Reply to: Gullible, Greedy, or Honest

[VectraMan]

Because dividends, like interest, result from an investment made with money that was already taxed in the first place.

But we do pay some tax on interest and dividends. So that's double tax.

[expat]

What I never understood is why dividends aren't taxed as normal income in the first place. Then we would never have had all these issues over IR35.

Because dividends, like interest, result from an investment made with money that was already taxed in the first place.

What is wrong here is that these "dividends" aren't dividends. They're distributed income, not the proportional reward for investing capital into a company which then uses that capital to do its business.

[tim123]

There seem to be three types of contractors on this board with regards to Umbrellas

The Gullible - who believe that the IR gives them money for expenses that are not incurred.

Personally I don't believe that anyone is that gullible to believe that the IR will let them off tax for false expenditure.

I think you're wrong. The financial/tax knowledge of the average person (even graduates) is stunningly low. If "someone who I know" tells them it is OK, then they will believe it. It really is like that.

tim

[VectraMan]

Tax it as normal income wouldn't solve the problem. You'd have to charge Employer's and Employee's NI on it as well. If you're going to do that for Dividends then why not for all other forms of income such as interest payments?

The fact that NI is charged on income from employment but not from other forms of income is what gives the problem. You could, of course, suggest that NI should be scrapped and income tax increased to compensate, but it is politically very difficult to do this.

Obviously that's what I meant. To the man in the street NI and income tax are the same thing. If you're a bit more cynical you'd say that NI is just a way of making the income tax rate look less than it really is, but that's a whole different issue. Why aren't dividends paid from a company taxed exactly the same as salary paid from a company?

Obviously I don't want it to happen that way, but what they've basically done is set up a rule, set up an exception to that rule, then try to setup an exception to the exception to apply the original rule to the people that the exception applies to. And they say tax is complicated.

[Hex]

What I never understood is why dividends aren't taxed as normal income in the first place. Then we would never have had all these issues over IR35.

Tax it as normal income wouldn't solve the problem. You'd have to charge Employer's and Employee's NI on it as well. If you're going to do that for Dividends then why not for all other forms of income such as interest payments?

The fact that NI is charged on income from employment but not from other forms of income is what gives the problem. You could, of course, suggest that NI should be scrapped and income tax increased to compensate, but it is politically very difficult to do this.

[VectraMan]

What I never understood is why dividends aren't taxed as normal income in the first place. Then we would never have had all these issues over IR35.

7. Hector is pissed off..

So will step 8 be IR35 v2, that won't be so easy to work around?

[Fleetwood]

8) Contractors leave UK and work elsewhere.
9) "Skill shortage" leading to FTVs and ICTs.
10) rates drop. Contractors become permies
.
.
.
.
99) Private enterprise made illegal. Showing initiative is punished by a long stretch in a re-education camp. Everyone works for the State, gives two dollars for Hate Week, and pays their "fair share" of what they "earn" (97%).

I told you it would end up like this.
Ayn Rand

[IR35 Avoider]

Must admit I've never really understood why this provision was needed anyway, especially given the way it's corrupted the whole market.

My understanding of the sequence of events is as follows.

1. National Insurance invented. Employment taxed more heavily than self-employment.
2. Some people who were employees decide to be self-employed, the tax wedge is smaller, so they can get more money for doing the same or similar jobs for clients.
3. Hector busts the employers of the workers in 2; self-employment is a matter of legal fact, Hector proves the workers are really employees, treats what were supposed to gross fees as payments of net salary and tells the employer to cough up tax and NI.
4. Clients decide they will only pay UK limited companies (agencies) for workers, thus insulating themself from fate in 3. The workers are now sole-traders invoicing agencies.
5. Hector cannot bust agencies using procedure in 3 as agencies do not "control" workers, so cannot be their employer. Consequently Hector creates S134 so that agency workers are once again taxed as employees.
6. As a result of 5 agencies decide to insulate themselves from Hector by only making payments to UK limited companiess... Consequently all contractors now have to have company.
7. Hector is pissed off, as the workers he has regarded all along as employees who should be taxed as such are now getting away with it, on top of that they now don't even pay self-employed NI, even worse some are avoiding higher rate tax by retaining earnings or splitting share-holding with family members. Hector creates IR35 so workers are once again "employees" for tax purposes.

[IR35 Avoider]

Nearly all of those I spoke to said that they couldn't understand why we couldn't operate as freelancers (sole traders)

The answer is very simple. Just look at things from an agency/clients point of view.

They want to pay contractor for a number of months to work for client. They would like to know in advance how much this is going to cost them. This means they need to know whether the contractor is their employee so any payments will be net of tax, and they pay taxes to Hector, or if the contractor is a business supplying services in which case they pay him gross and can forget about Hector.

They could spend thousands on lawyers to draw up bullet-proof contracts for services, and on training for their managers to make sure the reality reflects the contracts, and on extra personnel staff to monitor the managers, and on accountant and lawyers to argue with Hector when he doesn't believe they have done everything necessary to ensure the contractor is not an employee. Or they could just make a payment to a UK limited company for the contractors services, which automatically transfers all worries about status to that company.

