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How to strengthen IR35: Make contractors pay

22nd Jul 2015
Tax Writer Taxwriter Ltd
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iStock_contract_Pali Rao

This is the underlying aim set out in the latest discussion document on the Intermediaries Legislation (IR35). It is clear the government has no intention of scrapping IR35 - they want to strengthen it, says Rebecca Cave.

The intermediaries legislation (now in ITEPA 2003, ss 48-61) was introduced 15 years ago, heralded in the 1999 Budget by press release IR35 – hence the name. The target of the original legislation were employees who left their job on Friday, then returned to the same desk on Monday to perform the same tasks but working through a personal service company (PSC).

This now familiar pattern allows the employer to avoid large amounts of employer’s NIC, and duck other employment-related obligations such as sick pay, holiday pay, parental leave and termination payments. In most cases the worker also has more cash in their pocket after paying the administration costs of running a company, so everyone is happy except for the government, which misses out on about £430m in tax and NIC per year (HMRC estimates).

If the IR35 tests are met for a particular contract, the PSC must apply PAYE to the income from that contract, after deducting allowable costs, including travel and subsistence for the worker.

The deduction for travel costs makes working though a PSC economic for many contractors. The PSC will be based at the contractor’s home address, and hence the cost of travel to the “temporary workplace” in order to perform the contract, is tax deductible within the PSC, if the contract meets the temporary workplace rules (see chapter 3 of HMRC leaflet 490). There is a separate consultation on tax relief for travel and subsistence for workers employed through employment intermediaries which I will discuss in another article.

Widely ignored

The problem for the government is that the IR35 tests are widely ignored; evidenced by the fact that less than 4% (10,000/265,000) of PSCs pay any tax under IR35. This apparently is “unfair”. Although the discussion paper does acknowledge that there are many commercial reasons for people to work through a company, and for businesses to engage individuals in this way. It says: “The government recognises the benefits to the economy of having a flexible labour market and has no intention of stopping people from working in this manner.”  

The government’s solution is to reform IR35. But it doesn’t intend to change employment law to alter employment rights of workers or the duties of employers. This ignores the fact that many PSCs were set up to allow the engager to avoid all their employment obligations, rather than to save tax and NIC on both sides.   

The discussion paper sets out the following options for strengthening the effect of IR35, which are not necessarily mutually exclusive:

1. Make administrative changes as suggested by the IR35 forum report published in January 2015

2. Improve HMRC’s compliance response – i.e. undertake more IR35 investigations

3. Place the responsibility on engagers to determine if IR35 applies, and require the engager to apply PAYE and NIC to the amounts paid under the contract

4. Simplify the tests for determining if IR35 applies

The options for simplifying the IR35 tests include:

· Taking up some of the OTS recommendations in their employment status report, such as requiring an engagement to last a minimum period before it can be considered to be an employment

· Adopting the test used in the revised agency legislation (ITEPA 2003 s 44) of “supervision direction and control” (see Employment Status Manual ESM2056+) 

These options are only broad suggestions; the government doesn’t appear to have a settled approach to IR35 reform, but it does want any change to be as straight forward for engagers as possible, and to minimise the burden on engagers.

This is an early stage of the consultation process which means it’s an ideal time to influence the government’s thinking on IR35. The discussion paper says the government welcomes all views on the implications of a change in the IR35 tests; both positive and negative, and wants to know what your preferred approach would be.

You can respond to the discussion document directly to HMRC by email, or post your comments below and AccountingWEB will make a collective response on behalf of the community.

Rebecca Cave is the author of the Tax Advice Network practical tax weekly newsletter.

Replies (34)

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Chris M
By mr. mischief
22nd Jul 2015 19:11

Place the action where the responsibility lies!

My 22 year old HR client did not wake up one morning and say to herself "I know, why don't I set up a limited company to do this job?"  No, she was TOLD that was the way it was going to be by the agency and the engager.  In my view it should be the ENGAGER's obligation to assess status, just as it is in the Construction Industry Scheme.  So simply roll out that scheme list of tests to other sectors, job done HMRC.

Travel and subsistence - instead of coming up with new silly rules, just reduce the 24 month period down to 12 or even 6.

Likewise, I would say 24 months with one single engager on one single role - regardless of number of contracts - should be the starting point to consider that IR35 MAY - repeat may - apply.

 

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By memyself-eye
23rd Jul 2015 07:51

Impossible to be sure

My 58 year old contractor ltd co client swears he is outside IR35 -  most of his work points that way, some aspects do not. When told the difference in the tax treatment how many contractors would admit there are caught by the legislation?

