HMRC and IR35

[nickersan]

In part of my on going correspondence with the HMRC I was looking at the background to IR35. As somebody who has lived with this legislation and thought they knew the ins and outs, reading the wikipedia page has me spitting blood!

IR35 - Wikipedia, the free encyclopedia

IR35 is the United Kingdom tax legislation designed to tax "disguised employment" at a rate similar to employment. In this context, "disguised employees" means workers who receive payments from a client via an intermediary and whose relationship with their client is such that had they been paid directly they would be employees of the client.

Before IR35 was introduced workers who owned their own companies were allowed to receive payments from clients direct to the company and to use the company revenue as would any small company. Company profits could be distributed as dividends, which are not subject to National Insurance payments. Workers could also save tax by splitting ownership of the company with family members in order to place income in lower tax bands. (This latter practice was recommended by government publications advising on setting up family businesses, but attacked as tax fraud by other government departments, notably the Treasury. It came under separate, ultimately unsuccessful attack in 2007, see S660A.)

On 20 May 2010 the new Liberal Democrat/Conservative coalition Government's Programme for Government announced a commitment to "review IR 35, as part of a wholesale review of all small business taxation, and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility."[1] On 10 Mar 2011 the Office of Tax Simplification recommended that the treasury should suspend IR35 or compel HM Revenue & Customs to make changes to its implementation until wider structural reform to integrate Income Tax and NIC is introduced. After that, the Chancellor announced the Government would keep IR35 'as is' during Budget 2011, but with changes to HMRC administration and to create a new IR35 Forum.

Notice the similarity in the aims - the legislation is just there to ensure people pay what's due, similar arguments to those being trotted out now and similar to those that will be trotted out when the next draconian set of legislation is introduced.

Any to anyone that thinks the 60% of gross tax bills that you'd receive by declaring yourself inside IR35 are 'what's due', then you have a different idea of fairness than I. 60% equates 3 days of a 5 day week being handed over - that's 70s level taxation and it was clear which way the country was heading back then.

Personally I am going try to raise IR35 in all my correspondence with HMRC and would suggest others do the same. Maybe if enough people do this we can start getting the larger message across that IR35 was ill thought out, has failed to deliver anywhere near what was predicted and has only succeeded in alienating a large, highly skilled and hard working part of the labour market leaving many of us facing ruin.

[Fireship]

In part of my on going correspondence with the HMRC I was looking at the background to IR35. As somebody who has lived with this legislation and thought they knew the ins and outs, reading the wikipedia page has me spitting blood!

IR35 - Wikipedia, the free encyclopedia



Notice the similarity in the aims - the legislation is just there to ensure people pay what's due, similar arguments to those being trotted out now and similar to those that will be trotted out when the next draconian set of legislation is introduced.

Any to anyone that thinks the 60% of gross tax bills that you'd receive by declaring yourself inside IR35 are 'what's due', then you have a different idea of fairness than I. 60% equates 3 days of a 5 day week being handed over - that's 70s level taxation and it was clear which way the country was heading back then.

Personally I am going try to raise IR35 in all my correspondence with HMRC and would suggest others do the same. Maybe if enough people do this we can start getting the larger message across that IR35 was ill thought out, has failed to deliver anywhere near what was predicted and has only succeeded in alienating a large, highly skilled and hard working part of the labour market leaving many of us facing ruin.

If you’re going to go down the route of pointing out how paying 60% tax is unfair why stop there – let’s not forget the other unfair aspects of IR35 such as being classed as an employee without any of the benefits, i.e. lack of paid holidays and sick leave but to name a few…. All of which added up to one big deal breaker for me!!

In fact no one in their right mind would accept a permie position under those terms, more importantly I’m pretty certain it would be illegal for an employer to offer such terms (needs verification) in which case why is it:

1. Acceptable for the government to impose such terms on taxpayers if considered illegal for an employer to do so.
2. Why is it unreasonable to consider that anyone trading legitimately as a ltdco at the time would look for a legal alternative?