The above applies as much to agencies as it does to clients, which is why at the end of the day the money will always end up in one of two places before reaching the individual contracor; in a company owned by the contractor, which may or may not be willing to gamble on winning the status argument, or an "employer" (client, agent, brolly or contractor company) who only remunerates the worker as an employee, i.e with salary, pension contributions and employee-allowable expenses.

[VectraMan]

I started out with an umbrella as it was easy, and I wasn't sure contracting would be a long term thing. Now I've gone Ltd., but although it's not that complicated, it is a fair bit of extra effort especially in setting up, so I'm glad I didn't do it when making the original transition from permie. If I find myself caught by IR35 in future, I'll probably just go back to Parasol.

I was a bit unsure of my exact status though. I'm an employee, but I don't get holiday/sick pay/pension/redundancy etc., and I don't get paid at regular intervals, and if I'm not in a contract, I don't get paid at all. It's a bit of a strange middle ground between employee and self employed. At least now I know I'm definitely an employee of My Co.

[freshblue]

Brollies (or the decent honest ones) have a place because the very nature of work has changed and will continue to change. There are swathes of new entrants at basic and junior levels and the churn in our industry is high, contract/temp to perm and back etc. Increased legislation and outdated tax law has made Agencies push people into methods of working and a brolly can help these people get a foot on the ladder. There are now several types of "contractors" that simply did not exist before when we all ran limited comapnies:

1. Newbs who get a role (job any job) and need a trading vehicle for the £8ph helpdesk role.

2. Mid market who have some experience and chose to keep with the brolly for ease/comfort or decide to push on.

3. Senior - typically use limited / composite - risk friendly to some extent

4. CBA (Can't be Arsed) - Long timers and just want to get the cash and can't be doing with the hassle and debate over tax.

Of course I have been very generalistic and there are many variants but in my experience (20 years+) the landscape has changed signfcantly and thus new entities (brollies etc) have sprung up. I think the good ones will survive and become more than they are now and the crap will fall by the way side.

I used a brolly as I just did not want the hassle any longer and was happy with a sensible return that was safe as it could be. I use a limited company for purely entrepreunarial activities.

[malvolio]

Section 134c of the Finance Acts 1984, from memory - which is the bit that make the agent liable for NICs and Employers' tax if they provide staff directly. It's also the problem I am trying to circumvent in that other discussion about changing the way the market works (the theory is that it only applies for the provision of people; if they are providing a defined service it may not. In which case IR35 cannot apply either). Must admit I've never really understood why this provision was needed anyway, especially given the way it's corrupted the whole market.

[expat]

Nearly all of those I spoke to said that they couldn't understand why we couldn't operate as freelancers (sole traders) either - which is the right way for us to go because we don't employ anyone and nor are we employed.

I agree wholeheartedly. Unfortunately the answer to that question is "because the IR won't let us". Long before IR35, the Revenue would not allow most IT contractors (among others more relevant to the original legislation) to operate as self-employed. You didn't even have to take a test case to the commissioners or court: the very presence of that risk meant that no agency would take you on as self-employed.

Self-employed is exactly how I see myself, and how I was for several years in France, for example. But I can't do it in the UK, so I have to use a Ltd Co.

Pity the IR (HMRC) don't even know that we run Ltd Cos because they made us do it!

[Denny]

To be honest with you, I don't really understand what benefit brollies really have in the marketplace and, frankly, nor do various IR representatives I've spoken to about them in passing when discussing other personal tax issues. The most obvious thing about talking to the IR about them was that most had never even heard of them and when I explained what they were for and how they tended to operate nearly all of them declared them to be 'illigitimate sounding' bodies because they couldn't understand how it was possible for another company to take control of paying employees without legally being their employer in the normal way with the usual controls etc. Nearly all of those I spoke to said that they couldn't understand why we couldn't operate as freelancers (sole traders) either - which is the right way for us to go because we don't employ anyone and nor are we employed. Limited's, as far as they were concerned, were meant to be used as 'acorns' with ambitions of bocoming 'oak trees' or at least 'saplings' in terms of size. However, most conceded that it was common practice for freelancers or 'man in a van' sole traders to sometimes set up their own limited company but they understood that deciding to go limited was a considered choice with various pros and cons and deciding to do it was more to do with 'building a reputation and standing with the customer with the implied growth potential that being a limited would demonstrate' and it was often about having 'transparent accounts too (provided they didn't mind the competition knowing how well or badly they were doing) rather than it being about extracting dodgy personal income payouts disguised as dividends or because they were 'forced to' because they would otherwise be viewed as employees with rights when working on large client sites.

The only reason they exist at all is because they suit the interests of an industry with a notoriously powerful lobby (guess which one that is, DA, Tim, Fumberlore and all my other enemies on this site) and because the IR have been slow to investigate their working practices properly.

[foritisme]

I don't understand why the IR give them dispensations in the first place then start looking more closely at the expense policies ?