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By nogammonsinanundoubledgame
23rd Jul 2015 08:09

And from April 2016?

With the introduction of the dividend tax from April 2016, is not IR35 somewhat redundant?  Are we to assume that this increased drive by HMRC is purely to mop up IR35 cases up to April 2016?

With kind regards

Clint Westwood

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By thomas34
23rd Jul 2015 08:48

Agreed

My first reaction was that the 7.5% dividend tax was a contribution towards all those IR35 non-compliant taxpayers who weren't suffering tax via the deemed remuneration calculations. I'm surprised that IR35 seems to be raising its head at this juncture. It won't be totally redundant since HMRC have been paranoid about the subject for ever now.

I guess that if a contractor is found to breach IR35 and retrospective deemed remuneration calculations are imposed upon the company the director/shareholder will get a refund of his dividend tax. We're likely talking about a date after 31 January 2018 as the date when such tax is payable. 

So does that mean that the liability will pass from the director/employee back to the company as a result of a compliance visit?

For this reason I can't see much enthusiasm for IR35 after the dividend tax is introduced.

 

 

 

 

 

 

 

 

 

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By ireallyshouldknowthisbut
23rd Jul 2015 09:31

.

(3) will kill the whole market, which currently consists of the big players running around through increased layers of legislation trying to force 'the little guy' to take the fall if IR35 applies.

Had this occurred 15 years ago the whole contracting industry would look very different indeed.

It is relatively straight forward for HMRC to do a compliance review on (say) 1,000 contractors for HSBC, much harder to do 1,000 individual IR35 reviews. They dont manage that many all year.

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By jon_griffey
23rd Jul 2015 10:19

Joined up thinking

Shouldn't this instead be part of the overall review into the proposed merger of income tax and NIC?  If that could be achieved then the whole IR35 issue may well disappear.

 

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By johnjenkins
23rd Jul 2015 11:01

Oh dear oh dear

Where will this crap end up.

I am sick and tired of HMRC and government squeezing the SME's. If they carry on it will be their downfall.

I don't think HMRC should be involved in employment status. It's a commercial issue. If government want more money then raise vat or the basic rate of tax or both. All this coniving with IR35, for what? pocket change.

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By IANTO
24th Jul 2015 11:24

Employment status

johnjenkins wrote:

Where will this crap end up.

I am sick and tired of HMRC and government squeezing the SME's. If they carry on it will be their downfall.

I don't think HMRC should be involved in employment status. It's a commercial issue. If government want more money then raise vat or the basic rate of tax or both. All this coniving with IR35, for what? pocket change.

 

I've maintained right from the beginning of IR35, that the ET, or whatever the equivalent court is now ,should be the only body which determines employment status. When employment status is decided, then HMRC can determine what tax is due. Clearly this would have killed IR35 in its gestation period.

 

However, HMG are never going to agree to this approach. So my approach would be (and has been) to ask the ET (and ultimately the EAT for me) to decide your employment status. Clearly the conditions for doing so might prove tricky, but if more people appealed to the ET after being "caught" by IR35, then agencies and clients, who have much more political clout than we have, would lobby HMG for change.

 

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By hedleyg
23rd Jul 2015 13:57

IR35 and the chaos it continues to cause.

When, I started my IT Company twenty years ago, I fully intended to take on employees and expand. Within two years, I was delivering more taxation than my gross salary, when I was a permanent employee - a win win situation.

For me, managing six employees technically was about the optimum number. It became apparent over the years that taking on employees had ceased to be a simple arrangement, and had become more like a marriage taking on many 'civil partners', and providing benefits under a mini welfare state. You would need an employee to manage employment law. Add to that the costs of business premises - then forget expansion.
IR35 came in with a vengence. The amount of time, wasted in the contracting world over this single issue, was beyond belief. People in their mid-fifties, like myself, soon adapted to the situation, and only worked six months a year. Why leave home at 5:30am in the morning to beat the traffic, live away from home, work maybe 70 hours per week to see the reward for your effort maybe or maybe not taken by the government? It was easier to live a more frugal and certain lifestyle.
Ten years ago, I closed down the Company, effectively retiring, and delivering minimal taxes.

There is an unwritten covenant between the taxpayer and the Government. The taxpayer has an obligation to pay due taxes, and the Government an obligation to spend this taxation wisely.
Undemocratic European law making, expense fiddling by MPs, two unnecessary wars, devaluation of the pound by 25%, and economic banking disasters are not part of my vocabulary.

In February 2003, the Rt Hon Tim Yeo posted an 'Appeal for facts on burden of red tape' in 'The Times'.

This is the text of my letter about IR35 that was sent to him ...

