With all that is happening in our world I decided to pen a letter to my MP highlighting some of my concerns about government policy towards both ourselves and our industry. The first post was sent to the MP, the second post is the response from David Gauke MP, famed in 2011 for saying that paying a builder cash in hand (Evasion) was ok but Avoidance was not!
I entitled the email 'The Murder of the British IT Industry'
Dear xxxxxx,
I'm writing to you today regarding changes that are under consultation by both Government and HMRC that would deal a fatal blow to flexible working within the IT and other industries.
My History
I began working in the IT industry in 1986 and chose set up my own Limited Company in 1989 and began supplying services to clients. Since 2000 I have supplied services to 16 different client companies, 3 this year so far. None of these engagements were begun with the intention of being employed by the client, nor for the client to provide any of the following
• Pension
• Holiday Pay
• Sick Pay
• Maternity Pay
• Redundancy
As I am working through my own limited company I am responsible for ensuring that it pays corporation tax, VAT and operates a PAYE scheme. Personally, as is every other domiciled resident of the UK, I am required to submit a tax return where appropriate to account for all income and pay tax as defined under law.
Current State
I find the clients either by my own network of contacts or via agencies that contacts me about client requirements. With a client obtained via my own network I agree contractual terms with the client, have the contract reviewed by a lawyer and enter into an engagement that can last from a few days to a few years. My company invoices the client and awaits payment. With a client obtained via an agency I receive a proposed contract from the agency which is then subject to negotiation. Once a suitable contract has been agreed with the agency it is the reviewed by a lawyer and opinion given. Again the engagement lasts from a few days to a few years. My limited company invoices the agency who in turn invoice the client and I await payment. In both cases if the client becomes insolvent my limited company will not get paid and in the latter example the limited company won't be paid if the agency becomes insolvent even though they may have been paid by the end client.
How We Got Here
In 1988 a piece of legislation was enacted that effectively created a desire to incorporate Income and Corporation Taxes Act 1988. Prior to this freelance resources worked on a self employed basic, paying tax, type 2 and type 4 national insurance. Because of this legislation people moved to using a limited company and, as a result, were advised to begin distributing the companies profit as dividends, thus avoiding national insurance. Hence the effect of the legislation was to reduce the national insurance collected - not it's intention.
Once Labour came to power in the late 90s they began talking of Friday to Monday employees, those who resigned from a company on a Friday and were engaged by the same company on Monday though now working via their own limited company. The government introduced legislation known as IR35 which they said was intended to counter this however the wording and hence intent of the legislation was to cast a much wider net. The legislation placed emphasis on the 'perceived working relationship' rather than any obligations committed to in the contract between the parties, as HMRC put it - to look through the contract to any downstream contract between an agency (or intermediary in HMRC terms) and the end client.Given that I am not entitled to visibility of any downstream contract I have no means of ensuring that the engagement defined between my company and the agency is reflected down the chain of contracts until the end client is reached.
Dawn Primarolo and Gordon Brown, Paymaster General and Chancellor at the time, stated at every occasion that those working using their own limited company were paying less tax than other workers, a statement which is a misrepresentation of reality. They focussed on just the income tax aspect rather than the full picture. If I may give any example of a freelancer, working through their own company comparing the non IR35 and IR35 positions
If the limited company invoices £100,000 in a year
IR35 non IR35
Salary £10,000 £10,000
Employer NI £ 10,275 £ 0
Employee NI £ 4,959 £ 232
Corporation Tax £ 0 £18,000
Income Tax £23,185 £10,713
Total Tax £23,185 £28,713
Total NI £15,234 £ 232
As you can see overall tax paid (corporation + income) for a non IR35 position is actually higher than the IR35 position, contrary to the statements made by Primarolo, Brown and pretty much every HMRC person you'll meet. The 'saving' for the non IR35 position is that much less National Insurance is paid, though one could argue that since, as a one man limited company, I can't reclaim sick pay or maternity pay from HMRC nor recieve income when I have no client or am sick then this saving offsets my taking responsiblity for my periods of 'non-engagement'. If the 1988 legislation hadn't been enacted the amount of National Insurance collected would be somewhere between the two. As for the percentage of the invoiced amount of £100,000 being paid to HMRC, the IR35 position would pay 38.4% and the non IR35 position 28.9%. My current client is a Lloyds Syndicate and hence can't reclaim the VAT my company charges hence HMRC would collect an additional £20,000 on both of the above taking the tax/NI percentages to 48.6% and 40.7% respectively - at present HMRC labels me as a tax avoider who is not paying their 'fair share'!.
