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I wish that I was as optimistic as Julia Kermode that HMRC have actually listened to FCSA!
The red book comment about a 'careful consultation' sounds to me like a distant bulldozer starting up in the yard, and the 'devastating impact on the public sector' turning into, "a huge success in closing a tax loophole which levels the playing field for workers in the UK".
The employment status indicator on HMRC website is key to this and it seems to be completely useless with a strong bias. A good indicator would make a big difference to the UK economy. Why don't the contractor bodies publish their own status indicators?
I don't agree with the assumption that end clients will suddenly wish to convert contractors to employees.
The rules are actually that the service company will suffer tax deduction but does that then imply that the director of that company is then entitled to holiday pay etc?
Assuming it doesn't then you have a position where the end client may decide they want the best of both worlds e.g. the flexibility of using a third party contractor and peace of mind that, tax-wise, they are doing the right thing as, after all, if they are engaging for a shorter duration contract then they are unlikely to want the commitment to a new employee
The whole mutuality of obligation kicks in here too - the end client may have no responsibility, or intention, to give more work and that's where the balance starts to look uneasy.
So then you'd find a chunk of contractors (who are working long term for one end client and therefore you can say "fair enough") do switch to PAYE but that others retain independence, potentially suffer larger tax deductions on some contracts, but then as it settles undoubtedly argue better rates with the end client as the rules of supply and demand kick in.......
Or they "genuinely" just change the way they work either way we all know that working practices will change for such contracts.
The Treasury added a 10% stealth tax to public sector bodies - secondary NI contributions above the threshold - and assumed contractors would take the hit when it was passed on to them via renegotiated contracts. It is not clear to me who has actually ended up paying this additional levy. The path of least resistance, adopted by the public sector- everyone is in - will make some private sector businesses less competitive if they go down that route while competitors are less willing to be rolled over.
Doesn't it actually amount to closer to 26% when you tae account of the employee NICs and the costs of implementation? I find it hard to square the uneven playing field with HMRC's purpose of paying for public services - this seems to be paying to deviate them. Chaos in the public sector and private sector getting a "softly softly" consultation, ages afterwards.
I'd welcome views as this seems terribly unfair to me.
I think the last post makes an excellent point. The main contractor sector in my client base is in the nuclear sector. About 20% of my clients were browbeaten into switching to PAYE roles, which like for like adds roughly 45% on to the cost to the ulimate employer. Even though the rates were about 10% to 15% less, the "public sector" employers took the hit to the tune of around 30%.
However, the employers of the other 80% of my client base refused to be browbeaten, so for them things are just carrying on as they were in 2016-17. This gives them a significant competitve advantage over their rivals who caved in, and they have been noticeably more successful in winning business as a result.
So if you are a private sector hirer reading this thread and worrying about IR35, grow some BOLS!! You will have a significant competitive advantage compared to rivals who cave in to the HMRC bully boy tactics.
The original IR35 was good news for the "employers" as it shifted risk. As long as they could bully the "staff" to use a company they did not need to assess anything it was down to the individual to assess their own status. They instantly got rid of the decision do I employ or are they self employed and they lost the risk of HMRC turning up on a PAYE visit demanding back Tax/NI/Penalties.
The public sector will roll over as although they pay the extra NI it goes into government coffers and back to them. The private sector should fight harder but it will depend on them taking a risk with HMRC as sadly there is little certainty.
If we had clearer definitions of status that we could all rely on it would be easier and roles/engagements could be assessed properly.
The main issue is lack of certainty with contracts given out that appear to comply but bear no resemblance to the way things happen on the ground. At the moment the employers don't care as they don't take the risk and I have had contractors who get treated like staff and sadly ones who just behave like staff and so however good the contract they will fail if scrutinised.
We need a balance. It would be wrong that it's so broken that any staff can set up a company and work through it. However it's also wrong that many hardworking project based businesses can't be self employed.
Of course if something more radical was done such as the scrapping of NI (so employees paid more tax and employers paid either more income or corporate tax on profits) employer's NI would go and much of this muddle would go away. It won't happen as that would put headline rates if income tax at an embarrassing level for government. Why do we put up with being taxed to employ people anyway?
Ultimately it will be an unsatisfactory fudge as govt never see the big picture, have no courage for real change and only see as far as the next election and not the long term (unless it's putting things off).
It pays to carefully examine the justification put forward by HMRC et al for widening the scope of IR35. The public sector changes are hailed a success for "increasing compliance". There is no balancing analysis of how that more compliant position has led to a shortage of NHS staff, TfL projects being delayed and abandoned, HMRC projects going over budget and time, etc., etc.
In short the "success" of IR35 in the public sector has led to fewer projects being finished at higher cost. Who pays that cost? In the short term it's taxpayers. In the long term it's taxpayers. How can a success be claimed when public services cost more for less output?