The Rt. Hon. Tim Yeo, MP,                    
Shadow Secretary of State for Trade and Industry,                               
House of Commons,                        
LONDON, SW1A 0AA                                  9th. February 2003.                                           

IR35: The Red Tape

    Dear Sir,
                 As you are well aware the IR35 tax rules have caused considerable difficulties for computer professionals running their own small close companies. This is not another letter moaning about IR35, but a reasoned explanation of why this additional red tape is wrong.
 
    When the government introduced IR35, there was a great chorus of disapproval, from mainly professionals in the IT industry, that was ignored. Other professions, such as engineers, are also affected by these rules. The Professional Contractors Group sought a Judicial Review, and, after some delay, lost. On a later appeal, the PCG again lost. In both appeals, the presiding judges were critical of the new law. I felt this exercise was unlikely to succeed, as the government had drafted and passed Schedule 12 of the Finance Act, had unlimited funds to fight the action (our own taxes), an excellent spin machine, and the ability to tweak the law if, in the unlikely event, they lost the case.

    However, when this arrogant government introduced the concept of ‘deemed employee’, they raised the spectre of the other British disease, the ‘deemed right to strike’. I regard myself as self-employed. Contract Law says that I am self-employed (O’Murphy v Hewlett Packard). And current Tax Law says that I am a ‘deemed employee’. When a government defies common sense, and Contract Law, there is an embarrassment that quickly follows. To mask their embarrassment, they go through the motions of appearing to be fair. Every ‘deemed employee’ can submit a contract for ruling. This level of bureaucracy is wrong for the following reasons.

1.    The sort of work that I do is one of self-employment. E.g. Trouble-shooting, fixing problems, security and tuning databases – not jobs that any manager can direct and control.
2.    Contract Law says that I am self-employed.
3.    A contract can only be reviewed after it has been signed.
4.    The Inland Revenue ‘opinion’ is not binding.
5.    IR35 ‘goalposts’ always being redefined.
6.    An agency contract with the end client, to which I am neither a party, a signatory nor have any legal right to view, can determine my employment status.
7.    I object to the right for the IR to impose this extra level of bureaucracy. By all means, check all invoices and paperwork to ensure the correct taxation is paid, but vetting contracts is an intrusion.
8.    Any decision made about a contract, by an interested party, is essentially wrong.
9.    There is a potential conflict of interest, if the work that I do, is part of a public sector contract.
10.   It is necessary to have Professional Indemnity Insurance to be a contractor.
11.   The company pays VAT.
12.   As a director, I should be free to determine the level of investment back into the Company.

What the government forgot, in their enthusiasm for new taxes, is that I am truly self-employed and control all the strings that determine my tax liability. It is not a case of what tax laws can be used to calculate the tax due, but more a case of what taxation I choose to pay to the government. Consequently, I have made a major lifestyle change and now only work for six months in any tax year. Before IR35, I had worked for 52 weeks a year, sometimes every other weekend, taking only one week’s holiday in the first 4 years so as to place my company in a sound financial position. In all honesty, I am now enjoying life to the full and have no complaints.

    Why will I not work for the other 6 months? In three months, I can earn enough to pay all my annual outgoing. In a further 3 months, I earn enough for a reasonable (not grand) standard of living. As I am from the older school of computer professionals, I measure success not by materialistic gain, but by skills acquired, knowledge, learning and doing the job well. I do not aspire to live the socialist lifestyle of John Prescott.

Let us now move on and analyse the taxation that would have been paid in the latter part of the year.

1.    5% to run the Company
2.    Travel and PIE expenses
3.    Accommodation expenses
4.    Employers National Insurance
5.    Some residual Employees National Insurance.
6.    Higher rate income tax

All these costs come out of what my company invoices. Add, as a minimum, the 15-20% that most agents add on, and the VAT on the whole, then the share of the person, actually doing the work, looks rather small. Quite frankly, I prefer to take the time off, rather than be working away from home (normal for IT contractors) for four nights per week or commuting on congested roads to deliver this sort of return from my enterprise.

Now look at some of the problems this interference will bring back to the government.
 
