Reply to: The S58 vs IR35 debate

[lucozade]

The only sure fire way of escaping IR35 is if you own a software business , pitch and win a project, execute the project on your own business office and deliver it to client.

If you are sitting in client office, mixing with permies and writing code together, you are in IR35 and one day will be caught.

Bollox

[tractor]

You and I have had this argument before.

You choose a convenient starting point on which to base your point of view, allowing you to support a misleading conclusion. The fuller historical sequence is

1. Pre-1978 a contractor could work direct for a company without being taxed as an employee, if he/she passes self-employment status test. (This remains true thereafter as well.)
2. Companies were not willing to cope with the risk of status uncertainty, therefore required contractors to go via agencies, where a loophole means they can be taxed as self-employed even if they fail status tests - call this loophole 1.
3. The 1978 agency legislation closes loophole 1.
4. Agencies now the ones with employment status risk, so now they won't deal with "self-employed." Contractors move on to loophole 2, using limited companies. Once again employment status doesn't matter, everyone can avoid be taxed as an employee.
5. IR35 is introduced to close loophole 2.

So, in theory, a person with correct working practises does not and never has required any sort of intermediary in order to be taxed as self-employed. The self-employed to agency and later PSC to agency routes are (in theory) only needed as loopholes to allow disguised employees to lower their taxes.

In practice status uncertainty means an intermediary is required, a PSC is usually a contractors best solution to this problem, however it is not the simplest or most straight-forward. An umbrella is. So it is wrong to say a PSC is inflicted on us be legislation. We choose PSCs over umbrellas because of the advantages, the biggest of which is lower tax.

(I don't buy the idea that replacing a PSC with Parasol increases your risk so much as to justify the PSC choice. Most agencies we go through add significantly more risk to the chain than do the umbrellas we get to choose.)

That may (arguably) have been true for those that set up post IR35 (2000) but it wasn't so for those of us that have been in business pre 1978. Then, umbrellas were things that banks lent you when the sun shone and asked for them back as soon as it rained!

[malvolio]

You and I have had this argument before.

You choose a convenient starting point on which to base your point of view, allowing you to support a misleading conclusion. The fuller historical sequence is

1. Pre-1978 a contractor could work direct for a company without being taxed as an employee, if he/she passes self-employment status test. (This remains true thereafter as well.)
2. Companies were not willing to cope with the risk of status uncertainty, therefore required contractors to go via agencies, where a loophole means they can be taxed as self-employed even if they fail status tests - call this loophole 1.
3. The 1978 agency legislation closes loophole 1.
4. Agencies now the ones with employment status risk, so now they won't deal with "self-employed." Contractors move on to loophole 2, using limited companies. Once again employment status doesn't matter, everyone can avoid be taxed as an employee.
5. IR35 is introduced to close loophole 2.

So, in theory, a person with correct working practises does not and never has required any sort of intermediary in order to be taxed as self-employed. The self-employed to agency and later PSC to agency routes are (in theory) only needed as loopholes to allow disguised employees to lower their taxes.

In practice status uncertainty means an intermediary is required, a PSC is usually a contractors best solution to this problem, however it is not the simplest or most straight-forward. An umbrella is. So it is wrong to say a PSC is inflicted on us be legislation. We choose PSCs over umbrellas because of the advantages, the biggest of which is lower tax.

(I don't buy the idea that replacing a PSC with Parasol increases your risk so much as to justify the PSC choice. Most agencies we go through add significantly more risk to the chain than do the umbrellas we get to choose.)

Mostly wrong (for anyone but a bog standard do-what-you're-told contract resource, but they should be inside IR35 anyway), there are valid commercial and business reasons to use your own Limited Company that are nothing to do with taxation (or, more precisely, NICs).

[IR35 Avoider]

When the Government last looked at agencies using tricks to reduce costs (back in 1978) the consequence was a change in the law that stopped agencies employing people on a "self-employed" basis. To get around that agencies started requiring contractors to use a separate entity through which to supply their services and the PSC company came into existence.

You and I have had this argument before.