Proposed Legislation
The legislation that is under consultation requires that any company engaged by an agency to supply services to a client is subject to treating all revenue as salary, additionally suggesting that the agent/client deduct tax and national insurance before paying the engaged limited company. Further they would prevent the engaged limited company from paying travel and subsistence payments to the person supplied to the client site. This has a number of consequences. Firstly any pension contributions that the limited company wishes to make to a pension scheme would be after the deduction of National Insurance, contrary to what would happen with other limited companies. Secondly if your limited company were engaged by a consultancy to provide services to a client of their's you would not be allowed to pay travel and subsistence expenses however the employees of the consultancy at the same site would still be allowed to have their expenses refunded! Finally this would mean that, without regard to the contractual arrangement, anyone supplying services via their own limited company, would be only paid the net amount after Tax, Employer National Insurance and Employee National Insurance has been deducted by the agency, effectively making you an employee of the agency, with non of the benefits of employment but with all of the costs plus the Employers National Insurance.
Faced with such a change most freelance IT staff would either leave the industry or become permanent, thus destroying this Governments commitment to supporting initiative, small businesses and the flexible workforce. If, as a nation, we are to produce a world class IT organisation such as Google, Microsoft, Apple or any other then you, the Government, needs to reduce the burdens on small business, entrepreneurship and enterprise, not punish it with the restrictive , penal and outdated desires of the HMRC. We need simplification not further complexity.
I entitled the email 'The Murder of the British IT Industry'
Dear xxxxxx,
I'm writing to you today regarding changes that are under consultation by both Government and HMRC that would deal a fatal blow to flexible working within the IT and other industries.
My History
I began working in the IT industry in 1986 and chose set up my own Limited Company in 1989 and began supplying services to clients. Since 2000 I have supplied services to 16 different client companies, 3 this year so far. None of these engagements were begun with the intention of being employed by the client, nor for the client to provide any of the following
• Pension
• Holiday Pay
• Sick Pay
• Maternity Pay
• Redundancy
As I am working through my own limited company I am responsible for ensuring that it pays corporation tax, VAT and operates a PAYE scheme. Personally, as is every other domiciled resident of the UK, I am required to submit a tax return where appropriate to account for all income and pay tax as defined under law.
Current State
I find the clients either by my own network of contacts or via agencies that contacts me about client requirements. With a client obtained via my own network I agree contractual terms with the client, have the contract reviewed by a lawyer and enter into an engagement that can last from a few days to a few years. My company invoices the client and awaits payment. With a client obtained via an agency I receive a proposed contract from the agency which is then subject to negotiation. Once a suitable contract has been agreed with the agency it is the reviewed by a lawyer and opinion given. Again the engagement lasts from a few days to a few years. My limited company invoices the agency who in turn invoice the client and I await payment. In both cases if the client becomes insolvent my limited company will not get paid and in the latter example the limited company won't be paid if the agency becomes insolvent even though they may have been paid by the end client.
How We Got Here
In 1988 a piece of legislation was enacted that effectively created a desire to incorporate Income and Corporation Taxes Act 1988. Prior to this freelance resources worked on a self employed basic, paying tax, type 2 and type 4 national insurance. Because of this legislation people moved to using a limited company and, as a result, were advised to begin distributing the companies profit as dividends, thus avoiding national insurance. Hence the effect of the legislation was to reduce the national insurance collected - not it's intention.