1.    Independent IT contractors keep rates down for business and government by being able to undercut the rates charged by larger companies.
2.    Our advice is independent, as we are not trying to sell hardware / software products at the same time, or factor additional paid extras into a contract.
3.    Instead of using the free Linux Operating system that most independent contractors would recommend (and some other governments already use), the government will instead pay an annual tax in licensing fees to Microsoft and the US government.
4.    It is normal, for foreign (US) companies, to purchase a minor (but overpriced) item, from the home country to repatriate profits to a more beneficial tax regime.
5.    Using foreign skilled workers from the Islamic countries is now a security risk.
6.    Insufficient local expert skills will be available to oversee projects and control unrealistic design. For instance, the new NHS medical codes fiasco!
7.    Foreign workers can be more highly skilled, speak excellent English, but they do fail in communicating and understanding in an English business environment effectively leading to poor system designs.
8.    Although cheaper now, enabling foreign companies to do the work, will eventually lead to the IT services industry becoming another ‘import’. Just look at the state of the Japanese electronic industry. We have lost enough industries already to worldwide competition.
9.    Our small close companies cannot retain profits to expand, move into formal business premises or provide employment to others.

    In the last General Election, there was the lowest electorate turnout for many years – 58.7%, very near the low 57% turnout of 1918. This control-freakish government continues to interfere in areas that are none of their business. It is almost like there is malevolence in the government. They were elected to represent us – not to assume they rule us like thanes and barons, or manipulate us with spin and misinformation. They stealthily take more and more of our GDP in taxation, and give us, in return, a miserable level of public service. They manage the NHS atrociously, claim that it is in serious trouble, claim they need even more taxation, and pretend that they can fix it. The same money will be announced many times, but, in the unlikely event that all this extra taxation is spent on the NHS, some (unannounced) funding at the other end will be cut off.

The government has destroyed taxpayer’s pensions with the stealth tax on the dividend tax credits, and the new FRS17 accountancy rules. I personally preferred to pay tax up front at the higher rate than take the taxman’s shilling and trust the pension industry - a prosperous company, employing others, was to be my pension. Legions of professional and public sector workers are used to gather statistics (presumably, so that the government can trot out a few success stories for the next election) rather than being left alone to get on to do the jobs they love and enjoy.

So here we have a situation, where the electorate has lost faith in the government and has no expectation they will cure the problems in the public sector services. The honourable MP for Bristol South had her moment of fun in parliament using her parliamentary privilege to brand all IT Professionals  ‘tax cheats’. Who is cheating whom? I am paying all the correct tax on the income that I earn. I have no objection to paying fair and proportionate taxation, but I will not pay unfair and disproportionate tax. I prefer to brick up the windows.

And now to the final question, does the government want an extra estimated £20,000 of taxation revenue per year (and  £3,500 of VAT revenue), from an expanding business, or do they wish to continue with the pretence that I am a ‘deemed employee’? This is peanuts on the grand scale of government wastage, but how many other independent IT contractors, like myself aged 55 years, are working part time now as a direct consequence of the unfair IR35 tax rules and associated red tape.

Would it not have been simpler to say that close companies must assign a minimum percentage of potential profit as salaries?

PS. I submitted one contract in the early days of IR35 on 22nd. August and received a response from the IR on the following 8th. March – 8 days after the end of my Corporation Tax Accounting Period. No further contracts have been submitted.
All contracts now are assumed to be IR35 caught - I am now on three months holiday until the new personal tax year starts in April.

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By awdeek123
24th Jul 2015 12:04

Tax lost .....

I became so disillusioned with the IR35 debacle that I throttled back to part-time working in my early fifties and will now aim to average 2-days per week until I reach retirement age.  As a result the government will have missed out on over £400k in tax but I have few qualms when I see how much of it is squandered.  HMRC's calculations will never be able to quantify how much tax has been lost due to the 'disincentive to work effect'. 

[I also cut back on personal outgoings, sold a car and bought a bike and am generally more contented.  I understand this is not an option for everyone though]

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By hedleyg
24th Jul 2015 17:12

How many others went part-time?

Thanks to 'JAADAMS' yield tables, I can confirm that together with 'awdeek123', we wiped out the total tax yield for 2010-2011 and 2013-2014, and made a dent into the other 2 years.

If there are any others in their 50's or older, who were able to scale back or close their business, please add to this post with an estimate of the tax lost. It will only take 5 more people to wipe out the other 2 years.

Nothing is learnt by the government - meddling with tax can result in a lower tax yield - perceived unfairness never works.

Well done 'awdeek123'.

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By awdeek123
25th Jul 2015 17:39

The roots of my disillusionment

hedleyg wrote:

Thanks to 'JAADAMS' yield tables, I can confirm that together with 'awdeek123', we wiped out the total tax yield for 2010-2011 and 2013-2014, and made a dent into the other 2 years.

If there are any others in their 50's or older, who were able to scale back or close their business, please add to this post with an estimate of the tax lost. It will only take 5 more people to wipe out the other 2 years.

Nothing is learnt by the government - meddling with tax can result in a lower tax yield - perceived unfairness never works.

