dead in the water in terms of how HMRC has been going with its cases. My clients at risk of IR35 all have tax protection insurance, they are all keeping diaries of when the contractor treated them differently from the employee folk, and so forth.
Agreed. HMRC had an excellent opportunity to correct some of the inherent failings of how IR35 is being operated.
Although the Business Entity approach is the right approach to take, the tests and their scoring bears no relation to reality and so I will be recommending to my clients that they follow the approach that has been developed by the various tax specialists and laid down by David Smith in IR35 Defense Strategies.
All clients should have contracts written and agreed with end-clients incorporating as many of the IR35 specific points as they are both comfortable with (mutuality, control, substitution, etc.) and contracts to reflect ACTUAL delivery. Tax investigation insurance of at least £75,000 from Abbey Tax or equivalent quality supplier.
All letters from HMRC which might be the start of an inquiry or PAYE/NI/IR35 fishing expedition to be handed over to IR35 insurance specialists without direct response to HMRC from client or ourselves.
If required, pursue through courts and tribunals to the maximum extent possible (primarily driven by insurance coverage and support from 3rd parties such as PCG) and make it clear to HMRC you do not accept their IR35 determinations at any point and will go all the way.
Until IR35 is repealed we will continue to take this approach.
I don't think HMRC really understands how badly IR35 has soured the relationships between themselves and clients / agents over the past 13-years. The fact that it has done this without actually bringing in any money (after deduction of investigation costs) is a criminal waste of taxpayers funds.
FAO: Mr John Whiting-Pl proactively support intro of "Age test"!
I don't think HMRC really understands how badly IR35 has soured the relationships between themselves and clients / agents over the past 13-years. The fact that it has done this without actually bringing in any money (after deduction of investigation costs) is a criminal waste of taxpayers funds.
Thanks & Agreed; and it's for these reasons of bureaucracy, etc, that I'm passionate about seizing the opportunity of removing the risk of OAPs - who have to work in their old age because they suffer: (1) food price inflation > RPI or CPI as measured by ONS's basket of goods and services bought by UK's population, (2) reduced annuities due to HMG's Bank of England's "Quantitative Easing" policies & practices, (3) reduced interest on OAPs' savings (again due to HMG's Bank of England's "Quantitative Easing" policies & practices), and (4) etcetera, - from being caught in the very messy IR35 net AND having to charge clients for employers' national insurance contributions (NICs), especially when UK's Tax Minister Mr Danny Alexander MP seems to me to think that pensioners over 65 "Do not have to pay NICs!".
SUM UP: IF Mr John Whiting and OTS and CIOT really believe what they say to us about the HMG/OTS/HMRC tax procedures for the affairs of old people, THEN: Please ask him/them proactively support the introduction of an additional / new IR35 Business Entity Test question, to those already published by HMRC, of:
* "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".
Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes).
Ameliorate political fallout of granny tax by new IR35 B E T Q ?
Hi John Stokdyk! May I politely request - when you next contact John Whiting, etc - that (to ameliorate political fallout of granny tax, etc) you please ask him (etc) to consider an additional / new IR35 Business Entity Test question, to those already published, of the form:
* "Contractor's Age test - Is the contractor aged greater than State Pension Age? (999 points if yes)".
Of course, if HMRC's proposed system can only deal with two digits, then score 99 points (if yes); as, for your easy reference, I previously set out in this AWEB link:-
https://www.accountingweb.co.uk/anyanswers/question/ir35-2#comment-558692
Here are some rationales to support a "Contractor's Age test", for consideration:
(1) IF HMRC really does support the Chancellor's Budget 2012 for growth, THEN surely it's better that people over State Pension Age (SPA) are in work, creating economic activity for the UK's economy, rather than on the street or buses, or causing extra public expenditure through pre-mature dementia/altsheimers/etc and associated NHS or care home costs.
(2) Haven't the necessary contributions needed by the state already been paid by and for such OAP workers, through the NIC records?
(3) Don't the advances in computerisation since the post WW2 introduction of the NIC scheme mean that employers can now efficiently distinguish between workers aged below and above SPA?