The private sector was bracing itself and seems to have a short term reprieve. The private companies have many more reasons for not wanting permanent employees or unexpected tax bills if (eventually) HMRC can be bothered to audit. Whilst it is to be hoped that we will not see a return of mass marketed "tax dodging" schemes of the past, a contractor caught between a company who want flexibility and an inflexible HMRC who just want the money, is going to be in a difficult place.
HMRC can help here. How about a real time tool that is reliable and consistent (i.e. not the current offering) and which employer/contractor can share and which would be the final word. Surely some of the funds collected from "increased compliance" could and should be spent on this?
One of the problems here is that HMRC has entirely lost the trust of the contracting community. They have seen the imposition of law after law and increasing complexity. Look at the Budget this week. Yet more tinkering and the promise of not only retrospection to 1999 but deliberate double taxation. Is it any wonder that HMRC is facing a population that feels itself to have been selected for poor treatment, just for doing what their clients want.
My own feeling is that the contracting bodies owe it to their members to call for a deep and sensible examination of the contractor market, public and private; it's correlation with the gig economy; and how a sensible tax policy that seeks to boost the economy of the UK rather than be blindly and obstinately collect money to the long term detriment of all, can be achieved.
There are perhaps close on 2m contractors in the UK. Most are in the medical profession and are not consultants, but nurses. Some are in engineering. Some in high tech industries. Some in digital industries. Am I mistaken in thinking that there were all part of the Budget speech with a theme of "the UK is at the forefront here and we need to invest to stay there"?
It appears that HMRC has not had that memo and instead have decided, (under whose policy?), that they can deny the Chancellor and refute the will of Parliament.
As an ex HMRC employee myself, it saddens me to say it, but in this area, HMRC is not fit for purpose.
Left to their own devices, they will cause harm to this sector of the economy that we may never recover from.
This needs a long term strategy and not a short term delay.
Partly responsible for this mess is the concentration by HMRC on the 'Tax Gap' as a measure of their 'efficiency'. The original IR35 was supposed to collect £200m a year but probably collected less than that in total. Now HMRC can point to 'increased compliance' in the public sector which conveniently enables them to close the 'tax gap' - a figure which they estimate in the first place. The action against flexible remuneration packages, salary sacrifice, had the same root cause - for many years HMRC had left it alone as a 'commercial decision' in the words of their own guidance. Why change now? Because one of the root causes of the tax gap is revenue giving reliefs whether overt or by tolerating commercial practice. The revenue's own tax gap figures (https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...) clearly shows that in their opinion the biggest sector contributing to the tax gap is - the SME, the biggest tax sector figure is IT and NIC and the amount lost to 'failure to take care and legal interpretation' is 7 times greater than the amount lost to avoidance. So the greatest return to HMRC is to continue to soak the SME sector for IT/NIC - after all the rationale of Making Tax Digital was to force SMEs to use electronic data records removing the ability to inflate expenditure by estimated figures. Perhaps we should be asking for the OBR to take over the task of measuring the tax gap as, at the moment, the revenue's preferred method of measuring success which is calculated by - HMRC themselves...
Not sure how the tax gap can be down to SMEs with so much avoidance by the likes of Apple, Starbucks, Amazon etc and the act it does not seem to be policed?
How will the average end-client know the new rules? If (say) an architect's firm hire a freelancer limited company directly, then they will probably just pay on invoice as with any other supplier. It's one thing for Public Sector bodies to know the rules, but the average private sector business will never have heard of IR35.
And if such directly contracted companies are let off, and only freelancers going through Agencies are affected, then maybe Agencies will just charge a finder's fee to the end-client and let the freelancer be paid directly by the end-client.
I guess this will all come out in the consultation, but I think the private sector won't take this lying down.
Also, we all know HMRC has limited resources. It will only take a few Agencies to take a chance with the law, in an effort to attract the best contracts and freelancers, and the others will feel obliged to follow or to see their businesses fail. Every accountant is familiar with the client who says "my mate gets away with it so why can't I?".
I have been working for public sector organizations carry out project work which is deemed via the IR35 online assessment tool to be outside of IR35.
However as is typical with public sector they have taken the safety approach of a blanket policy of every temporary contracted member of staff being deemed as being inside IR35
I now not only have to pay an umbrella company for the privilege of paying my money to me. I am also liable for both employers and employees NI
This basically boils down to an overall tax rate of 44% of my invoiced amount and then out of that remainder i have to allow for holiday pay pensions and and sick pay.
It makes contracting in the public sector completely unviable unless daily/hourly rates increase substantially.
Everyone I know that has been affected by this is looking to move out of the public sector.
I cannot see how HMRC can say its been a success.
It's not been thought out properly and its killing contracting work in the public sector!!