Well done 'awdeek123'.

A little off topic but I'm sure many will know where I'm coming from with some further explanation of the roots of my disillusionment .... the straw that broke the camel's back occurred a few years ago when I was working very long hours (in a windowless client office) preparing for an appearance as an expert witness in the High Court in London. During this period I sent my annual return to Companies House in good time only to receive an automatic £150 fine for late delivery. Further investigation showed that it had arrived 4 hours late due to a local (Edinburgh/Lothian) Royal Mail strike that I couldn't reasonably have known about in Aberdeen. When I visited the Companies House website there was a banner on the home page stating that the mail strike would not be accepted as an excuse for late delivery. At this time I only had Talksport for company during the working day and was bombarded with regular adverts reminding people to re-register for their annual benefits entitlement so that they could 'get the right money'.  This was a stark reminder of the two tier society we have created in which wealth creators are punished for trying their best to comply with unnecessarily complex rules whilst others have to be cajoled by an inane celebrity into applying for free money.  

Further, on the subject of the squandering of public money, I have considerable first hand experience of assisting family members navigate the incredibly complex benefits system and can confirm the levels of inefficiency, incompetence and disinterest shown by the various government departments are truly staggering.  On one occasion my sister-in-law found herself in extremely distressed circumstances with no money for food, rent or electricity and the only way of contacting the relevant benefits departments for emergency assistance was via a premium rate call service. It cost her £11 being abused and shunted around the system with no result before her phone credit ran out.  So much for Tony and Gordon's public service reforms!  

At this stage I decided to opt out of the rat race and look after no. 1 by substituting work with leisure time.  Fortunately I work in the oil industry which is so detached from reality that it's relatively easy to earn £100k p.a. by working 2 days per week with no particular skills (or at least it was before the oil price crash and some normalisation of rates started to occur). So I work a few days a month, help out with some start-up companies and generally take things easy.  This year I'll probably do no work, live off retained earnings and claim a corporation tax refund. This year I'll pay the 'right amount of tax' i.e. none.  If the government doesn't like this type of unreasonable behaviour by a 'hard working family' member - well they started it!

........ end of rant.

However it's a serious point that whilst the government has made some heroic assumptions in its calculation of the amount of tax collected purely due to the fear factor of IR35 restricting wholesale tax avoidance by 'disguised employees', it takes absolutely no account of the revenue lost through the actions of folks like me who have simply 'had enough'. 

 

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Jennifer Adams
By Jennifer Adams
23rd Jul 2015 16:02

Have a look at the statistics...

 

Tax YearNo. of IR35 EnquiriesYield2010 - 201123£220,0002011 - 201259£1.2m2012 - 2013256£1.1m2013 - 2014192£430,000

 

>>>> so ... should we be worried?

I have a couple of what I would term 'possibly IR35' but as Mr Mischief  says...they werent asked but were told.

 

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By johnjenkins
23rd Jul 2015 16:32

What really is worrying

is that government persist in this crazy IR35 "must work" routine.

If something is not right, it doesn't matter what you do, IT WON'T WORK. The more you mess about with the workforce, the less happy they become and the less productive they become. A Message to GO. Carry on and watch the coffers shrink even further.

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By Nick Graves
24th Jul 2015 13:27

Yes but...

johnjenkins wrote:

is that government persist in this crazy IR35 "must work" routine.

If something is not right, it doesn't matter what you do, IT WON'T WORK. The more you mess about with the workforce, the less happy they become and the less productive they become. A Message to GO. Carry on and watch the coffers shrink even further.

It provides too many boondoggles and well-paid jobs for otherwise utterly useless people to prosecute this patently absurd stuff.

Unlike King Knut trying to demonstrate that he couldn't reverse the tide, these people won't give up their cosy gov't pension entitlements just because reality gets in the way. 

 

 

 

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By fionamcke
24th Jul 2015 11:22

Not joined up

I agree with Jon Griffrey. If they merged NIC with income tax (ers NIC IS just a tax) then most of these complications would fall away. Unfortunately I doubt that simplification will ever happen. Can you imagine any Government having to admit the true amount of tax it has levied on employment? Or giving up this opportunity for raising more tax virtually in secret? Then there's the fact that such consilidation may result in raised taxes on those that vote the most, wealthy pensioners.

Regarding the allowability of various travelling expenses I think there is also an argument for allowing them for some employees. Many 'temps' who are classified as employees (usually lower paid) change work location every few months. They do not have an option to move closer to their temporary employment sites. So for anyone working at a site for less than 12 months travel is an unavoidable necessary cost. Hugely expensive to HMRC of course so not happening.

