Reply to: Accountants in Denial over IR35

[IR35 Avoider]

Well, this is a bit embarrassing. It turns out my accountants have be running an umbrella since 2016. Cost £19.50 a week. Which works out at about £100 a year more than they're charging me to run a company. Actually, once you account for the fact that the fee won't have to be paid out of taxed income, the take-home would probably be higher from the umbrella.

[IR35 Avoider]

What you may be overlooking is the handling of pension contributions.

Pensions are a non-issue for me, I can't make any more contributions. (But that is a very good point, generally speaking. Until a couple of years ago I was putting massive amounts into my pension, so this would have been very important.)

[IR35 Avoider]

If the current public sector rules get rolled out to private sector as is then there is no point to using a Ltd as the tax must be paid by the last entity in the chain engaging the contractor. i.e. the agency. Which is why many agencies have required contractors to use a brolly so they don't have to sort out the tax themselves as they are no longer the last entity in the chain. It's not allowed for the Ltd to receive payment gross of tax under IR35.

Thanks. that's useful information about the agencies insisting on brollies so they can offload the admin, I hadn't thought of that. So I may not have any choice.

As for cost of brollies vs Ltd, I've not checked the figures to be sure but the more reasonably priced brollies (charging a fixed rate per month rather than a percentage) probably cost no more than what it costs for accountancy services over a year for a Ltd.

My accountant charges £62.50 a month for running a company, I don't recall seeing any brollys that charge less than £100.

In other words, worth researching the current state of play regarding public sector IR35 and what you may want to do to avoid certain scenarios depending on what happens with IR35 in the private sector over the coming 18 months.

No idea what you mean here, sorry.

[WordIsBond]

I won't be doing anything different, unless you can tell me the name of a brolly that charges less per month than it costs me to run a company. I don't understand how running a PSC, including payroll for one person, costs a third less than it costs to add the same person to a brolly's payroll, but the last time I checked, it did. That was a few years ago though, so maybe the increased demand for brolly's will result in better terms?

What you may be overlooking is the handling of pension contributions. If you are making large pension contributions, the rules as applied in the public sector end up with tax and NI being paid on the pension contribution, too. You can go ahead and make the pension contributions personally and reclaim the income tax on your self assessment, but not the NI.

But you can use a brolly that will treat your pension contribution as salary sacrifice and make the contribution for you.

So to get the whole picture you have to offset that savings and the accounting costs, etc, vs the brolly fees. And then you have to decide if the hassle of running a Ltd company is worth it.

[Hobosapien]

I won't be doing anything different, unless ...

If the current public sector rules get rolled out to private sector as is then there is no point to using a Ltd as the tax must be paid by the last entity in the chain engaging the contractor. i.e. the agency. Which is why many agencies have required contractors to use a brolly so they don't have to sort out the tax themselves as they are no longer the last entity in the chain. It's not allowed for the Ltd to receive payment gross of tax under IR35.

So Ltd is only really beneficial if doing mostly outside IR35 contracts, based on current public sector IR35 rules.

As for cost of brollies vs Ltd, I've not checked the figures to be sure but the more reasonably priced brollies (charging a fixed rate per month rather than a percentage) probably cost no more than what it costs for accountancy services over a year for a Ltd.

In other words, worth researching the current state of play regarding public sector IR35 and what you may want to do to avoid certain scenarios depending on what happens with IR35 in the private sector over the coming 18 months.

[IR35 Avoider]

I will be off next year, winding up, claiming ER, going brolly, waiting 2 years then spinning up another LTD once the dust settles and if it is favourable.

I won't be doing anything different, unless you can tell me the name of a brolly that charges less per month than it costs me to run a company. I don't understand how running a PSC, including payroll for one person, costs a third less than it costs to add the same person to a brolly's payroll, but the last time I checked, it did. That was a few years ago though, so maybe the increased demand for brolly's will result in better terms?

[jamesbrown]

Back in 99, when the original press release came out, everyone thought the world as we knew it for freelancers would end.

Yeah but, to be fair, the original plans looked a lot like the public sector rules that they're now about to roll out, 19 years later.

[Jessica@WhiteFieldTax]

Back in 99, when the original press release came out, everyone thought the world as we knew it for freelancers would end. Here we are 19 years later, same story.

There will be a way through this latest set of hurdles, I’m sure. For now we need to see a bit more on HMRCs plans (if that isn’t an oxymoron)

[WordIsBond]

I'm sending out two newsletters:

Maslins - everything as normal, nothing to see here, keep on contracting indefinitely peeps!

MVLO - OMG contracting's gonna collapse, everyone liquidate via us quick before it's too late!

Hope nobody notices the contradiction

Note to self: don't trust Maslins' advice but invest in his company, he knows marketing.

[WordIsBond]

The IR35 reforms however make that risk more real and importantly, more capable of being calculated, and a finance director asking for and receiving a report on the possible cost, is going to be quite concerned.

How will they react?

Either they will seek to reduce the risk by reducing the number of contractors - in favour of permies perhaps - which at least allows them to forecast numbers and prevent embarrassing reports to stock exchanges of errors and unknown contingencies - which means higher costs which will be offset against paying employees a lower rate than the contractor role - or they will apply blanket "inside IR35" decisions and impose cuts in rates to offset costs.

