Does anyone else feel like they are being financially ripped by the tax-man

[WordIsBond]

That argument leads to the FLC - an idea so insane that I really hoped I would never have to think about it again.

You do realise the logical flaw in saying that because someone adopted certain policies based on a principle, that the principle itself is invalid?

IPSE might have been saying, "You might get better compliance if it weren't so punitive and you really need to stop taxing people on cash-in-lieu of employment rights, so let them exempt 20% on the deemed payment." That might actually have had a hearing.

A lot of contractors would be better off next month if they had.

And as I accept myself and spend time telling people - life is unfair, deal with it...

Indeed. But since this whole thing is allegedly about "fairness" it doesn't hurt to point out the unfairness of their solution and at least try to get some mitigation.

[webberg]

The above exchange identifies a core conflict in how contractors think and act.

On the one hand, fiercely independent and proud to be expert and from some of the comments here, difficult to manage, preferring to be their own man.

On the other, the suggestions or "advice" or views from agencies and scheme promoters are all taken at face value and not questioned. The central conflict of such parties is that they are selling product for their own benefit and often do not possess the qualifications or professional detachment needed to give advice worth the name.

Almost all contractors I know were perfectly well aware that use of a company reduced the amount of tax paid. (Not in fact true if measured over a reasonable period of say 5 years but again, this is a function of the historic view of contractors which was very short term.)

[eek]

You do realise the logical flaw in saying that because someone adopted certain policies based on a principle, that the principle itself is invalid?

IPSE might have been saying, "You might get better compliance if it weren't so punitive and you really need to stop taxing people on cash-in-lieu of employment rights, so let them exempt 20% on the deemed payment." That might actually have had a hearing.

A lot of contractors would be better off next month if they had.

Indeed. But since this whole thing is allegedly about "fairness" it doesn't hurt to point out the unfairness of their solution and at least try to get some mitigation.

Once again you are looking at it from your (a contractors) point of view rather than HMRC or the client's point of view - clients were able to bypass employer NI by using contractors, the FLC didn't solve the issue HMRC care about and that is keeping the employer NI firewall in place so it cannot be avoided....

[WordIsBond]

I also confess that I struggle to see the logic in your numbers, but there is little to be gained in pursuing that line.

It's not hard. Calculate the take home pay of someone on £110K and the take home pay of someone on £120K. It's only £3,800 difference, and that's not counting the ER NI that would be due if it were an inside-IR35 contractor.

Employment "rights" come in two forms. There are statutory rights such as sick pay, holiday pay, maternity pay, leave in some circumstances, notice periods, etc.

There are then those benefits that employers choose to offer for various reasons. These might be share/bonus schemes, buying holiday, memberships/discounts, etc.

This is a useful distinction. You didn't mention the right against unfair dismissal, which is in the first category.

Some statutory rights are available to all, employees or otherwise, even if the self employed have to wait longer and/or receive slightly less money.

Some, yes. Others, no. Let's leave maternity pay, sick pay, and holiday pay out of the discussion. Employees pay tax on that income. IR35 contractors get cash-in-lieu for those, and appropriately should pay tax on that income (assuming they really are inside IR35). I'm not talking about those employment rights.

I'd argue that a significant part of a contractor's rate is to cover the fact that he doesn't get redundancy pay, the right to appeal against unfair dismissal, termination notice, etc. An employee gets all those rights and is not taxed on them.

Employment benefits can be matched in the self employed world if you chose to pay for them. It is very much a personal choice though.

In summary, there some employment "rights" that the self employed will not have unless they pay/insure for them - but not as many as you think. In part however the contractor premium is meant to cater for this.

How many contractors use that premium to acquire the rights they are missing out on is perhaps low (I don't know as I have no data on this). But it is a choice.

Yes, indeed. But an inside IR35 contractor pays full tax on that premium whether he acquires those rights or not. An employee does not. Even if it's a BIK, he doesn't pay EE NI.

An employee might have a Relevant Life Plan. An inside IR35 contractor can't. An employee might have large pension contributions. An inside IR35 contractor can do that, too, but EE and ER NI will be paid on them. And so on.

The remaining part of the contractor premium (i.e. the additional reward over and above an equivalent employee) is for other matters. Skill, expertise, the ability to be available and unavailable at short notice, niche experience perhaps.

If we are comparing to an "equivalent employee" then skill and experience should be equivalent. Unless we are going to say that it isn't two people doing the same job in the same way who should pay the same tax.

Re: the ability to be available and unavailable at short notice, I agree. But that's part of the employment rights discussion. The client wants a flexible resource, not a permie. The IR35 contractor gives up the security of employment for cash, and is told he must pay tax on that cash. The employee gets the security, which is very valuable, and is not taxed on it.

I suggest that the above part of the premium is in reality 70% or more of the reason for the contractor premium and that many perhaps most end clients do not regard the increase as being for lost employment rights. (Indeed following that logic to a conclusion says that the role was inside IR35 anyway).

Indeed, we are talking about an inside role here.

Whatever clients might be thinking about that extra cash to the contractor, the contractors know they are being paid for giving up security and rights. Few contractors complained about the lack of rights until they were being thrown inside IR35. Now, it's all the rage to talk about rights. Why? Because we know we're giving up rights and security. We were getting cash for that. Now we're being told we should pay more tax than the people who have those rights and security. In some cases, the government is taking over 60% of that extra cash we got. Why should anyone keep doing that?