(4) With the intellectual/skills capital of workers > SPA, isn't it sensible to unleash same, especially as an ageing population demands sufficient workers, and immigration is now discouraged by HMG due to the costs of congestion, etc?
@JohnStokdyk: Thanks, and "Age test" update done ...
Hi John! Thanks for your kind comment, and because the proposed Contractor's Age test criterion is to draw a line whether, or not, the contractor is over or under 65, or whatever SPA (UK State Pension Age) evolves to, it should be easy to apply by HMRC, and be seen to apply.
As HMRC has had a court/tribunal ruling that a contract - or a series of contracts - may be part-inside IR35 and part-outside IR35, then the revised IR35 "Age test" condition would be to apply (or not apply) IR35 accordingly.
Please see update on this link:_
https://www.accountingweb.co.uk/group-thread/business-entity-tests-detai...
Business Entity Tests - Crass
If I am correct in my calculations, the maximum "score" achievable is 98 points.
However, for those individual freelance contractors whom:
- (sensibly) choose not to have business premises
- charge by the hour
- have no other staff
- don't have (ridiculous) bad debts
- enjoy good health (haven't sent a substitute)
The maximum possible is 13 points. Medium risk.
In my opinion, this means in excess of 99% of individual contractors will at best be medium risk.
Now that m'lud makes these Business Entity Tests utterly useless, utterly unworkable, and completely unhelpful.
But you knew that already didn't you?
Age tests..
Dsticki,
You forgot to mention the biggest sting of them all for pensions: Gordon Brown's 'removing a tax' when Labour came in and at a stroke reducing the pension funds ability to reclaim tax paid on dividend income, and making final salary schemes unaffordable and reducing everyone's potential pension pots, or how about 'Labour's prolifigate spending and creating artificial growth in the economy which now needs to be reversed'.
On topic, I'm starting to feel sorry for the Chancellor as he gets boxed in by HMRC and the Treasury and forced to adopt these measures on their advice. It's the civil servants (or jobsworths as real working people call them) that have an ingrained interest in keeping the tax system complex as it keeps them all in a job- they are hardly going to support something that might mean some of them are out of a job!
Of course creating it's own special department tells you only one thing- the Treasury and HMRC will fight tooth and nail to keep IR35 no matter what any politician wants to do.
I wonder which Labour chancellor approved of all those civil servants being 'contractors'?
@hopkins-hohg:Feedback on your "Contractor Age test" comments ..
Hi hopkins-hohg! Thanks for your comments on the proposed IR35 "Contractor Age test". Here's some feedback:-
Dsticki,
Just for clarity: my login nickname on AWEB is "dstickl", short for "Don Stickland"
You forgot to mention the biggest sting of them all for pensions: Gordon Brown's 'removing a tax' when Labour came in and at a stroke reducing the pension funds ability to reclaim tax paid on dividend income, and making final salary schemes unaffordable and reducing everyone's potential pension pots, or how about 'Labour's prolifigate spending and creating artificial growth in the economy which now needs to be reversed'.
Correct! I tried to keep that post short! BUT if I draw up a ppt for presentation to Mr John Whiting, etc, I'll try to include your "pensions raid etc" point; thanks.
On topic, I'm starting to feel sorry for the Chancellor as he gets boxed in by HMRC and the Treasury and forced to adopt these measures on their advice.
Understood. IMHO some "civil servants" behave like "drivel servants".
It's the civil servants (or jobsworths as real working people call them) that have an ingrained interest in keeping the tax system complex as it keeps them all in a job- they are hardly going to support something that might mean some of them are out of a job!
Yes; IMHO it's a demonstration of Gresham's ecnomic law - that the bad drive out the good. (Unless the good have courage, of course!)
Of course creating it's own special department tells you only one thing- the Treasury and HMRC will fight tooth and nail to keep IR35 no matter what any politician wants to do.
Up to a point, hopkins-hohg! IMHO a "special department" could provide a focus of attack by Ministers, & MPs, and the PAC could force "civil servants" to give evidence under oath - just like that HMRC lawyer - whatever Lord Augustine O'Donnell (the enobled ex-Cabinet Secretary) squawks, so that they would know that they could be charged with perjury [and be furnished with hand cuffs, if needed] if they did not tell democratically elected MPs the FULL truth about the taxation of the electorate.