[TykeMerc]

If you’re going to go down the route of pointing out how paying 60% tax is unfair why stop there – let’s not forget the other unfair aspects of IR35 such as being classed as an employee without any of the benefits, i.e. lack of paid holidays and sick leave but to name a few…. All of which added up to one big deal breaker for me!!

In fact no one in their right mind would accept a permie position under those terms, more importantly I’m pretty certain it would be illegal for an employer to offer such terms (needs verification) in which case why is it:

1. Acceptable for the government to impose such terms on taxpayers if considered illegal for an employer to do so.
2. Why is it unreasonable to consider that anyone trading legitimately as a ltdco at the time would look for a legal alternative?

To be fair that's not entirely true, the terms aren't imposed.

If you're contracting via a MyCo Ltd and are IR35 caught (or not for that matter) there's absolutely nothing stopping you paying yourself during holidays, sick, bank holidays and funding pensions etc it's a business you run with a MyCo Ltd, just the same as IBM Uk Ltd, HP UK Ltd etc.

True, during time off you're not fee earning, but that's the same for other businesses, they're just bigger and have more fee earners.

If you've seen my earlier posts on these threads you will realise while I never used these schemes I do deeply object to retro tax legislation.

[Fireship]

To be fair that's not entirely true, the terms aren't imposed.

If you're contracting via a MyCo Ltd and are IR35 caught (or not for that matter) there's absolutely nothing stopping you paying yourself during holidays, sick, bank holidays and funding pensions etc it's a business you run with a MyCo Ltd, just the same as IBM Uk Ltd, HP UK Ltd etc.

True, during time off you're not fee earning, but that's the same for other businesses, they're just bigger and have more fee earners.

If you've seen my earlier posts on these threads you will realise while I never used these schemes I do deeply object to retro tax legislation.

Indeed, however the assumption is that you will have sufficient funds to pay yourself in the event of long term illness which may be impractical, but that’s a risk you take when freelancing!!

However, permanent employees of the companies you refer to would, under similar (and other) circumstances, be protected by employment law, so called disguised employees are not. So either you are an employee working for the end client or you are an employee working for your own ltdco but you certainly can’t be both. IR35 denies the contractor all the legal protection afforded to the permie sitting next to him whilst effectively claiming he has the same employment status – that’s a pretty hefty (and unjust) imposition in my book.

As always there are many other aspects of being IR35 caught which trigger healthy debate!

[nickersan]

To be fair that's not entirely true, the terms aren't imposed.

If you're contracting via a MyCo Ltd and are IR35 caught (or not for that matter) there's absolutely nothing stopping you paying yourself during holidays, sick, bank holidays and funding pensions etc it's a business you run with a MyCo Ltd, just the same as IBM Uk Ltd, HP UK Ltd etc.

True, during time off you're not fee earning, but that's the same for other businesses, they're just bigger and have more fee earners.

If you've seen my earlier posts on these threads you will realise while I never used these schemes I do deeply object to retro tax legislation.

No terms aren't imposed, but how Joe Contractor Ltd is run and taxed is, in contrast to say an IBM Ltd.

And to be honest, I'm sure I speak for most contractors when I say we were all quite happy with (and all to aware of) the downside risks - no holiday, no sick pay, no pension or health cover, no redundancy payout when your contract finishes and having to fund a period of unemployment while you find another - knowing that the upside - no corporate ladder climbing, remaining hands on rather than moving into management and of course being compensated that little bit better - made up for this.

Or at least it did until you found that any monies taken out of your company incurred PAYE and that, oh yes, while on one hand you're a disguised* employee hence the PAYE, but on the other you're still a company so we'll have employers NIC too!

* disguised meaning, well you appear to do the same job as perm, therefore you're both the same regardless of their 25 days holiday and benefits package.

[d000hg]

Any to anyone that thinks the 60% of gross tax bills that you'd receive by declaring yourself inside IR35 are 'what's due', then you have a different idea of fairness than I. 60% equates 3 days of a 5 day week being handed over - that's 70s level taxation and it was clear which way the country was heading back then.

