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Join AccountingWEB’s IR35 campaign today

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15th Oct 2014
Editorial team AccountingWEB.co.uk
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With your help, AccountingWEB is preparing to tackle the thorny issue of IR35 in a campaign supported by FreeAgent and other concerned specialists within the accountancy profession.

Throughout its 15 years’ existence, the IR35 tax regime has been an irritant for individual contractors operating one-person limited companies (aka “personal services companies”) and the accountants advising them.

Following a House of Lords select committee investigation earlier this year and a subsequent review of employment rights, IR35 is now climbing the political agenda ahead of next year’s general election.

Against this backdrop, AccountingWEB is launching a three-month project this week to ensure the voices of accountants around the country are heard in the corridors of Westminster and Whitehall.

The IR35 campaign starts with an online survey to explore how IR35 affects accountants and their clients. The issues the survey brings to light will be explored in more detail in a November webinar featuring representatives from FreeAgent, TolleyGuidance and IR35 specialists from Qdos.

All of the information gathered will be collated into a whitepaper setting out the technical background and guidance alongside practical advice about how to handle IR35 clients and the problems (such as enquiries) that they encounter.

Once the practicalities have been addressed, the views and suggestions of AccountingWEB members will be put forward to the Office of Tax Simplification, HMRC, political parties and tax policy think tanks.

There is a strong possibility that IR35 reform will feature in forthcoming election manifestos and we want to make sure that the experiences of people on the front line are taken into account. If policy makers had bothered to listen in 1998-9, we might have avoided the past 15 years of grief.

FreeAgent founder and managing director Ed Molyneux explained why his company is backing the campaign: “IR35 is a big deal for us. We’re all about 1-2 person businesses and IT contractors. They have enough difficulties running freelance businesses without this uncertainty hanging over their heads.”

IR35 affects a subset of FreeAgent’s end users, but is a major concern for the majority of the accountants who use the system to work with their freelance clients. “A lot of those accountants lose sleep over IR35,” Molyneux said.

While FreeAgent appreciates that HMRC’s job is to collect tax, Molyneux commented: “The problem IR35 is trying to solve isn’t the question of false self-employment, it’s the disparity in tax between sole traders, employees and limited liability company directors. This could be done if there was a limited company structure like the US ‘S Corporation’, where all income is passed through like a partnership to the personal tax return.”

Along with AccountingWEB and our other IR35 campaign supporters, FreeAgent is keen to collect data that can be used to convince policymakers of the need for reform. “When it comes to the issues that are important to our customers, we want to stand up for things we believe in,” Molyneux said.

You can play your part in our IR35 campaign by completing our online survey. The survey will provide a statistical framework for the initiative, but as usual you can add extra insights on the issue by commenting below.

Replies (22)

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ghm
By TaxTeddy
15th Oct 2014 10:33

I can't take this seriously

Call me a cynic but this looks like an easy way for FreeAgent to get my contact details and also a convenient profile of my clients affected by IR35.

Further, I don't see that any “survey" is going to influence government policy on this thorny and long-standing issue. Clearly the Treasury sees the use of one man companies as tax avoidance and nothing that the profession has said or done down the years seems to have altered this view.

So unless someone can come up with a good alternative to IR35 which makes the Treasury / HMRC feel comfortable about tackling perceived tax avoidance there is unlikely to be any change. Also I would disagree that this is likely to feature in any election manifesto as it affects far too few voters and is a difficult issue for the public at large to understand.
 

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By Eyrie
15th Oct 2014 11:14

Alternative to IR35

The simplest solution would be to treat dividends from a close company as a deemed salary subject to income tax and NIC, rather than the lower tax rate applicable to dividends, and have this deemed salary deductible for CT.

Of course, simplest does not always equal practical and I'm sure someone will point out various flaws in making it that simple.

Thanks (3)
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By Pozzer6
15th Oct 2014 11:34

NIC's on dividends

I partly agree with Eyrie - one of the original problems perceived by HMRC was the loss of NIC's so why not treat dividends as subject to NIC. As for tax saving - yes a company can shelter tax at 20% and drip feed reserves in retirement in the form of a pension - but then Osbornes proposed pension changes will enable taxpayers to do almost the same thing anyway.

Clearly its not as simple as that but its about time we had some simplification of our tax system!

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By Old Greying Accountant
15th Oct 2014 11:46

Just stop faffing ...

... and merge tax and NI.

Thanks (9)
By Michael Harle
15th Oct 2014 12:00

IPSE

I would have thought that Freeagent should work with someone like IPSE (formally PCG), who have been campaigning for years, rather than start a new campaign,

Surely one large campaign is better than lots of smaller ones?

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By Psyche
15th Oct 2014 12:07

NICs on dividends - agree

I agree that the best way to solve the problem would be to subject close company dividends to the same National Insurance rates as salaries. Tax would remain lower (20% versus a jump to 40%) -- but that could be the means of making up for contractors' lack of holiday and sick pay and job security. And it would be MUCH better than contractors and their accountants needlessly fretting over whether they will be caught and have to cough up not only their share but their client's share of tax and NI.