I wonder which Labour chancellor approved of all those civil servants being 'contractors'?
A partially blind one, perhaps, who apparently sometimes lacked the capability to see the full implications of what s/he was doing, especially if they did not have a sound grounding in mathematical sciences, perhaps? I think we should be told, specifically, who made the "decision" in each case, for each of HMG's 2,000 NPWs, don't you?
Merger of NI and income tax does not help
Just to point out that any such merger would be Employees NI (EE NI) with income tax - the real injustice of IR35, however, is Employers NI (ER NI). Since ER NI is a business tax it would not be rolled into income tax. Those who are caught are effectively paying both forms of NI on their income - a worse than double-taxation issue.
If that doesn't sound right then have a look at this comparison of different ways of working:
http://www.shout99.com/contractors/showarticle.pl?id=70964
It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?
How could all those "experts" not get the most fundamental aspect of IR35's unfairness across to the Chancellor?
Good point, @ chEEK!
Just to point out that any such merger would be Employees NI (EE NI) with income tax - the real injustice of IR35, however, is Employers NI (ER NI). Since ER NI is a business tax it would not be rolled into income tax. Those who are caught are effectively paying both forms of NI on their income - a worse than double-taxation issue.
If that doesn't sound right then have a look at this comparison of different ways of working:
http://www.shout99.com/contractors/showarticle.pl?id=70964
It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?
How could all those "experts" not get the most fundamental aspect of IR35's unfairness across to the Chancellor?
IMHO, the answer to your last question is lack of capability (including lack of capability in the 5 Rs of Reading, wRiting, aRithmetic (especially), Reasoning and Recall) of the very educated so-called "experts". (Broadcaster Mr Andrew Neil might claim that this is due to the scrapping of Direct Grant Grammar schools "in the name of equality", a crime - apparently - equal to the dissolution of the monasteries, perhaps.)
Perhaps someone should draw up an easy-peasy pictorial powerpoint to set out IR35's unfairnesses?
Indeed - also apathy / lack of understanding
I think there's also a lack of interest from the PCG in dealing with the injustices of the Inside IR35 situation. They are hell-bent on repeal, despite their chairman having acknowledged that repeal is a dead duck, they refuse to see how this will play out and stick to a dogged, albeit now half-hearted,"The PCG remains committed to abolishing IR35".
Even if their business entity tests had been all they ever dreamed they might be, those inside IR35 would still be right up the creek in paddle-free mode. I see it as gross negligence of their responsibility to ignore this issue.
Not quite right
It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?
IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.
@ThornyIssues:Regret I have 2 disagree on basis of "Acid Test" Q
It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?
IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.
Hi ThornyIssues! RE: Your "Not quite right" comment above, which IMO is not quite right of itself, because IR35 (A) firstly removes any alleged artificial links to determine whether a worker is a "disguised employee" of the alleged "end client", and then (B) in the same tax breath, so to speak, re-inserts those self same alleged artificial links to penalise the worker!
May I again [as I did on 23/03'12] gently point out that - as part of the vogue for tackling alleged tax avoidance - HMT seems to make great play of "the spirit" as well as the letter of taxation? So, here’s an ‘acid test hypothetical question’ to clarify:
IF a pensioner/worker aged over State Pension Age (who genuinely believed that s/he was not caught under IR35 as a ‘disguised employee’ after making a review of the then available facts) had (as Director) decided to leave insufficient funds in the ‘intermediary limited company’ to cover the alleged ‘employER NI payable’ as subsequently decided by HMRC - with the result that the ‘intermediary limited company’ were put into liquidation by HMRC trying to recover what NI monies allegedly due that they were able to - THEN could that same pensioner/worker be held liable by a court of law to personally pay the balance of the outstanding ‘employER NI payable’ monies?
Because IF the answer to this ‘acid test hypothetical question’ is ‘yes’, THEN it seems to me that the pensioner (over 65/SPA) would have to partly ‘pay ER National Insurance contributions’ and any EE NIC due (currently nil contribution required because there is sensible recognition that their NI record has been paid in full) – contrary to your above assertion of 'So there is no "employee" paying EE and ER NIC.'
