The S58 vs IR35 debate

[eek]

The problem I see with brollies is that if the client doesn't pay the brolly, then the contractor has nobody to sue. Or do I have that wrong?

That's a separate issue. I come from the time when directors of some umbrellas used them as their own personal piggy bank.

However, its equally true that many umbrellas don't like hassle and won't chase up problems when they occur leaving you with no money and no means of legally pursuing the debt. Which would be another reason to not use one.

[TheFaQQer]

A fair point given compusource.

I can't remember who it was, but one poster had been through three umbrellas that all disappeared with the money.

Prosperity4 became Tarpon, who are still trading, but I can't remember the others that went bust.

[jbryce]

Clearly you are new to this contracting game. There were an awful lot of such examples between 1990 and 2005....

I'm sure some cowboys set up in 2001 just to do a runner when the opportunity arrived.

Not that new and I remember people being ripped off.
I used the ltd company until my, then, accountant put me through a 'tax efficient umbrella' aka Sanzar.
His primary motivation was avoiding IR35 and saving me hassle. Dear lord.

Anyway, as you say the ltd route has the advantage that you minimise the length of the chain.

[malvolio]

Anyway, as you say the ltd route has the advantage that you minimise the length of the chain.

..as well as smoothing your cash flow across periods of non-work, offering you limited liability, offering you greater freedom over working hours, pensions planning and holiday planning, access to venture capital if you want to expand or require specific tin, wires or apps, the option to expand by using your own employees or sub-contracting your work and preferential taxation levels in some areas to reward you for taking risks and funding your own life.

But apart from that, very little advantage at all...

[jamesbrown]

offering you limited liability

This. The clue's in the name! All good points made above, but this one is very high up on the list.

[Zero Liability]

Gosh. Really? you mean that HMRC may have PSC companies in their sights too? Even though we tout for work, pay our own pension. insurances etc? But PSCs keep the universe moving; without them - business in the UK would lose their flexibility and competitive edge.

Dear oh dear, but that would be madness. Would HMG and HMRC really target us PSCs just as a means of getting more cash into the treasury, even though it's bonkers?

My oh my, but it really looks like Umbrellas and PAYE is the only way to go.

The "general public" who consider PSCs pure tax avoidance devices are, to put it mildly, ill-advised, if not outright hypocrites. What are pensions, if not tax avoidance devices?

I don't think there's a real justification for taxing employment income much higher than other sources of income, and I doubt HMRC is bothered to offer one. They are just there to collect funds to finance government activities not financed through borrowing (deferred tax) or money-printing (which is how HMRC and most of the government probably think things are made in the economy), and occasionally muse upon their own self-importance. I certainly see no moral issue with tax avoidance and, legally, you are acting within the letter of the law. If they don't like it, they should reform the law, or find better ways of enforcing it, like pursuing the end clients, whom I presume they are afraid of, as opposed to raiding often clueless contractors with far fewer resources at their disposal, and then pretend it's a "moral" issue. Where's the concomitant employment "rights", then? Perhaps the higher ups in the government (and the HOL consultation seems to hint at this) understand how important the freelancer market is to the UK economy.

Even if the argument is that it's to "incentivise" economic growth (which freelancing does, anyway, by adding flexibility to the UK labour market), what is the difference between a contractor inside and outside IR35 in terms of their economic contribution? The end client will pay you the same regardless, and that is the perceived value you're adding to their operation. I get (but don't agree with) why some people object to the government engaging PSCs, given its abysmal track record for economising in any real sense, but what's the alternative? Hiring incompetent temp staff? Or permies whose lifetime cost may far exceed that of any contractor, once benefits, pensions etc are factored in? The government is competing with the private sector for skill across a range of markets, so realistically it needs to offer sufficient remuneration to attract them away from it.

You sacrifice employment rights and often security, and must source your business of your own accord. Whether you are, in some arbitrary ways, like a "real" business or not, that's how it works.

Now, if they want to merge NI and PAYE, rein in spending and make taxation actually bear some resemblance to any useful services the government provides, fair enough. Spending the dosh, milking it out of the taxpaying public and then hounding anyone who doesn't pay what they think is the 'correct' tax is just stupid, particularly since how utterly contrived and difficult IR35 is to enforce.

The truth of the matter is that people who think these are "tax avoidance" vehicles are either clueless that they, too, could wield their expertise to work as freelancers, or perhaps they realise this and are just afraid to leave the security of permanent employment, so instead out of envy they lambast contractors who are utilising their skills in an efficacious manner. Or perhaps they don't have the right skillset, in which case - acquire it. I certainly doubt they have some strong "moral" compunction.

