I always knew we were right....

[NotAllThere]

Your company sounds like a proper business. Many contractor's companies are not, and the only reason they incorporate is to reduce their tax bill. Not that you'll find many admitting that, at least not on a public forum.

There is a spectrum from white to black with shades of grey in between. Your arrangements are white. Artificial/contrived schemes are black. Then there is the grey area which many myco's fall into.

If you don't incorporate you end up personally paying more tax than if you were an employee, which is also "unfair". That was always my beef with IR35. If they'd said that if you're caught you have to pay eenic, but the end employer has to pay ernic, that would have been annoying (from an income perspective), but fairer. I wonder how it would all have turned out...

[DonkeyRhubarb]

I find the agency act 1979 which forces people to use a limited service company rather than being self employed rather restricts that viewpoint. The tax reduction is a byproduct not the (legally required by law) reason.

Fair point, although the "tax reduction" part is optional.

I can only speak from personal experience that most contractors I have worked with incorporate predominantly for tax purposes, and would certainly fear an IR35 investigation!

[DonkeyRhubarb]

If you don't incorporate you end up personally paying more tax than if you were an employee, which is also "unfair". That was always my beef with IR35. If they'd said that if you're caught you have to pay eenic, but the end employer has to pay ernic, that would have been annoying (from an income perspective), but fairer. I wonder how it would all have turned out...

+1

If there hadn't been such a huge disparity between inside and outside IR35 I don't think the schemes would have taken off. IR35 created a bonanza for the tax avoidance industry.

[AtW]

Parliament never intended for Malvolio(or the vast majority of contractors) to evade IR35.

I am pretty sure he doesn't evade IR35.

I am certainly not.

HMRc should have closed the loophole in 2001 when they became aware of it.

I believe the judge said in the judgement something along the lines of "HMRC had no such obligation".

[IR35 Avoider]

Oh and before you suggest Personal Service Limited Companies are tax avoidance schemes, they are not most people have to use them due to the Agencies Act 1979.

Most people don't "have to" use companies, an umbrella is the simpler and more obvious option. They (rightly) choose to use companies because of the tax advantages.

HMRC wants everyone on PAYE. As I understand it, the history of their attempts is like this:-

1. (Direct "fake" self-employment ruled out.) In theory there's nothing to stop a sole-trader contracting direct with client. However HMRC would lose out due to lower taxes if all employees did this, therefore there are employment status tests which if failed will land client with an unexpected tax bill. Consequently clients will only contract with limited companies, usually agencies.

2. ("Fake" self-employment via an agency ruled out.) A contractor who failed status test with respect to a client could work as a sole trader via an agency, with neither the agency or client at risk of being considered the employer. The agency legislation is passed and now gives agencies the same dilemma clients had in (1), that they face employee tax bill if they deal with sole traders. So agencies now join end-clients in no longer being willing to deal with sole traders.

3. ("Fake" self-employment via a PSC ruled out.) After the agency legislation blocked the most obvious loophole allowing "fake" self-employment, instead of all going on PAYE as HMRC wanted, contractors started forming limited companies. Hence IR35 was invented to combat that.

So it is true that contractor companies came into widespread use as a tax mitigation measure, they were a direct response to the agency legislation. Prior to that contractors had been sole traders.

[AtW]

I am a life long member of f4j - are you?

No, I am not.

There was some legal case from about 80 years ago that said the opposite to you. Parliament intends you to pay 100% tax.

Yes, Parliament intends everybody to pay 100% tax that is due, which is fair enough.

Courts in this country decided many times already that artificial arrangements don't change actual facts.

[AtW]

Your company sounds like a proper business. Many contractor's companies are not, and the only reason they incorporate is to reduce their tax bill.

It's not artificial to run Ltd in UK.

It would be artificial to run Ltd in Isle of Man whilst doing all business in UK.

Your attempt to drag everybody who has got Ltd into "tax avoidance" is pretty desperate and rather insulting (in my view) to a lot of people who pretty had no choice but to use Ltd in UK for their contracting work.

[IR35 Avoider]

If you don't incorporate you end up personally paying more tax than if you were an employee, which is also "unfair". That was always my beef with IR35. If they'd said that if you're caught you have to pay eenic, but the end employer has to pay ernic, that would have been annoying (from an income perspective), but fairer. I wonder how it would all have turned out...

For this to makes sense, you have to assume that the client would agree to exactly the same rate regardless of which of you was responsible for employers NI.

To put it another way, you are wrong to say IR35 taxes you more, you are making a framing error by not taking into account that the client payment comes with the obligation to pay any employers NI that may be due. Your real income is not your rate, it's the rate less employers NI.

To put it a third way, if your company gets an IR35-caught 100K from the client, your income is not the 100K but the deemed salary IR35 attributes to it, on which you pay precisely the same taxes as an employee.

Edit: on re-reading, I'm not sure you were making the point I thought you were. Apologies if I got it wrong.

[AtW]

Most people don't "have to" use companies, an umbrella is the simpler and more obvious option.

It's simpler but much higher risk to lose your money and why pay somebody else to run your accounts? Ltd makes far more sense as it can allow to save up warchest and provide consistent salary over long period of time.

From my point of view it's no choice at all.

[IR35 Avoider]

It's simpler but much higher risk to lose your money and why pay somebody else to run your accounts?

From my point of view it's no choice at all.

I don't think the risk of losing one months pay is significantly reduced by using a PSC instead of an umbrella, given that you face that risk from the agency or client going bust anyway, and they are far more likely to do so. (In the absence of fraud, a company like Parasol is less likely to go bust than the bank they transfer your money into! Though I suppose the bank money is insured.)