 

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By Gimlet2008
24th Jul 2015 11:24

IR 35 dejected potential client

 

Not sure I want to widen teh debate and I have to say many erudite comments here of which I am in awe, but recently I have noticed a couple of things: 

 

 There are it seems still whole swathes of people who have been "forced" to set up  a limited company who come and see me and have no clue about IR35.  

I recently met a new potential client who  I though it was an extremely high risk that they were IR 35 , went through all the ins and outs, and they said they understood. But would I engage them on the understanding that they would self assess as not inside IR 35. I was a bit taken aback and said no. That would led to some possible problems later down the line. They seemed dejected/ confused. We both felt that our time had been wasted I think.

I have struggled with these points and wonder if I have over reacted and everybody is in reality blissfully carrying on regardless ? So I suppose my questions is am I being harsh ? Has somebody got a magic answer to dejected potential client ?

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By BrianNicholls
24th Jul 2015 11:26

“supervision direction and control”

If you look at the discussion document again, you will see that there is no mention of "supervision direction and control". It actually refers to supervision direction OR control.

This is a hurdle that will be almost impossible to overcome.

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By PaulCharles
24th Jul 2015 11:27

MOD Staff and then Contractors

hi i wonder how many MOD staff have set up companies ..ive been advised,,that rather a lot of Ex Mod retire on a friday and  then return to the MOD on the Monday with a Limited Company setup....an odd arrangement,,,but the government departments accept such arrangement.

 

 

 

 

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By NeilW
24th Jul 2015 11:32

Just equalise the taxation then

The simplest thing that will work is to make employee and business taxation the same. If you earn the money then you pay the tax rate on your net profit regardless of the contractual arrangements. 

The problem here is social engineering and believing that certain tax rate changes are better than others. 

The price of the flexibility of contracting should be born by the client not the taxpayer. And that applies across the board. 

 

 

 

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By mwalker
24th Jul 2015 12:02

Tax vs Benefits

NeilW wrote:

The simplest thing that will work is to make employee and business taxation the same. If you earn the money then you pay the tax rate on your net profit regardless of the contractual arrangements.

 

That would be fine, so long as the ensuing available benefits were also aligned.

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blue sheep
By NH
24th Jul 2015 11:56

PSCs

as a matter of interest - for all those clients that offer their personal services through a company, has anyone filled out the relevant PSC box on the SA return for dividends instead of the usual dividend box, or does everyone else take the view that if they are not IR35 they are not a PSC?

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By LindsayRuddock
24th Jul 2015 12:04

proposed dividend tax looks like a very modest burden for PSCs


Anyone, what figure would the dividend tax have to be to fully cancel out the tax advantage of avoiding 13.8% employers NICs (applicable to over 65's) and what figure would it have to be to cancel out both employers and employees NICs (12% / 2%) for under 65's?

A 7.5% dividend tax even when scaled up to a percentage on profit surely looks quite modest in comparison with the total NICs percentage, at least for under 65's. If the new tax takes away the pressure and uncertainity on PSCs then surely this is a good thing to be welcomed by PSCs. Once the rules are clear, the market rates will adjust.

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By jonsa
24th Jul 2015 12:09

Nothing new - HMRC hate contractors

IR35 was not the start of HMRC hating contractors.  They certainly have done for the last 40years, as well as that similar bunch of sub-contractors under CIS.

They will not stop hating them, so we must expect IR35 to continue in a draconian fashion and probably get worse.  I expect HMRC to decide the outcome without taking much notice of what is said, as they usually do when these industries are involved.

One point - nobody has mentioned the original IR35 and that it was up to the end client to shoulder the responsibility.  There was an uproar and pressure.  HMRC backtracked.

 

The future. There will be less travel costs to claim, more dividend tax to pay, less employer's allowance to claim and no doubt more to come.  You may think I am being rather cynical, but I think I am more of a realist.

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By maxmcculloch
24th Jul 2015 14:56

The Government is dragging on IR35 to the death

In its early days, one of the first recommendations made by the Office of Tax Simplification was to scrap IR35 all together.  HMG/HMRC ignored this and has now obviously tasked OTS to come up with ways of fixing the already deemed unworkable!  

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By thomas34
24th Jul 2015 18:05

OTS

maxmcculloch wrote:

In its early days, one of the first recommendations made by the Office of Tax Simplification was to scrap IR35 all together.  HMG/HMRC ignored this and has now obviously tasked OTS to come up with ways of fixing the already deemed unworkable!  

