Reply to: Charlie and Thomas -- Another Nice Example from HMRC

[Brussels Slumdog]

Slumdog will do Charlie's work remotely 3 out of 5 days a week as a Belgian self employed.

[Acme Thunderer]

Tax man now gets £120 a day with the agency and its margin. This is not "tax neutral"; this is an even more egregious example!

In both examples the VAT man gets £120. First one £100 from contractor and £20 from agency. 2nd one £120 from agency. So makes no difference if contractor is VAT registered or not.

[swamp]

Even if the end client can't reclaim VAT if you go through an agency they can (and will) reclaim the VAT, so it remains Tax neutral e.g.

VAT registered contractor gets £500pd and add VAT £100, Agency charges end client £600pd, VAT of £120 but claims back £100 (from contractors invoice) - Tax man gets £120 VAT in total (£100 contractor and £20 agency)

Non VAT registered contractor gets £500pd, Agency charges end client £600pd, VAT of £120 - Tax man gets £120 VAT

So it only makes a difference if the end client isn't VAT registered AND you are going direct

Tax man now gets £120 a day with the agency and its margin. This is not "tax neutral"; this is an even more egregious example!

[Acme Thunderer]

Banks, insurance companies, charities, law firms, and most of the public sector cannot reclaim VAT because they cannot register for VAT.

Sure if you contract at a telco, say BT, then the VAT is neutral because BT are permitted to register for VAT. But you contract at Goldman Sachs, say, then the treasury gets £100 a day extra.

Even if the end client can't reclaim VAT if you go through an agency they can (and will) reclaim the VAT, so it remains Tax neutral e.g.

VAT registered contractor gets £500pd and add VAT £100, Agency charges end client £600pd, VAT of £120 but claims back £100 (from contractors invoice) - Tax man gets £120 VAT in total (£100 contractor and £20 agency)

Non VAT registered contractor gets £500pd, Agency charges end client £600pd, VAT of £120 - Tax man gets £120 VAT

So it only makes a difference if the end client isn't VAT registered AND you are going direct

[swamp]

It is grievously painful for me to ever agree with madame, but in this case, he/she/it is correct.

In almost every case of a £500 per day contractor, the client pays the contractor £100, the contractor pays HMRC £100, and the client reclaims the £100 from HMRC. The only thing that is accomplished by this circus is it marginally stimulates the economy by providing employment for bods to keep track of and report the whole thing, a benefit which is more than washed out by the cost of the HMRC bods who keep track and enforce it on their end.

Well, one other thing is accomplished. It allows HMG to pretend that companies are paying the tax when anyone with 1/4 of a brain knows it is the consumer.

And yes, there are exceptions, but not enough to matter.

VAT does not belong in these discussion. It just confuses matters.

Banks, insurance companies, charities, law firms, and most of the public sector cannot reclaim VAT because they cannot register for VAT.

Sure if you contract at a telco, say BT, then the VAT is neutral because BT are permitted to register for VAT. But you contract at Goldman Sachs, say, then the treasury gets £100 a day extra.

[WordIsBond]

Rubbish: HMRC collect £120bn a year from VAT. That is hardly "revenue neutral"!

For every £500 per day contractor at a bank the government trousers an extra £100. That's tax that a permanent employee (at the same bank) is not expected to pay.

It is grievously painful for me to ever agree with madame, but in this case, he/she/it is correct.

In almost every case of a £500 per day contractor, the client pays the contractor £100, the contractor pays HMRC £100, and the client reclaims the £100 from HMRC. The only thing that is accomplished by this circus is it marginally stimulates the economy by providing employment for bods to keep track of and report the whole thing, a benefit which is more than washed out by the cost of the HMRC bods who keep track and enforce it on their end.

Well, one other thing is accomplished. It allows HMG to pretend that companies are paying the tax when anyone with 1/4 of a brain knows it is the consumer.

And yes, there are exceptions, but not enough to matter.

VAT does not belong in these discussion. It just confuses matters.

[fidot]

Rubbish: HMRC collect £120bn a year from VAT. That is hardly "revenue neutral"!

For every £500 per day contractor at a bank the government trousers an extra £100. That's tax that a permanent employee (at the same bank) is not expected to pay.

The £120bn mostly comes from the end consumer.

In the general case (i.e. excluding banks, insurance and local authorities), VAT is just passed along the chain. One company's input VAT is another's output VAT, which is why it is regarded as revenue neutral.

[madame SasGuru]

Rubbish: HMRC collect £120bn a year from VAT. That is hardly "revenue neutral"!

For every £500 per day contractor at a bank the government trousers an extra £100. That's tax that a permanent employee (at the same bank) is not expected to pay.

and of the £120bn HMRC receives exactly how much of that is contractors in banks? If it's 1% I would be shocked...

And remember I'm merely repeating HMRC's view here not my own..

[swamp]

How many times do I have to login and repeat the following:-

HMRC regards business to business VAT as revenue neutral* - they will either receive the money from your company or the company that employs you rather than your company.

* Yes I know banks, insurance and local authorities are slightly different but not enough to make a difference here.

Rubbish: HMRC collect £120bn a year from VAT. That is hardly "revenue neutral"!

For every £500 per day contractor at a bank the government trousers an extra £100. That's tax that a permanent employee (at the same bank) is not expected to pay.

[madame SasGuru]

They never mention the VAT raised for the exchequer - if I’m inside IR35 then they don’t get that!