For workers aged below SPA (State Pension Age) IF the answer to spirit of the above hypothetical question is 'yes', THEN your above assertion of 'So there is no "employee" paying EE and ER NIC' seems to me to be very wrong.
Where did you get that calculation?
It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?
IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.
I don't understand where you came up with the idea that the taxes are in any sense "put back in the pot" and then taxed with only income tax and EE NI.
I believe you'll find that in an IR35-caught case, all of income tax, EE NI and ER NI are notionally put back into the "the intermediary" (i.e. the Ltd Co) and then taxed as if the Ltd Co is the employer and the freelancer the employee.
In the words of the Dim Prawn re ER NI "Somebody has to pay it" (totally wrong of course, since in a Sch D sole trader set-up nobody pays ER NI).
Also, it is important to bear in mind that this is a Ltd Co that is forced onto people (due to other legislation that means that agencies will only deal with Ltd Cos, not sole traders, in case they are deemed to be the employee) so the ER NI is, in real terms, a tax on the freelancer.
Almost
It takes us back to the OTS report paragraphs C25 and C27. C25 states that those caught by IR35 are effectively in the same boat as employees - but how many employees do we know that pay EE NI and ER NI?
IR35 is an "equivalence" tax e.g. your are "deemed" an employee and therefore essentially all monies are taxed like an employee. So, if found caught under IR35, there is a tax adjustment that sees any corp tax, ER NI etc paid by the intermediary put back in a pot, 5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.
I don't understand where you came up with the idea that the taxes are in any sense "put back in the pot" and then taxed with only income tax and EE NI.
I believe you'll find that in an IR35-caught case, all of income tax, EE NI and ER NI are notionally put back into the "the intermediary" (i.e. the Ltd Co) and then taxed as if the Ltd Co is the employer and the freelancer the employee.
I beleive that is what I said - the pot being that of the LtdCo run by the freelancer and what HMRC call "intermediary". Thus what we have is the turnover in the pot to which 5% is allowable against "the expense of the business" and the remaining 95% being assigned to the employee (director) and taxed under PAYE.
Errr... no
You said:
5% deducted and then the remaining 95% subject to PAYE/EE NIC. So there is no "employee" paying EE and ER NIC.
You stated that the remaining 95% were only subject to EE NI. It is treated as though it contains the ER NI (as if it had been handed over by the client/employer with an inclusive ER NI amount). That ER NI is payable as well as the EE NI. Therefore that employee is paying both EE NI and ER NI.
Also, bear in mind that the Ltd Co was enforced on the individual (due to S44 and its predecessor s134), then it is looked through for the purposes of constructing a notional contract... then it suddenly springs back to life and becomes liable for ER NI?
The unfairness aspect of this is described here with 3 worked example cases, employed, self-employed under Sch D and Inside IR35, all paid the same by the client:
http://www.shout99.com/contractors/showarticle.pl?id=70964
The numbers for Inside IR35 are slightly simplified (e.g. the actual calc strips out the ER NI rather than charging it on the full amount), but the concepts of how these are in the real world and how they are treated in the tax world are the important issue.
Hope this helps.
Right of Substitution
I always felt the 'right of substitution' test was the tricky one. As a one-man service company, my business is closely tied to me as an individual (my personal reputation and word-of-mouth recommendations from clients). With the best will in the world, very few of my clients would be that keen on my suddenly putting a sub-contractor into their offices. I have the right spells and incantations in my T&C document, but the practicality would be very different, to the extent that I'd probably not be able to collect my points on that.
Even when I did have a proper job, I've often been on projects where I've been the only person in my company with the particular skills needed. If I'd gone under the proverbial bus, the project would have been terminated.
Outside of large organisations where multiple individuals with the same skill-sets are available, the right of substitution just doesn't exist in any practical sense - regardless of the contract terms.
Client Risk Test
Wait.... so I get penalised 10 points if, as a small business owner, I do a good job of my due diligence when taking on new clients, and so don't have any bad debts?
I know a fellow contractor who lost a chunk of money when a client went under. Should I tell him the good news?