Once Labour came to power in the late 90s they began talking of Friday to Monday employees, those who resigned from a company on a Friday and were engaged by the same company on Monday though now working via their own limited company. The government introduced legislation known as IR35 which they said was intended to counter this however the wording and hence intent of the legislation was to cast a much wider net. The legislation placed emphasis on the 'perceived working relationship' rather than any obligations committed to in the contract between the parties, as HMRC put it - to look through the contract to any downstream contract between an agency (or intermediary in HMRC terms) and the end client.Given that I am not entitled to visibility of any downstream contract I have no means of ensuring that the engagement defined between my company and the agency is reflected down the chain of contracts until the end client is reached.
Dawn Primarolo and Gordon Brown, Paymaster General and Chancellor at the time, stated at every occasion that those working using their own limited company were paying less tax than other workers, a statement which is a misrepresentation of reality. They focussed on just the income tax aspect rather than the full picture. If I may give any example of a freelancer, working through their own company comparing the non IR35 and IR35 positions
If the limited company invoices £100,000 in a year
IR35 non IR35
Salary £10,000 £10,000
Employer NI £ 10,275 £ 0
Employee NI £ 4,959 £ 232
Corporation Tax £ 0 £18,000
Income Tax £23,185 £10,713
Total Tax £23,185 £28,713
Total NI £15,234 £ 232
As you can see overall tax paid (corporation + income) for a non IR35 position is actually higher than the IR35 position, contrary to the statements made by Primarolo, Brown and pretty much every HMRC person you'll meet. The 'saving' for the non IR35 position is that much less National Insurance is paid, though one could argue that since, as a one man limited company, I can't reclaim sick pay or maternity pay from HMRC nor recieve income when I have no client or am sick then this saving offsets my taking responsiblity for my periods of 'non-engagement'. If the 1988 legislation hadn't been enacted the amount of National Insurance collected would be somewhere between the two. As for the percentage of the invoiced amount of £100,000 being paid to HMRC, the IR35 position would pay 38.4% and the non IR35 position 28.9%. My current client is a Lloyds Syndicate and hence can't reclaim the VAT my company charges hence HMRC would collect an additional £20,000 on both of the above taking the tax/NI percentages to 48.6% and 40.7% respectively - at present HMRC labels me as a tax avoider who is not paying their 'fair share'!.
Proposed Legislation
The legislation that is under consultation requires that any company engaged by an agency to supply services to a client is subject to treating all revenue as salary, additionally suggesting that the agent/client deduct tax and national insurance before paying the engaged limited company. Further they would prevent the engaged limited company from paying travel and subsistence payments to the person supplied to the client site. This has a number of consequences. Firstly any pension contributions that the limited company wishes to make to a pension scheme would be after the deduction of National Insurance, contrary to what would happen with other limited companies. Secondly if your limited company were engaged by a consultancy to provide services to a client of their's you would not be allowed to pay travel and subsistence expenses however the employees of the consultancy at the same site would still be allowed to have their expenses refunded! Finally this would mean that, without regard to the contractual arrangement, anyone supplying services via their own limited company, would be only paid the net amount after Tax, Employer National Insurance and Employee National Insurance has been deducted by the agency, effectively making you an employee of the agency, with non of the benefits of employment but with all of the costs plus the Employers National Insurance.
Faced with such a change most freelance IT staff would either leave the industry or become permanent, thus destroying this Governments commitment to supporting initiative, small businesses and the flexible workforce. If, as a nation, we are to produce a world class IT organisation such as Google, Microsoft, Apple or any other then you, the Government, needs to reduce the burdens on small business, entrepreneurship and enterprise, not punish it with the restrictive , penal and outdated desires of the HMRC. We need simplification not further complexity.
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