If you are on a salary of £70k, what % of the amount your employer pays goes to HMRC? Surely it is about 60% once NI is factored in...

[ASB]

A 'real' business has costs associated with its employees in excess of salary. 28 days holiday and ers ni.

Who pays them? The employees of course. Through lower salaries.

I dont really see ir35 as unfair in that respect. Unless one is looking for it.

all those costs and a risk premium are rolled up into the fee.

that 400 a day contract. Would it be a 100k permie role? No chance. Maybe 60k.

[nickersan]

A 'real' business has costs associated with its employees in excess of salary. 28 days holiday and ers ni.

Who pays them? The employees of course. Through lower salaries.

I dont really see ir35 as unfair in that respect. Unless one is looking for it.

all those costs and a risk premium are rolled up into the fee.

that 400 a day contract. Would it be a 100k permie role? No chance. Maybe 60k.

A £400 pd contract probably translates into £92K or there abouts.

Using Nixon Williams calculator (https://www.nixonwilliams.com/net_pay_calculator.asp), £400 pd outside IR35, would net you £65K, while inside IR35 would net you about £54K.

Using the Salary Calculator (The Salary Calculator - 2014 / 2015 Tax Calculator), a £60K salary turns out just shy of £42K.

Taking the inside IR35 figure, that's a £12K difference or nice round £1K a month - obviously not £1k you can spend in the conventional sense, from that you've got to cover a pension, save in case you're sick or find yourself out of contract, it's got to cover health insurance or a whole raft of other expenses. Even saving the whole £1k each month would by my reckoning only afford you a just over a month between contracts based on a 6 month term (and you don't have to look too hard to find people who've been out of work for 6 months +).

But that's not the point, what IR35 did, overnight amounted to a 16% tax increase! Imagine if that happened to PAYE, there'd be uproar but because the contracting community is a minority it went largely unquestioned.

Not that people didn't try and are still trying to question it, but it all seems to fall on deaf ears. MPs have been largely useless, opposing IR35 when they're in no position to change it, then turning 180 degrees once they're in power.

[Zero Liability]

It isn't 'fair' in the least, it assumes that everything the government spends its cash on is 'legitimate', and also that 'fairness' (which again, it isn't) ought to drive tax policy. I think PAYE workers are vastly over-taxed at anything but the lowest wages. It is, however, at odds with what the government wants, and I guess that's what matters to them in the end. Even then, what HMRC thinks employment looks like, and how it has evolved along with market needs over time, are two different things. What do a bunch of collections bureaucrats know about markets? There isn't even the pretense that it maximises tax revenues, because for all the government knows, the net effect of wider enforcement of this cost-inefficient measure could be to rake in even lower tax revenues if flexibility in the labour markets is hampered, even assuming many contractors who declare themselves "outside", are "inside" on HMRC's terms. HMRC and the gov't have both done very little to justify the measure on any grounds.

I'd just rather they wrapped NI and the income tax into one, lowered tax rates all around, perhaps even replacing them with a single, flat tax, with a basic income guarantee for lower income individuals, limiting spending to the perceived essentials and stopped it there. No IR35, no NIC, no income tax, no inheritance tax, no CT etc. Just a load of twaddle to tax people at different rates to serve social engineering purposes, and also to hide how much they actually tax (or don't tax) particular groups of individuals, to micromanage an economy they can barely grasp.

In the end, they just print or borrow whatever else they want, anyway.

[SpontaneousOrder]

A £400 pd contract probably translates into £92K or there abouts.

I think what ASB means is that a premie of the same caliber as a contractor on 400 a day, would only be earning 60k max. So when you factor in the cost of sick pay, holidays, etc then the £400 per day contractor is earning the same as the 60k premie. So on that basis it doesn't make any sense to use sickness & holiday pay to distinguish yourself from a permanent employee as you are entirely free to also ay yourself sick pay and holiday pay.