Employment Status & IR35 expert Re Legal Consulting Ltd
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Will the UK government grasp the IR35 tax nettle?
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IR35: The employee vs self-employed tax conundrum

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Rebecca Seeley Harris reviews the Office of Tax Simplification literature on the taxation of personal service companies and the self-employed. Is the time now right for the government to grasp the nettle of this most prickly of problems?  

11th Aug 2020
Employment Status & IR35 expert Re Legal Consulting Ltd
Columnist
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On 26 March 2020, following his announcement on the Covid-19 support package the for self-employed, Chancellor Rishi Sunak noted with regard to NIC: “It is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”

This may have prompted the Office of Tax Simplification (OTS) to released its evaluation update and stock take of the work it has carried out on corporation tax, personal service companies and self-employed people’s taxation. As a previous a Senior Policy Adviser to the OTS, I was personally involved with some of this earlier work.

Peronal Service Companies (PSCs)

Working through a PSC makes it possible to share, or defer, the distribution of income received by the company as dividends, so that it is taxed at a lower rate. If the owner is in a position to significantly defer the distribution of income, then it may be realised in capital form when the company is sold or wound up.

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Replies (9)

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By mydoghasfleas
12th Aug 2020 09:46

If there was a real desire to reform the logical step would be to abolish NICs altogether and raise the rate for income tax. Current age exemptions could be overcome by a fixed level of age allowance. Ignore the screams of, "unfair to x,y znd z" the only people who think tax is fair are those who do not have to pay it. It would leave the thorny issue of employer's NIC but look at the simplification on the individuals' side, no need to discriminate between employed, self employed, non-employed, no parallel collection structures for tax and NIC, no distinction between earnings for tax and earning for NIC.

It will not happen because no Government is going to grasp the nettle and call NICs a tax.

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By johnjenkins
12th Aug 2020 09:48

Blah blah blah blah blah. Same old, different day. The OTS said years ago that IR35 wasn't fit for purpose. It never has been and never will. It should be abandoned immediately. HMRC should not and never should get involved with employment status. it is a commercial decision. Hasn't anybody with the power yet realised all our taxation problems (lack of money in the coffers) is due to either Government or HMRC trying to screw more out of those that work hardest. Take a step back, let's get rid of all these taxes that try and cover up other problems. So let's just have a basic rate of tax, no NI, on earnings. that way if Government need more money they can put the rate up. Trouble is the electorate will then know which Government gives value for money. But isn't that what they are there for - to serve us, not for us to serve them.

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By North East Accountant
12th Aug 2020 10:17

Let's hope they don't come up with all self employed and close company directors must put themselves on the payroll for all drawings.

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7om
By Tom 7000
12th Aug 2020 11:34

OTS

How about make dividend tax 10% ie class 2 1% +class 4 nic 9% and just abolish IR35. So if you choose to work as a company, you get no employment rights, no pension etc and thats just a personal choice and let the market take its position. If you see lots of employees incorporating, double dividend tax....and close the door of the trap you just set....

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Replying to Tom 7000:
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By johnjenkins
12th Aug 2020 12:35

Yeh why not tax everybody up to the eyeballs and stifle any chance of the UK having the entrepreneurs to allow us to move forward next year.

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By matchmade
12th Aug 2020 11:59

I'm not sure NICs should be abolished: the concept of a National Insurance Scheme is still valid and it's useful to remind people of this as a major benefit and responsibility of being a UK citizen, even if it doesn't really cover the full cost of the NHS, State Pension, unemployment benefits etc. Just rolling NICs into one big income tax pot sounds tidy, but I think it's important that people understand National Insurance as a concept, as a contract between citizens and the state.

However, I think NICs should be disconnected from employment status completely and extended to everyone over 18, so they know it's a genuinely national scheme from which everyone benefits and everyone has to pay in, income permitting. The unemployed would be exempt from NICs, but students wouldn't, just as they should lose their arbitrary exemption from council tax (if they're capable of paying university fees and their living costs, they should pay to use council services just like everyone else).

The new National Insurance scheme would include a new obligation for retirees to pay in as well, at a reduced rate as they won't be contributing to pension or unemployment benefits. They will moan, but the point of this is to generate the funds to solve the social care crisis. In return for retirees paying NICs, they would all have a brand new entitlement to state-funded NHS care homes (or care-at-home services) as required by demonstrable medical and occupational health need. Care home residents or their families would of course be able to pay extra for top-up services and a better quality of accommodation if they wish.

This new system of care will mean that the mass of British citizens will be able for the first time at an affordable cost to insure themselves against developing dementia, Parkinson's, cancer, general frailty and other needs in their later years. Because everyone will be paying in, the cost per person for such insurance will be much less than buying it through a private provider (private insurance against developing dementia, for example, is extremely expensive at the moment, and only two insurers offer it). Retirees on small incomes would be protected from paying NICs by annual allowances, just as the low-paid are now.

If old people say they shouldn't have to pay, because they've "paid their fair share" etc in their working years, I simply say: no, you didn't! When they were young, there were far fewer old people than today, and a much higher young:old ratio. People also died younger, so were less of a "burden" on the state finances which working people were financing. And when they were paying in, there wasn't this new entitlement to care home funding either.

Finally, Employers' NICs will simply continue as a straight tax on employment. Some will argue the rate should be cut to make it cheaper to employ people, but there is a decent counter-argument that if you keep it the same or even make it more expensive, there will be greater incentive for employers to invest in innovation and improving productivity, which I believe has been shown to have a greater impact on long-term economic performance than keeping people employed in low-paid, low-productivity work.

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Replying to matchmade:
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By whitevanman
13th Aug 2020 19:10

I did wonder, when they recently banned Justin, where we would find the provocative, inaccurate, BS that we so loved. The wait is over!

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By andy sutcliffe
12th Aug 2020 13:07

spell check

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By Chris Pittock
18th Aug 2020 09:34

If the Class 4 (self-employed) rate of NIC was to increase to the same as Class 1 (employed) then the bulk of the IR35 problem would be removed and it would save everyone trouble and costs. The remaining issue is the ERNIC, (bear in mind the Government are already providing the Employment Allowance) and this needs to be removed for all. If you stop and consider... a Tax on employment?! Remove it and it may resolve the unemployment issue as well. We shouldn't be taxing employment, we should be encouraging it! The Government will have to balance it's books another way but don't tax employment. (ERNIC of course originally financed pensions, SSP and SMP, but pensions and SSP now have to be financed by the employer as well!)

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