This they will do as it will be difficult to transfer a legal obligation to pay tax and em'er NIC to an intermediary. To do that, they would have to rely upon a warranty or indemnity from the intermediary which means taking a significant financial risk on that intermediaries integrity. Would you do that?

Or they will treat the risk the same way they treat most other risks -- insure against it. TLC35 -- Engager's Edition is about to become a big thing. Whether they pay for it, or contractors pay for it, will be a point of negotiation, no doubt. But that is the least intrusive way to deal with the risk and eliminates any need for any significant restructuring.

A lot of roles will be determined by clients to be inside. A lot of others will be determined to be outside but only with insurance in place.

[WordIsBond]

Good point, very good point indeed! Kicking myself for not thinking about that myself.

My invoice is on the way. I did tell you I work on a percentage basis, right? I'm not greedy, 5% of what you save by going ER instead of taking it all in one large dollop of dividends, and I'll be content.

I personally am not as sure as you that MVL before 2020 is the way to go. It's not my plan. I'm just saying that if that is what you think, there are risks in waiting too long.

[jamesbrown]

It's also worth bearing in mind that capital treatment is based on on TiS legislation and that will be applied at the time a distribution is made, whereas ER is something you claim via your self-assessment for the tax year in which the distribution was received. The high bar is the capital treatment, the low bar is the ER, relatively speaking. People often aggregate these two different things (capital treatment and ER), but they are distinct. It's possible that the funds could be split into two distributions (e.g. one large, one small) that span two different personal tax years.

[Maslins]

I'm sending out two newsletters:

Maslins - everything as normal, nothing to see here, keep on contracting indefinitely peeps!

MVLO - OMG contracting's gonna collapse, everyone liquidate via us quick before it's too late!

Hope nobody notices the contradiction

[webberg]

In my opinion, most private sector engagers will react by applying a very high hurdle for any contract claimed to be outside IR35.

To date, end users have sought to lay off certain employment related risks to agencies and intermediaries. These risks, such as liability for holiday pay, sick pay, etc are arguably low value for the large enterprises and manageable because a contractor is perhaps unlikely to want to bite the hand that feeds them.

Whilst I know that some enterprises (including my former employers) have metrics that seek to measure the risk and the impact on bottom line, the final result is usually a low (and manageable) number.

The IR35 reforms however make that risk more real and importantly, more capable of being calculated, and a finance director asking for and receiving a report on the possible cost, is going to be quite concerned.

How will they react?

Either they will seek to reduce the risk by reducing the number of contractors - in favour of permies perhaps - which at least allows them to forecast numbers and prevent embarrassing reports to stock exchanges of errors and unknown contingencies - which means higher costs which will be offset against paying employees a lower rate than the contractor role - or they will apply blanket "inside IR35" decisions and impose cuts in rates to offset costs.

This they will do as it will be difficult to transfer a legal obligation to pay tax and em'er NIC to an intermediary. To do that, they would have to rely upon a warranty or indemnity from the intermediary which means taking a significant financial risk on that intermediaries integrity. Would you do that?

End users who have any sense of the impact of the impending changes, will be taking action soon. They will not go to the cliff edge of 5th April 2020. This group will want their intermediaries to be talking to them about coping strategies in the same time frame.

End users who are not so aware, probably those at the lower end of the demographic, will be reliant upon the intermediaries and may be pushed into a position in which they have to take a decision quite quickly and without thinking over the consequences. This will leave them exposed perhaps to what will be a new crop of "schemes" designed to keep the IR35 risk away from individuals and end users.

There are no doubt an endless series of positions between the above.

So in my opinion, there will be section of the market which will see "business as usual" for a long period yet, but eventually the legal obligations of the parties here will demand that new business models are adopted.

[splitbrain]

Hammond has the power to do that if he chooses to do so and Parliament backs him. Whether he could pull it off or not, and whether or not he'd try, I can't say.

If he thinks there is significant avoidance/cheating going on, he could do something like change the rules with immediate effect for any who are not already in the process. I think he'd have a hard time changing the rules for someone who had already started the process, too many people would say that's not fair, and it isn't like he has a big enough majority not to be worried about a few rebels.

If I had significant funds that I wanted to get out using ER before April 2020 I'd definitely want to start the process before November. Maybe I'm just being paranoid but the more money that comes into play the more paranoid I tend to get. Sounds like you've got enough that it matters.

Edit: and this discussion assumes Hammond will do the next budget, which is not a given. If an election is called you might want to consider just making the leap then, because Labour would have a new Budget immediately after being elected, and for them Entrepreneur Relief is simply to relieve all entrepreneurs of all their money.

Good point, very good point indeed! Kicking myself for not thinking about that myself.

High chance of a snap election and Jez/John scrapping ER, I do recall reading Labour hate it. Fortunately my client will allow me to change to brolly mid-way through the contract (I have that in writing) so I can trigger an MVL on the day of an annoucement of an election.

Hector can fark right off, I'm ready for them.