I stand to be corrected but I believe the OTS fudged the issue by giving 3 alternative suggestions - keeping it as it is, amending it or scrapping it. In other words, to quote Monty Python, they stated the bleeding obvious. I think you're being too kind to the OTS of whom I wonder what they've achieved during their history.

 

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By mydoghasfleas
24th Jul 2015 15:16

The dividend tax may not match the "lost" Class 1 but

it looks like PSCs will be on the receiving end of withdrawn Employment Allowance; budget referred to one man companies, immediate thought was to make them a one woman companies but that might not work for same sex marriages (well the male ones anyway).  That with the dividend tax yield will go a little further to balancing it up.

My thoughts then turned to the commitment on income tax rates.  The last administration but one promised not to increase higher rate tax and it did not.  Instead it "introduced" additional rate tax; the quotes are to acknowledge  the previous additional rate charged on investment income when surtax disappeared.in 1972.  So Boy George (real name Gideon) is capped with the principal tax rates but when you introduce a new tax there is nothing to stop you tinkering with the rate, 7½% becomes 10%, the claim will be it is to reduce the abuses of PSC's but drags in many others who have significant dividend income. 

Once the pips are squeaking (not my phrase but Dennis Healy's) on the dividend rate there could be a migration back to salaries for those who can; for those who cannot (anyone who has dividend income of more than £5,000 not derived from PSCs) it is a big tax hike. 

Basic rate taxpayers not using ISAs for equities will need to assess them as an option if their dividend income exceeds £5,000.  Some portfolio adjustments between couples will need to be reviewed - married couple one higher rate one basic rate, dividends £10,000 all with basic rate spouse might now split portfolio to take the full £5,000 exemptions.  It's an opportunity for advice fees.

Gordon Brown claimed making tax credits non refundable would affect few individuals' tax liabilities; it put very few liabilities up but led to massive pension deficits when the Trustees were denied access to £6,000,000,000 per annum.  He certainly managed to take considerable numbers of pensioners out of tax mainly by ensuring their money purchase pensions purchased much smaller pensions.

I am not a pensioner yet.  I am however old enough to remember how deeply each Chancellor (red, blue or coalition striped) has embedded his tongue in his cheek before reading out the red box contents.  You can tell when politicians lie, their lips move.

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By iainhunneybell
26th Jul 2015 14:51

Incorporation has nothing to do with tax efficiency

The core issue with IR35 is that it starts from the premise that people only incorporate to avoid tax and then ties itself in ever tighter knots as it tries to identify these ‘tax cheats’ and make them pay similar tax to full-time employees. The recently announcement of ‘no T&S’ for one-person companies is squarely in this area. Then the dividend tax is around the idea that contractors will only pay themselves the tax-free allowance and take the rest as dividend, thereby saving NIC, however…

The reason contractors incorporate is that it is IMPOSSIBLE to get work unless they are incorporated. It is usually a mandatory requirement by any client that the contractor MUST operate via a Limited Company, have business insurances and Company bank accounts. Unless they can pass these tests, they cannot even be considered for any work. And the reason for this is the Employment Laws. Client businesses want to make it as clear as possible that a temporary worker is just that and not an employee due employment benefits and everything that go with them. Most will also INSIST that the contractor work via a third party agency even if that agency has nothing whatsoever to do with their selection or work. Again, the reason is to put as many ‘layers’ between the person and the client to demonstrate they are not an employee even if it does involve paying additional amounts to an agency for no benefit beyond being an ‘invoicing proxy’ (and additional layer of intermediary).

So if you ever hear or read anything where it’s explained that contractors incorporate for tax efficiency, stop listening/reading, as the person has in that instant demonstrated they know little about what they claim to be an expert about. The fact is; You cannot work as a contractor unless you operate via a Limited Company, period.

Next of course is that contractors almost certainly contribute MORE tax than if they were full-time employees. Many contractors will collect VAT and even if they try and ‘make best use of dividends’ for remuneration, it’s likely the PAYE they will pay on these amounts will exceed the combined PAYE and NIC that would be collected from their work as a full-time employee of a larger business. The contractor’s business will also pay CT while as an employee of a Corporation, it’s quite likely ‘efficient tax planning’ by the business will lead to lower net CT as a result of the person’s work. There are also issues like the ‘exposure’ the Government has to a full-time employee being laid off where unemployment benefits must be paid, while a contractor working for their own business is never deemed to be out of work, even if the business has no revenue. Consequently a contractor is unable to obtain unemployment benefits that a full-time employee would get in a similar ‘no work’ situation, lowering the Government’s exposure.