You choose a convenient starting point on which to base your point of view, allowing you to support a misleading conclusion. The fuller historical sequence is

1. Pre-1978 a contractor could work direct for a company without being taxed as an employee, if he/she passes self-employment status test. (This remains true thereafter as well.)
2. Companies were not willing to cope with the risk of status uncertainty, therefore required contractors to go via agencies, where a loophole means they can be taxed as self-employed even if they fail status tests - call this loophole 1.
3. The 1978 agency legislation closes loophole 1.
4. Agencies now the ones with employment status risk, so now they won't deal with "self-employed." Contractors move on to loophole 2, using limited companies. Once again employment status doesn't matter, everyone can avoid be taxed as an employee.
5. IR35 is introduced to close loophole 2.

So, in theory, a person with correct working practises does not and never has required any sort of intermediary in order to be taxed as self-employed. The self-employed to agency and later PSC to agency routes are (in theory) only needed as loopholes to allow disguised employees to lower their taxes.

In practice status uncertainty means an intermediary is required, a PSC is usually a contractors best solution to this problem, however it is not the simplest or most straight-forward. An umbrella is. So it is wrong to say a PSC is inflicted on us be legislation. We choose PSCs over umbrellas because of the advantages, the biggest of which is lower tax.

(I don't buy the idea that replacing a PSC with Parasol increases your risk so much as to justify the PSC choice. Most agencies we go through add significantly more risk to the chain than do the umbrellas we get to choose.)

[BrilloPad]

If I was into that kind of thing, I'd definitely give Lisa my business.

I saw your reply before I saw the original post. Gave me a shock......

[fullyautomatix]

I think the IR35 discussion is perfectly valid for this thread because that's why so many of us are in this mess!

I still haven't met one person that can categorically explain to me what IR35 is and what I should do about it. Hasn't it been around since 2001?

I also don't feel that people need to defend themselves with regards to whether they are operating as a limited company or not.

So here's the process:
Agency offers me a contract on the basis I operate limited
I go setup a limited company
I employ an accountant to manage my company and tell me how to operate my business and pay myself
I tell them I want to operate above board and transparent and do everything by the book
They say "take this much salary, expenses and take the rest in dividends" - I do
Agency tells me to take out public liability and professional indemnity insurances - so I do (i'm now insured)
when I'm sick I don't get paid so that has to be covered by the profits in the company
when I'm on holiday I don't get paid so that has to be covered by the profits in the company
I don't have a pension so I should take one out through my company
I have 1 weeks notice that my current contract may end

In the meantime I do what I do best - work in IT, code/script/design etc. Bouncing around different projects.

I pay my VAT bills, corporation tax, accountancy fees, self assessment fees, etc on time.
I submit all my paperwork to Companies House and HMRC on time

I seek other work for my business through various contacts and I'm currently setting up a website to promote my services locally.

I'm clearly not operating a business and must pay myself a huge salary so I can pay more tax eh ?

So basically IR35 asked me to prove I'm a business so that I can get the same tax breaks that big corporate can get.

The only sure fire way of escaping IR35 is if you own a software business , pitch and win a project, execute the project on your own business office and deliver it to client.

If you are sitting in client office, mixing with permies and writing code together, you are in IR35 and one day will be caught.

[LisaContractorUmbrella]

If I was into that kind of thing, I'd definitely give Lisa my business.

Thanks

[TheFaQQer]

I do understand though that a contractor may feel more in control of things if he works through a PSC - you do need to be able to trust your umbrella company if you're going to work with one

If I was into that kind of thing, I'd definitely give Lisa my business.

[LisaContractorUmbrella]

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.

You do have that with an umbrella company it's just that the action is in their control as they have the business to business contract with the agency/client. In my experience it's pretty rare for legal action to be necessary - in 11 years we've only instigated it a couple of times. Occasionally an agency/client will go down the tubes but there's very little that can be done about that whether umbrella or PSC. For the most part disputes over money are resolved amicably.

I do understand though that a contractor may feel more in control of things if he works through a PSC - you do need to be able to trust your umbrella company if you're going to work with one

[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.

[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]

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.

[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.

[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.

[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.