To be clear, I'm not even talking about myself here. I'm outside and only working with foreign clients for the time being.

I'm talking about a policy that is unfair and yes, in my view, punitive. Many contractors inside IR35 will be sent home unpaid in the coming weeks while perms will receive full pay. Yet the contractors pay much higher tax. It's a negative incentive to contracting and is likely to significantly undermine the flexible workforce in the UK. It's just not worth it. Get a good perm job and have the security.

[eek]

I'm talking about a policy that is unfair and yes, in my view, punitive. Many contractors inside IR35 will be sent home unpaid in the coming weeks while perms will receive full pay. Yet the contractors pay much higher tax. It's a negative incentive to contracting and is likely to significantly undermine the flexible workforce in the UK. It's just not worth it. Get a good perm job and have the security.

In which case they should be immediately issuing SDS appeals on the basis of proven no Mutuality of Obligation (although being honest I suspect most contractors are going to be binned rather than furloughed as companies are likely to be really pulling the shutters down and removing all unavoidable costs).

As for the rest of your argument - if a contractor is being paid £400 a day (including employer NI) compared to a permanent member of staff being paid £55,000 a year or even £60,000 there is a significant difference in take home pay in return for the flexibility and lack of rights.

Now if the contractor is on £300 a day compared to a member of staff on £55,000 a would accept your argument but that isn't the case - the end client / agency is still paying a premium for the flexibility.

[WordIsBond]

Once again you are looking at it from your (a contractors) point of view rather than HMRC or the client's point of view - clients were able to bypass employer NI by using contractors, the FLC didn't solve the issue HMRC care about and that is keeping the employer NI firewall in place so it cannot be avoided....

I get that. Doesn't change my point. I'm not advocating the FLC, I thought it was a stupid idea. HMRC was never going to go for it because it was optional.

Human nature says that if you make something too expensive people will go to great lengths to avoid it. If HMRC hadn't made IR35 so expensive, if they had structured it to take some account of the difference between employees and contractors, you'd have had better compliance. They only gave a 5% allowance, which didn't begin to cover the difference. They've even taken that away now.

The result is that people will stop contracting or fall prey to those who devise all kinds of shady schemes. Then, they'll get caught, and there will be that many fewer contractors left. Death of the flexible workforce.

[webberg]

Yet the contractors pay much higher tax.

Even in the context of the present debate, I cannot agree that the above is true.

My view is that over a reasonable period of say 5 years the tax paid by employee and contractor, even where a PSC was used, is about the same.

The real difference is Em'er NI.

An outside IR35 arrangement sees no such NIC.

An inside one does and end clients view this as additional cost.

It is a good test of what you are worth to the end client. Are they willing to pay that additional cost? are they not and therefore want you to pay it? Are they willing to share it?

[gables]

In which case they should be immediately issuing SDS appeals on the basis of proven no Mutuality of Obligation (although being honest I suspect most contractors are going to be binned rather than furloughed as companies are likely to be really pulling the shutters down and removing all unavoidable costs).

As for the rest of your argument - if a contractor is being paid £400 a day (including employer NI) compared to a permanent member of staff being paid £55,000 a year or even £60,000 there is a significant difference in take home pay in return for the flexibility and lack of rights.

Now if the contractor is on £300 a day compared to a member of staff on £55,000 a would accept your argument but that isn't the case - the end client / agency is still paying a premium for the flexibility.

Ha ha, and don't I know it

[gables]

I doubt if any contractor has ever said to themselves 'I am going to set up a ltd company to avoid paying NI'. Agencies and clients are the ones who have always dictated as a condition to work with them you must have a Ltd Cpy.

They may not explicitly say that, but then within about 30 secs they've decided on low salary\dividends\spouses as shareholders to avoid paying NI, and also fail to operate inside IR35 when a contract is clearly caught, the reason to pay less tax.

[WordIsBond]

Even in the context of the present debate, I cannot agree that the above is true.

My view is that over a reasonable period of say 5 years the tax paid by employee and contractor, even where a PSC was used, is about the same.

Can we agree that the context of the present debate is whether IR35 is an excessive, unfair, even punitive solution to the problem?

If that's the context, then the only comparison that matters is between the contractor who is inside and the employee. That is the only contractor I've been discussing in this thread.

If we are talking about inside-IR35 contractors then they will ALWAYS pay more tax than the equivalent employee unless they are so stupid as to work for the same rate as the employee. If they make more than that employee they will also pay more tax (and at their highest tax rate). That's the way IR35 works.

This is so self-evident that I can only assume you've lost the context or you wouldn't have said that.

If you think we've been talking about comparing outside contractors to employees then it's no wonder we're at cross-purposes. I've never argued that outside contractors are taxed unfairly. In fact, I've suggested that it would be better if they were taxed marginally more, to end tax-motivated incorporation, and then IR35 could just be jettisoned, simplifying the life of everybody and rendering about 1/3 or more of the discussion on this website moot.

About 7.5% more on dividend tax, with an extra dividend allowance for pensioners, would just about do it, and would make everyone's life easier, including HMRC.