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By Gone Sailing
15th Oct 2014 12:23

Benefits of Ltd Co

HMG should get its head around the other benefits of someone trading as a Ltd Co rather than SE and leave the tax incentives alone.  The NI issue is resolved with the 'reasonable salary' issue, but don't tell anyone.

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By Ninian
15th Oct 2014 12:34

NIC on dividends

If close co dividends are to be subject to NICs then will it be just for IR35 type companies or all close companies? If the former then in trying to decide whom to NIC we are more or less back to square 1; If the latter then close companies not of the IR35 genre are going to be arbitrarily disadvantaged vis-a-vis non-close companies - not all close companies exist as service companies. So again it is a case of identifying who to apply NIC to - Square 1 again; or do you then introduce some arbitrary level of 'remuneration' which has to be NICable and beyond which dividends are acceptable (shades of Dawn Primarolo and her 'appropriate amount of tax'). Also, if NIC is to be applied should it not be at a rate equivalent to Class 2 for self-employed because bona-fide service companies are basically self-employed and all that will be achieved by imposing 12+13.8% NICs will be the rapid closure of a lot of small companies.

I don't know if it was just a(nother) Gordon Brown aberration but there was an obvious drive a few years ago to get small businesses into companies (remember 0% CT?) so is it in the government's thinking now to reverse all that - because full-blown NICs surely will?

All these things could have been done by now but haven't; possibly not just because a solution isn't that easy in practice but perhaps also because beyond HMRC there remains in government some desire to encourage small business with effectively lower tax rates (self employed have always enjoyed less NICs than the employed)?

Thanks (2)
Replying to saltimbamba:
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By thacca
15th Oct 2014 13:22

Agree

Ninian wrote:

If close co dividends are to be subject to NICs then will it be just for IR35 type companies or all close companies? If the former then in trying to decide whom to NIC we are more or less back to square 1; If the latter then close companies not of the IR35 genre are going to be arbitrarily disadvantaged vis-a-vis non-close companies - not all close companies exist as service companies. So again it is a case of identifying who to apply NIC to - Square 1 again; or do you then introduce some arbitrary level of 'remuneration' which has to be NICable and beyond which dividends are acceptable (shades of Dawn Primarolo and her 'appropriate amount of tax'). Also, if NIC is to be applied should it not be at a rate equivalent to Class 2 for self-employed because bona-fide service companies are basically self-employed and all that will be achieved by imposing 12+13.8% NICs will be the rapid closure of a lot of small companies.

I don't know if it was just a(nother) Gordon Brown aberration but there was an obvious drive a few years ago to get small businesses into companies (remember 0% CT?) so is it in the government's thinking now to reverse all that - because full-blown NICs surely will?

All these things could have been done by now but haven't; possibly not just because a solution isn't that easy in practice but perhaps also because beyond HMRC there remains in government some desire to encourage small business with effectively lower tax rates (self employed have always enjoyed less NICs than the employed)?

Agree with all of this. A very sensible post.

Thanks (1)
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By raybackler
15th Oct 2014 12:57

9% NI on service company profits

Ninian raises a lot of good points on this issue.  To have service companies pay the same NI as the self employed should be the key goal.  Other close companies should not be included.  There could be some simple tests - not the current HMRC tests.  For instance:

1. Business premises or working from home? - Working from home = 1 point for NI

2. One major source of income (75% threshold) or multiple sources of income? = 1 point for NI

3. Multiple employees or just fee earner and spouse? = Fee earner and spouse only = 1 point for NI

4. Get 3 points and you pay 9% NI plus Class 2.

Incidentally as an accountant working from home, I score 2 points and it is only the multiple sources of income that saves me!!

This would put service companies on the same footing as the self employed, which could then lead to further simplification down the road, as advocated by Old Greying Accountant.

Maybe to allow time for adjustment, the 9% NI could be introduced over 3 years, say 3%, 6% then 9%.

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By NeilW
15th Oct 2014 13:04

Simplify the whole lot.

There is no justification for any tax differential between corporations, sole traders, partnerships and employees. 

What really needs to happen is for the whole thing to be unified. 

Scrap National Insurance and roll it into income tax where required, charge corporations at the same rates as income tax. 

Then scrap capital allowances and just make all spending by businesses immediately allowable (if wholly and exclusively, etc.). 

The differential tax rates are the problem, so unify the tax rates and shift the offset to the allowances side of the sheet. Small personal service companies tend not to spend a lot on business investment. Lack of business investment is the economic problem in the UK, so shift the tax offset to there. 

There has been too much politics with tax rates to try and grab headlines. That is why they are a unholy mess. If we can't get away from that, then we're just going to have endless emergent interaction issues. 

Which is great for accountants (if you can charge for the time), but probably not sensible from the country's point of view. 

 

 

 

 

Thanks (4)
Dave Chaplin
By Dave Chaplin
15th Oct 2014 13:25

We all know the simplest answer…. merge income tax and NI

It amazes us at ContractorCalculator that HMRC is still flogging the dead horse that is IR35. In its current format it doesn’t work. Given the ease with which savvy contractors can dance around it, and the fact that HMRC investigations are unlikely to collect from contractors if they have no money in their company, HMRC needs to admit defeat and go back to the drawing board. We all know the simplest answer…. merge income tax and NI – but it will never happen. Politics will get in the way. For contractors, IR35 is simply an exercise in due diligence and insuring themselves against expensive investigation fees.

