Reply to: HMRC and IR35

[nickersan]

Flat taxes benefit those that pay more disproportionately. Though I personally think they are fairer than a progressive system. So what level?

Keeping allowance the same what level do you think flat taxes would have to be at?

On a 27k average salary one is paying 46% including both lots of ni. Given under this scenario nobody pays less the flat rate will have to be higher. Though moving 13% to an employer might make it slightly more palatable.

I have seen suggestions of a flat tax rate of around 23%. But dont see how on earth that can balance the books.

only answer is radical cuts to public services.

I think the books balance because the money moves through the economy faster, being taxed each time it moves.

Think what happens when most people get a pay rise, they spend it. If that pay rise came in the form of a tax cut, the money would still get spent, being taxed as it was.

[Zero Liability]

Flat taxes benefit those that pay more disproportionately. Though I personally think they are fairer than a progressive system. So what level?

Keeping allowance the same what level do you think flat taxes would have to be at?

On a 27k average salary one is paying 46% including both lots of ni. Given under this scenario nobody pays less the flat rate will have to be higher. Though moving 13% to an employer might make it slightly more palatable.

I have seen suggestions of a flat tax rate of around 23%. But dont see how on earth that can balance the books.

only answer is radical cuts to public services.

This strays a bit off topic, but yes, the government would have to re-order and re-prioritise its spending, and maybe sell off some of its assets. It should do nothing but provide emergency services, law and order, defence and arguably roads, sanitation, healthcare and education, particularly given how the political complexities of cutting the latter two, but with a basic income guarantee I see the last two as less necessary. These are the services that supposedly only it can provide or provide satisfactorily, which I will grant for the purposes of the discussion, so they are a good way to narrow down what it should spend on. We can't assume current spending is efficient, either.

A considerable part of the budget relates to legacy costs, like pensions, as well as servicing the British government's debts. I haven't seen the particular details for 23%, though even 30% would be an improvement. Bear in mind, PAYE and NI constitute 50% of income receipts, with other taxes, such as VAT and CT filling in the rest of it. So whilst it looks like it has a long way to fall, they're not accountable for the entirety of the govt's receipts as it is. NZ seems to work just fine on a tax rate that floats at around 30%, with the CT at 28%. I don't see why Britain couldn't go to something like 30% and scale down over time to 20%. The difference in size is just a matter of scale. If anything, the British government should be able to realise economies of scale.

Whilst I share and agree with SO's sympathies, if people got a bill for how much their govt costs them (including indirect costs), and how their tax receipts are spent, I think they'd begin to narrow down the range of spending they support. One could say paying for those services you receive benefit from, to the extent that you benefit from them (not to the extent that you earn) is fairer than a progressive tax. A flat tax still doesn't do that, but it's a step closer, particularly if it's set in accord with spending in the way I described above. It isn't particularly fair to exclude lower income individuals from taxation, since they still benefit from the services others pay for, but since most people support a safety net from the government, a basic income guarantee and exemption from tax for lower income individuals could be coupled with such a tax.

Where the tax system really begins to annoy me with regard to 'fairness', is when it becomes a vehicle for social engineering and a means to serve agendas other than covering govt outgoings. I think the shape of current spending and taxing has more to do with vested interests, including lobbies, than efficiency or fairness.

[SpontaneousOrder]

The big point is we should all be treated fairly ... If people think that's a fair system, then they have a different definition of fair to me.

If you want fairness, then we shouldn't be paying any tax at all. We'd purchase subscriptions instead.
To support the violent extortion of peaceful people and to argue for fairness in the same breath (if you were to do that) is the height of hypocrisy.

That is to say, as long as we're talking about taxation then I very much doubt you'll be able to invent any kind of system that looked remotely fair. It's all about promising to steal from peter to subsidise paul, and then promising peter you'll steal from steve etc etc.

If taxation were ever to be considered fair, in any way at all, then it wouldn't need to be policed so vociferously - 95% of people would willingly participate.

[ASB]

Flat taxes benefit those that pay more disproportionately. Though I personally think they are fairer than a progressive system. So what level?

Keeping allowance the same what level do you think flat taxes would have to be at?

On a 27k average salary one is paying 46% including both lots of ni. Given under this scenario nobody pays less the flat rate will have to be higher. Though moving 13% to an employer might make it slightly more palatable.

