IR 35 inside contract – still paying Employer’s NIC?

[Gonzo]

Contractors were paying employer/e NICs , only less because of the drawing scheme. And with IR35 it is almost like they want to take it back from contractors.

Not quite. With a limited company, it is possible to take a salary below the threshold for tax and NI (about £5,000 a year), then all the rest as dividends which don't attract NI.

Some accountants recommend taking a salary the same as the minimum wage, which will result in some NI being paid.

Either way, el Gordo does not like this and thought that, unlike other tax avoidance schemes, he could have a go at it through IR35.

I agree with what I think your point is. If it was just the standard tax and standard employee NI that we had to stump up then the fight back would not have been as strong.

But being expected to pay the employer's NI as well giving an effective tax rate between 50% - 60% was entirely unreasonable and hence so many are prepared to fight it.

[2uk]

I agree with what I think your point is. If it was just the standard tax and standard employee NI that we had to stump up then the fight back would not have been as strong.

But being expected to pay the employer's NI as well giving an effective tax rate between 50% - 60% was entirely unreasonable and hence so many are prepared to fight it.

Yes this is my point , I realized it after some RTFM. What precisely do you mean by “fight-back” - the PCG , the risk taking contractor or the one that tries to ensure compliance as much as possible ?

[Gonzo]

Yes this is my point , I realized it after some RTFM. What precisely do you mean by “fight-back” - the PCG , the risk taking contractor or the one that tries to ensure compliance as much as possible ?

It was what the PCG was originally formed for. It has evolved into much more than that now, but that is primarily what it is for.

[2uk]

It was what the PCG was originally formed for. It has evolved into much more than that now, but that is primarily what it is for.

Thanks. I am out of intelligent questions. Maybe someone else can take it from here.

[chris79]

Almost. It's not the legislation making yuou pay more, it's your own choice of payment vehicle. Have a history lesson, on me.

Historically contractor pay has always been higher than permie pay because the client didn't have the albatross of employers NIC around his neck so could afford to pay you slightly more on an hourly/daily/project basis. You were then of course able to set your affairs up in the most tax-efficient way possible to reduce your own liability and keep more of your money - this generally worked to the financial advantage of both contractor and client. If there was an agency involved they stayed neutral, charging the client an agreed %age of the contractor rate as their margin.

It was the advent of first the Umbrella co then the MSC that made everything so complicated. Agencies discovered that they could still charge the client a %age of the margin to cover employers NIC and the client wouldn't quibble. They could then pay the contractor through his MSC or Umbrella relieving themselves of any liability for employers NIC. 9 times out of 10 the contractor would be better off in his pocket doing the min-wage-plus-dividend thing or the PAYE-plus-expenses thing with an Umbrella even if the agency paid him the permie rate for the job or did a split of the bit of margin that the client thought was going to cover the employers NIC. So the agency was happy (they kept the extra margin that was meant for NI, or used the NI saving to undercut their rivals on rates and get more business) the contractor was happy (he had more money to spend), the MSC and Umbrella providers were happy (they had an expanding and profitable market to tap into) and the client was none the wiser. Only loser was the govt, as less employers NI was being deducted and paid over. On a small scale this was not a problem, but then the agencies and MSC providers started to get greedy and your non-genuine contractors started to appear in the MSC schemes.

Cue HMRC panic and a knee-jerk reaction that introduced the Intermediaries Legislation (IR35). This had the desired effect in a few cases of scaring people away from the MSC or Ltd Co working practice (mostly into Umbrella rather than back to permie, which was of course not what they intended at all) but it was so ill-thought-out and badly worded that most contractors and MSC providers just ignored it. After all, what was the worst that could happen? The contractor's company gets hit with a bill for the extra tax and NI. Hmmmm, but in that case his company just folds with no assets and hey presto! Nobody legally liable for the tax bill! Another company providing his services starts tomorrow, absolutely nothing they can legally do about it.........

So the govt sat down and had a rethink. Instead f throwing money at trying to enforce IR35 they started to research the market thoroughly. They turned it inside out and stripped it bare, and learned exactly how it worked. Then they set about building the legislation to destroy it.

Hence where we are now.

Umbrella contractors are not better off than permies unless they are on a significantly higher rate because they have to fund the Umbrella Co fee and the employers NI out of their gross earnings, while at the same time the goalposts have been moved on the amount of expenses they can claim to reduce their tax liability.

MSCs are no longer a viable option for anyone in the form that they used to be because of the requirement to pay full PAYE on earnings (including employers NI) and the legislation that allows unpaid debt to be transferred to third parties, ie you.

Small Ltd Cos are OK and can operate as usual in a tax-efficient manner for the owner/manager providing they can demonstrate that they have no connection to anyone that HMRC could possibly designate as an MSC provider and providing they are still compliant with the IR35 provisions.

Once again a large proportion of people have gone back to permie working because contracting is no longer a viable option for them financially. Some have ensured their rates are significantly higher than permie equivalent and gone to Umbrella. Some have taken great pains to set up their company and contractual structure to ensure that they are as outside any legislation as they can be and have very little to fear in terms of a tax investigation. And some are just blundering along blindly, not really knowing the bigger picture and hoping for the best when other people (who usually have their own agenda) tell them it will be OK.

HTH.

One of the best posts I've read on this forum! Well done. Beats all the idiots who just reply with "GET AN ACCOUNTANT" to any question ever raised here.

[2uk]

One of the best posts I've read on this forum! Well done. Beats all the idiots who just reply with "GET AN ACCOUNTANT" to any question ever raised here.

Indeed it is.

[Gonzo]

One of the best posts I've read on this forum! Well done. Beats all the idiots who just reply with "GET AN ACCOUNTANT" to any question ever raised here.

Unfortunately with the MSCs changes that happened earlier in the year there have been an awful lot of basic questions asked on here recently that some of us have seen again, and again, and again.

Which wouldn't be so bad if these questions were not answered in the basic guides that you can get from this site and others, and from the stickys at the top of this forum.

I make no apologies for being short with people that are too lazy to do a bit of searching.

[exbrm]

Well said Bigbird.
Let's see if any more **** hits the fan this week/next week when HMCR are supposed to be clarifying Accountant/MSC Accountant rules - the ones blundering along blindly may be in for a shock!

Check out todays Front Page re: MSC Accountants........

http://www.shout99.com/contractors/

[chris79]

Check out todays Front Page re: MSC Accountants........

http://www.shout99.com/contractors/

No surprises there that it's got 'Giant' somewhere in the paragraph. I personally decided to take zero risk, that's why I do all my own book keeping, invoicing, contract affairs, etc now.

[VectraMan]

But being expected to pay the employer's NI as well giving an effective tax rate between 50% - 60% was entirely unreasonable and hence so many are prepared to fight it.

Exactly the same as an employee though. Just that permies don't know that they pay 50%-60% tax because their salary is after employer's NI. It only seems unfair if you compare it to a permie salary, but that permie salary has already had employers NI deducted.

Good history lesson from BB.