Thanks (1)
JCACE
By jcace
15th Oct 2014 13:31

Close company divis Class 4

The simplest solution, that would be a good money raiser for HMRC, would be for all close company dividends to be subject to Class 4 NICs, (either net or gross). The close company legislation definitions already exist. There would still be some companies that try it on by using umbrellas or other means to circumvent the closed company definitions, but as has already been pointed out, the majority of closed companies act like self employed traders anyway. Then do away with IR35 and the uncertainty of the rules surrounding it.

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Replying to Tax Dragon:
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By Ninian
15th Oct 2014 14:19

Class 4

Again, there are issues. Some close companies merely let investment properties which wouldn't attract NIC as a self-employed activity so you would have to make an exception there, if nowhere else, unless you are just looking to increase taxation.

Maybe all IR35 needs is to be re-jigged so the burden of proof of independence goes back to the 'employer' - as is still the case with a non-company self-employed person - CIS being a prime example. The obvious problem would be as to whether employers would insist on PAYE only and squeeze rates of pay to compensate for the employer NIC instead of ensuring that the reality of engagements is independence. I wasn't privy to the deliberations surrounding the introduction of IR35 but have heard it said that pressure from big business caused the burden of proof to be put on the 'employee'. Maybe this was so or maybe the government wanted to avoid what I have just suggested.

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By vstrad
15th Oct 2014 14:36

What about the workers?

If dividends from service companies, or close companies, are to be subject to NI, the working shareholders in those companies would have a very strong case to be eligible for Job Seeker's Allowance and other benefits from which they are currently excluded. The basic problem is the disconnect between employment law and tax law.

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ghm
By TaxTeddy
15th Oct 2014 15:34

Isn't the solution the other way round?

Surely the problem is the disguised income tax we call NI being selectively applied to some income (salary) but not others (dividends).

So to simplify - don't create more rules about what is or isn't attracting NI - scrap NI and adjust the rate of tax to keep the overall tax take neutral.

Now - all we need is a politician brave enough..........

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By Ken Howard
15th Oct 2014 15:47

Yep, scrap NIC

The clear answer is to scrap NIC and increase income tax/corporation tax accordingly.  Not only will it immediately remove the salary + dividend issue, it'll also bring all those people who live on "non Niable income" into the fold to pay their way, just like the workers have to do, i.e. those living on investment income, pensions or taxable state benefits.  NIC isn't an insurance policy or any other "touchy feely" fund - it's just another tax, but it's patently unfair because it's only imposed on the workers.

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By johnjenkins
15th Oct 2014 19:42

We Know what

the answer is. We have known for years but nothing will be done, because silly governments don't realise we all know what they are up to. They just think we are a load of crooks, (except those that think divis should be nic'd) out to con HMRC. Can't wait till they start taking money out of bank accounts.

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By Moonbeam
18th Oct 2014 13:35

And Anyway your survey doesn't work

In Q1 the third statement makes no sense.

the second page won't move on after being completed.

I'm anyway in agreement with most others that merging tax and ni is the answer

I wouldn't have given any personal details anyway as I didn't want to go on a mailing list.

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By kjevans
19th Oct 2014 18:10

Fairest solution

Would be to make the "deemed employers" liable for tax and NI (and benefits) on Ltd co freelancers payments if they were found to be employees - just as it is with self-employed persons. A colleague in the US tells me that that is what happens there. So companies are very careful to treat their freelancers as external suppliers.

How is it possible to tell whether a micro business is a "personal service company" as opposed to a very small company in the service sector - and why should they be treated differently from any other very small company?

And scrap NI, of course.

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By Robert Lovell
20th Oct 2014 16:02

AccountingWEB can make a difference

Many thanks to everyone for their comments about our IR35 campaign so far, whether good or bad.

We understand why some people are concerned about the involvement of a sponsor and whether the overall campaign will make a difference in the long run.

However this is an AccountingWEB campaign, supported by FreeAgent. Without this support we would struggle to get the voices of thousands of accountants heard at the higher levels we aspire to.

IR35 is consistently one of the most well-read and commented on topics on AccountingWEB, and we feel that if we can mobilise as a group we’ll be able to achieve a lot more.

As the UK’s largest online community of accountants and finance professionals we feel it’s important that we surface this debate in a more collective and credible way.

These sorts of campaigns are something we want to do more of on AccountingWEB. If we can make enough noise, then we at least have a chance of influencing policy and change.

We would urge all interested parties to take part in the survey to provide that opportunity.

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By lme
20th May 2015 10:50

Please replace IR35 asap - it stinks!

Pretty close to government - or at least, HMRC-sponsored tax avoidance, so far as I can see. Huge risk and uncertainty for decent people trying to do a good job made ridiculously difficult and expensive by this piece of legislation which must be amongst the worst ever written.

 

Ah, feel a bit better now I ahve got that off my chest, thanks!

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