I have seen suggestions of a flat tax rate of around 23%. But dont see how on earth that can balance the books.

only answer is radical cuts to public services.

[Zero Liability]

I guess the one benefit of being a contractor, in control of your LTD, is that you can control how much goes towards allowances for sickness, slow periods etc. Whereas for permies, their employers tend to do this, often due to legal requirements, and include it as part of the overall benefits package. They do, however, have statutory employment rights, which contractors forsake. The benefits to the engagers, of contractors, is immense. Conveniently, they don't have to pay the employer's NICs, however, if HMRC does decide you're "inside" IR35, which is bollocks.

That said, to repeat myself, I think permies are mostly over-taxed. I don't think we should get preferential tax treatment to them, but equally I don't think they should pay as much tax as they do. The way the govt seems to deal with it is to decide what it'll spend on and then figure out how it will cover those expenses, through a combination of taxes, borrowing (deferred taxes) and money printing (inflation tax.) I am sure they'd prefer everyone to be paying PAYE tax but surely there is the recognition that this can actually damage the economy, and why they by and large ignore the freelancing market? We'll see what comes of the PSC Committee.

[nickersan]

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.

Sadly I don't think, at least from what I've seen contracting for the last 15 years or so, that caliber or skill plays much part in deciding rate.

It's an interesting argument, that sick and holiday pay are included in you rate, which I wouldn't argue with and I doubt many would. As a contractor you're obviously compensated very well, but what I would say most contractors have a problem with is being told you're working on the same terms as your less well paid and considerably more secure permanent counterparts and therefore should be penalised by the tax system.

Personally, since the 2008 crash (and I've been lucky) I've had to fund 4 months of unemployment, initially suffered a 25% rate cut once I found another contract and since getting my rate back towards the pre-crash level, have been given a non-negotiable 10% rate cut.

I'm not complaining about this, it's part of the game and I could just as easily have been made redundant in that time like many have been.

I am however trying to show that, we all have choices, I could take a permanent role if I wanted and the benefits come with that, likewise if you permanent you're free to become a contractor with the benefits that provides.

The big point is we should all be treated fairly - IR35 introduced roughly a 16% tax increase overnight resulting over half of your earnings going in tax (dividends aside, remember you pay both personal and employers NIC if caught by IR35). If people think that's a fair system, then they have a different definition of fair to me.

[nickersan]

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.

Amen to that. You simply need contrast the ease of VAT with the complexity of PAYE - VAT returns done in minutes, PAYE administered by a specialist (your accountant).

A flat rate, starting after you earn above a given amount, would be simple to administer, simple enforce and most importantly so simple for those paying.

[Zero Liability]

We'll see where PAYE and NI stand if it becomes more transparent what the latter is, and what it 'contributes' towards.

[ASB]

Nickersan, I think you are being a bit generous. I would suggest 78k as a fair comparison for earnings. This is based on 222 working days (25 holiday, 8 bank holiday, 5 sick. Ons average) and also factors in ers ni.

so this is 30% premium. Or about 8,000 net.

But what of other permie benefits? I personally get 10% salary, car or cash, life insurance, critical illness, health cover. Target 10% bonus too.

but where I am 400/contract and 45k permie role would br broadly similar.

in essense I take the view that it's market forces resolve the rates and risk premium. Under ir35 I don't think there is anything other than a comparative tax burden. And yest it chanegs in accordance with the progressive nature of our system to potentially a little over 60%.

So should people pay less because they contract?

Not specifically no. There is already an aruguable risk premium. And they can pay less by only operating outside ir35. I was able to do that for 20 odd years, obviously predating ir35 for a chunk of it. In my case this was mainly by only taking on fixed price development to an agreed spec. If necessary I would agree the production of the spec t and m but generally would try and do this fixed price too.

of course a lot of people are either unable or unwilling to do this. In the unwilling case tough. Thats their choice. In the unable case, tough too. Though I have quite a lot of sympathy. Their is no certainty that I can agree terms with a client. And those terms have consequences I have to accept.

One of the issues when unable to get work etc is access to benefits, or somehow covering the war chest costs. I think, therefore, that one ought to be able to be treated as self employed. Not quite as advantageous as outside ir35. Not as penal as inside. Equally a fairer comparison to similar operations which supply personal services.

[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.

[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.

[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.

[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.

[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...

[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.