As for the DOTAS bunch, I've nothing but sympathy for them.

[NotAllThere]

People who've started contracting from about 2006 onwards don't really know what it was like at the start, and why it caused such a stir. I've been contracting since 1995. The reason IR35 caused severe problems was not because suddenly we had to pay more tax, rather that it was impossible to determine whether you need to comply with it or not. When the question of clarity was put to Dawn Primarolo (aka Dim Prawn) in the house she replied "It's perfectly clear. If you're in IR35 you pay the tax, if you're not you don't."

Back then, this was the main point of discussion among contractors. Are we affected by IR35 or not? How can we tell? Do I pay this extra money when I don't really know if I have to, or do I take the risk of not paying it and finding out later that I was liable. It was a pretty crap position to be in. If the legislation had been framed to make it clear we now had to pay employers NI on all our company income, after t&s expenses + 5%, most of us would have sucked it up.

Over the years it has become far easier, as a result of court cases, to determine whether you would-be-an-employee-were-it-not-for-the-intermediary, and now it's entirely possibly to structure yourself and your contracts in a non-artificial way so that you're not affected by it.

[speling bee]

People who've started contracting from about 2006 onwards don't really know what it was like at the start, and why it caused such a stir. I've been contracting since 1995. The reason IR35 caused severe problems was not because suddenly we had to pay more tax, rather that it was impossible to determine whether you need to comply with it or not. When the question of clarity was put to Dawn Primarolo (aka Dim Prawn) in the house she replied "It's perfectly clear. If you're in IR35 you pay the tax, if you're not you don't."

Back then, this was the main point of discussion among contractors. Are we affected by IR35 or not? How can we tell? Do I pay this extra money when I don't really know if I have to, or do I take the risk of not paying it and finding out later that I was liable. It was a pretty crap position to be in. If the legislation had been framed to make it clear we now had to pay employers NI on all our company income, after t&s expenses + 5%, most of us would have sucked it up.

Over the years it has become far easier, as a result of court cases, to determine whether you would-be-an-employee-were-it-not-for-the-intermediary, and now it's entirely possibly to structure yourself and your contracts in a non-artificial way so that you're not affected by it.

Thanks NAT. I think the whole IR35 business has also driven some of us to genuinely be more business like and less disguised employee like. I could easily have sat around being a bum on seat at the same client year after year, but I'm glad I've got myself in a mini-consultancy frame of mind, where I typically run multiple clients at once, accept the work I want and turn down the work I don't.

Having said all that...

I would get rid of NI, roll most of it into income tax and introduce a voluntary secondary pension scheme. Then get rid of the dividend tax credit, so that income is treated as income. We would still have the ability to retain funds in the company if wanted to.

[LisaContractorUmbrella]

Umbrella companies are in a difficult position as they effectively have 2 sets of people that they must keep happy in order to thrive as a business - the agencies and their employees. I can't speak for anyone else but my feeling is that I run a business and part of that business, as with any other, is credit control and therefore we do actively pursue monies owed from agencies and will take legal action if necessary. The only issue that we sometimes have is that an employee will think that they are entitled to money from the assignment but the agency or client has an issue with their performance - this is obviously a subjective issue and sometimes leads to long and protracted arguments - legal action would probably make little difference to the outcome so we often become mediator between the agency and our employee to find a happy outcome for both. We certainly wouldn't ignore an outstanding debt - it's just not good business practice. As a large employer we work with a specialist employment law firm who are on hand to help us should legal action become necessary and, in this way, we may have more power than an individual, representing his PSC, fighting with an agency.

[speling bee]

Umbrella companies are in a difficult position as they effectively have 2 sets of people that they must keep happy in order to thrive as a business - the agencies and their employees. I can't speak for anyone else but my feeling is that I run a business and part of that business, as with any other, is credit control and therefore we do actively pursue monies owed from agencies and will take legal action if necessary. The only issue that we sometimes have is that an employee will think that they are entitled to money from the assignment but the agency or client has an issue with their performance - this is obviously a subjective issue and sometimes leads to long and protracted arguments - legal action would probably make little difference to the outcome so we often become mediator between the agency and our employee to find a happy outcome for both. We certainly wouldn't ignore an outstanding debt - it's just not good business practice. As a large employer we work with a specialist employment law firm who are on hand to help us should legal action become necessary and, in this way, we may have more power than an individual, representing his PSC, fighting with an agency.

I'm sure you do a decent and straightforward job, Lisa, but it is a problematic business model for the employee. If I do work and the client won't pay, I need the option of legal recourse.