How many times do I have to login and repeat the following:-

HMRC regards business to business VAT as revenue neutral* - they will either receive the money from your company or the company that employs you rather than your company.

* Yes I know banks, insurance and local authorities are slightly different but not enough to make a difference here.

[PurpleGorilla]

They never mention the VAT raised for the exchequer - if I’m inside IR35 then they don’t get that!

[WordIsBond]

Isn't that called Employer's NI?

Hardly. Employer's NI is paid on the cash compensation paid to an employee.

Roughly speaking, the value of employment rights is calculated by taking the price a client would be willing to pay for a contractor, and subtracting from it the things they would be willing to pay for an employee of equivalent value -- wages, Employer NI, pension contributions. The difference is what it is worth to them to not have to give the contractor employment rights -- security/MOO, holiday pay, sick pay, redundancy pay, etc. That value, whatever it is, is something that the employee receives and is not taxed on it. The contractor does not receive those things but he does receive money (a higher rate) to compensate him for them, and is taxed on it.

In the example I gave above, ABC Ltd was willing to pay £50K (tax, pension, salary) for Thomas, but £70K for Charlie. There's a £20K differential there, and it is all about the value of employment rights. Maybe £20K is too high, they'd only pay £65K for Charlie, and the employment rights are only worth £15K. Doesn't matter the amount, the point is that it is worth SOMETHING and Thomas doesn't have to pay tax on it and Charlie does. If Charlie has to pay tax on the same basis and at the same rates that Thomas does, AND has to pay tax on the money he gets in lieu of employment rights, he's being unfairly taxed. Thomas gets the employment rights tax free.

If HMRC would give PSCs an "employment rights allowance" where a certain percentage is not taxed because they are compensation for employment rights, IR35 would be more equitable/less punitive and compliance would be better. If you really think you only have 10% compliance and 90% non-compliance you are admitting that you've structured the thing very badly. Either you've made it so complicated that it is too hard to comply, or you've made it so imbalanced that people have such a strong incentive to cheat that 90% of them will. There are few areas of life where 90% will cheat.

[madame SasGuru]

When HMRC start taxing the value of employment rights then it will be "fair" for them to tax the amount that is paid in lieu of employment rights.

Isn't that called Employer's NI?

[WordIsBond]

(Devil's advocate)

Surely HMRC should only be concerned about what's fair for them.

Who benefits from the lack of work guarantee, ease of dumping, lack of holiday pay, lack of employment rights? The client/employer does surely. HMRC don't benefit from it (bar perhaps some tenuous argument re higher chance of job seeker's allowance etc).

So what should really happen is end client offers person £50k employed salary or £60k contract rate (or £70k, precise figure irrelevant, key thing is it's more to compensate for lower rights). The tax is at the same rate (obviously more tax paid if income is higher). The client then pays more for not having to give the individual employment rights. The individual receives more money (through higher pay, not lower taxes) to compensate for lower rights.

Why should HMRC (UK Plc) suffer because the individual and the end client agree to treat things in a non employed way?

And thus demonstrating that the HMRC example is a nonsense. It won't happen. Charlie will be paid more and will pay more tax than in their example. Thus my follow-up post, using £70K as Charlie's compensation, which is actually something that could happen in the real world, for a comparative contractor to a £44K salaried position.

HMRC maybe should only be concerned about what's "fair for them" but HMG should care about incentives and disincentives to entrepreneurship, and the economic benefits of a functioning flexible workforce.

You can run the numbers as well as I can, let me know if I'm wrong. In fact, you probably have software that would do it automatically where I have to use a spreadsheet.

If ABC Ltd offers a choice between a £44K perm salary (plus AE pension contributions, total cost £50K) or a £70K contract through PSC Ltd, it is virtually tax neutral for HMRC which choice Charlie and Thomas make. They'll actually pull in more from the guy who takes the contractor route, even if he's outside IR35. The reason is because, even though rates aren't equal, Charlie receives monetary compensation for the employment rights (that's what happens in the real world) and that compensation is subject to tax. Thomas receives the tax-free benefit of the employment rights. That inequality is mostly (but not quite entirely) balanced out by the disparity in tax rates. The result is that Charlie pays more, and UK plc is not hurt at all by Charlie's decision to go the contractor route.

When HMRC start taxing the value of employment rights then it will be "fair" for them to tax the amount that is paid in lieu of employment rights.

[Maslins]

But HMRC's solution to the unfairness is to force Charlie inside IR35, with the result that he will pay an extra £5K, approximately. Now, that's nice and fair for THEM because they get close to the same amount of money. But it is hardly fair for Charlie. Now, he has LESS take-home pay than Thomas, no guarantee of work after this contract, in fact no guarantee he won't be dumped without notice, no holiday pay, no employment rights at all, and HMRC in their wisdom have decided his take-home pay should be less than the employee's.

(Devil's advocate)

Surely HMRC should only be concerned about what's fair for them.

Who benefits from the lack of work guarantee, ease of dumping, lack of holiday pay, lack of employment rights? The client/employer does surely. HMRC don't benefit from it (bar perhaps some tenuous argument re higher chance of job seeker's allowance etc).

So what should really happen is end client offers person £50k employed salary or £60k contract rate (or £70k, precise figure irrelevant, key thing is it's more to compensate for lower rights). The tax is at the same rate (obviously more tax paid if income is higher). The client then pays more for not having to give the individual employment rights. The individual receives more money (through higher pay, not lower taxes) to compensate for lower rights.

Why should HMRC (UK Plc) suffer because the individual and the end client agree to treat things in a non employed way?