It’s also true that a lot of contractors work a long way from home. I know one person that commutes from the Midlands to Edinburgh and travel of several hundred miles is not at all uncommon. Some contractors will visit two of three different client locations equally far apart in a week. To therefore consider such travel as similar to a daily commute seems unreasonable, especially as if that same person were an employee of a larger company making the same journeys, then they would be entitled to T&S. What is ‘fair’ about the same person making the same journey, but when they do this while operating as their own business they become a ‘tax cheat’ and so will not be allowed the T&S as a business costs, yet as an employee of a larger company, T&S is allowable? Seems blatantly unfair and handing a unfair business advantage to larger businesses while stifling start-ups.

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Dave Chaplin
By Dave Chaplin
27th Jul 2015 09:45

Contractors actually pay more tax than employees

The HMRC propaganda surrounding IR35 contains one very large conceit - that firms can hire contractors at less cost than they incur for hiring employees. Apples are not being compared to apples.

The discussion document example compares a permie lawyer on £70K pa and an equivalent contractor lawyer who invoices £70K per year. Anyone care to try and find a contract lawyer with the same skills who charges LESS than their permie equivalent?!

Let's get real, an example.....

A quick survey of contractor contacts working in IT tells us that a contractor on £400 per day would probably earn about £60K per year salary.

The numbers:

£60K per year permie:

Total cost of employee: £67,160

Total tax paid: £24,990

 

£400 per day contractor

(5 days per week, 46 weeks per year - £8K salary)

Total cost to firm: £92K

Total taxes paid: £26,015

 

HMRC would like us to think you can find a contractor who would move from permanent employment to contracting and only charge £260 per day. If you are that contractor, please send me your CV - your hired!

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By iainhunneybell
27th Jul 2015 20:01

Likely to be greater difference that this

I can assure you that any contractor that could command a £60K salary would NOT be being hired at £400/day. Make that £600 or more...which just makes your case more.

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Dave Chaplin
By Dave Chaplin
28th Jul 2015 16:15

The fundamental assumption driving IR35 is flawed

iainhunneybell wrote:

I can assure you that any contractor that could command a £60K salary would NOT be being hired at £400/day. Make that £600 or more...which just makes your case more.

My small survey amongst current IT contractor friends yielded these rough figures. It really does depends on skillset though. However, we all know that no-one goes contracting where there is a high demand for their skills and expects to get a worse deal than their permanent counterparts. Even the very original legislation that was focused on the "Friday to Monday" mob weren't getting worse deals. I was there in the late 1990's when it all happened. Firms agreed to re hire staff as contractors, paying them considerably more, simply because they would lose them otherwise. And they all paid much more tax than before.

The whole premise of IR35 is based on the false assumption that a contractor invoices the same as an equally skilled permie gets paid in gross salary. Doh!

 

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By Chris Tullett
27th Jul 2015 15:32

IR35 has always been a problem to deal with due to so many inherent uncertainties. The OTS recommendation that it should be scrapped as it is unworkable still remains the best solution in the current environment. As others have said, new tax changes, when implemented, will cover some of the "losses" so no need to "get tougher" on IR35. There are many more areas requiring attention by HMRC.

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By iainhunneybell
27th Jul 2015 20:05

And on the 'incorporating to avoid tax' point

And it occurs to me too, that one of the clients that are the MOST rigourous in INSISTING that a contactor can only operate via a Limited Company is... [drum roll] Cabinet Office enforcing a 'contracting framework' across HMG which includes HMRC. So if you wish to contract to HMRC, you are REQUIRED to prove...in great detail...that you operate via a 'PSC'. And yet this is also a vehicle just to avoid tax?

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By iainhunneybell
29th Jul 2015 10:17

Paid gross salary

Yes this is a common totally uninformed view leading to claims of "overpaid contractors". Indeed it is supposed to have been Cherie Blair considering contractors overpaid that was the trigger for IR35, which is not only very badly informed as well as something of the pot calling the kettle black given her own rates of pay!

People 'forget' the true cost of employment is at least 2x a person's *gross* salary and that the contractor's rate has to cover everything from business insurances, personal, heath and permanent disability insurances, holiday and sick pay, cover periods of no contract, all equipment, training, often considerable travel, NIC, CT and so the list goes on, BUT... people look at their *net* earnings and then at a contracting *gross* amount and equate one with the other...which is a *long* way from reality.

It's all the worse that the increasing changes seem to be designed to 'force' contractors to be taxed as if permanent employees and gradually disallow all business expenses, while at the same time allowing the same expesnes for larger businesses. I am sure some contractors do 'play the game' to the max to minimise their tax, but that is not justification for impacting all micro-businesses as it will simply limit start-up opportunities.

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