Freelance Limited Company (FLC) offering from IPSE

[eek]

It's safe to say that the dividend tax isn't praiseworthy. It does however provide an argument that the expected revenue gain will at most be 1/2 of what it was and potentionally even less. However its purpose is not to take more money off us, its just to take more money full stop..

I think we need to look at the two attacks though and see what the purpose of them is.

The T&S one is clearly not aimed at the high level consultant. The permanent side of our work is explicitly excluded that's why I don't think it's aimed at us and why a simple barrier approach could be used.

The ir35 discussion is however also aimed at people higher up the pay scale. The lawyer example is a clear demonstration of that. How we attack that is harder though as I'm sure we all know people who match that example.

[WordIsBond]

I like the idea that the employer is liable for the employer's NI portion, but I'm not sure I see the incentive either for the contractor or the client when IR35-caught. In the event that SDC applies, this would mean the PSC would effectively disappear and a particular individual would need to be on the client's payroll.

I definitely wouldn't go that far.

The simplest thing would be, if the client declares a contract with a Ltd Co contractor to be SDC, to have a new class of NI. Say class 5 NI, which would be 8-9% of all Ltd Co. payments (less than 13.8% because of the monthly tax-free amount, pension contributions, etc).

Would contractors really be paying it? Perhaps. My guess is in some cases client would eat some of that cost, but it would drag on contractor compensation. It's a small enough amount that clients won't automatically say, "Ok, we need to slash the rates we're going to pay." Ultimately, supply and demand would determine rates.

[jamesbrown]

It's safe to say that the dividend tax isn't praiseworthy. It does however provide an argument that the expected revenue gain will at most be 1/2 of what it was and potentionally even less

I think we need to look at the two attacks though and see what the purpose of them is.

The T&S one is clearly not aimed at the high level consultant. The permanent side of our work is explicitly excluded that's why I don't think it's aimed at us and why a simple barrier approach could be used.

The ir35 discussion is aimed at people higher up the pay scale. The lawyer example is a clear demonstration of that. How we attack that is harder though as I'm sure we all know people who match that example.

Yes, I agree with that assessment, but I think it will be easier to sell if any proposal has broad applicability (i.e. across several pieces of legislation). Although the T&S consultation is much further along, it seems to me that one or two simple rules could eliminate quite a lot of the abuse there. However, the SDC and others aspects strike me as a done deal because they tie in too nicely with the agency legislation (deals with earned/employment income subject to SDC) and what they're planning for IR35 (deals with unearned/dividend income subject to SDC). Any screening rules will probably sit on top of the SDC rules in terms of identifying scenarios that are SDC by statute (i.e. no T&S relief and IR35-caught), but it will be tougher to argue for scenarios that are not SDC by statute, because HMRC operates on FUD, and it will be near-impossible to convince clients to take a risk without that clarity.

[eek]

I definitely wouldn't go that far.

The simplest thing would be, if the client declares a contract with a Ltd Co contractor to be SDC, to have a new class of NI. Say class 5 NI, which would be 8-9% of all Ltd Co. payments (less than 13.8% because of the monthly tax-free amount, pension contributions, etc).

Would contractors really be paying it? Perhaps. My guess is in some cases client would eat some of that cost, but it would drag on contractor compensation. It's a small enough amount that clients won't automatically say, "Ok, we need to slash the rates we're going to pay." Ultimately, supply and demand would determine rates.

I think any person caught as under new IR35 would end up paying the full amount because HMRC are not and actually legally cannot settle for less than the full amount. So bang goes that class 5 NI example. Remember all recent settlements have been full tax due (the only thing we are offering is no potential court visit and no additonal fines).. My expectation would be no special treatment full tax (somehow or other by either the contractor's company or the end client) including Employers NI would need to be paid...

And companies (especially large companies who are very risk adverse when it comes to this stuff) will as soon as they become potentially liable insist and ensure that they will not end up responsible for the full amount. No company or agency will take the risk of allowing you to use your own limited company (of any type). They will insist that a trusted umbrella is used...

I can see how an insurance policy would fix that problem however I really can't see it being affordable in the first few years... Given the amount of money that would need to be insured and the difficulty of winning an no SDorC case I can't imagine many insurance companies will be creating affordable (£200 or so) policies that cover the possible tax...

[jamesbrown]

I definitely wouldn't go that far.

The simplest thing would be, if the client declares a contract with a Ltd Co contractor to be SDC, to have a new class of NI. Say class 5 NI, which would be 8-9% of all Ltd Co. payments (less than 13.8% because of the monthly tax-free amount, pension contributions, etc).

Would contractors really be paying it? Perhaps. My guess is in some cases client would eat some of that cost, but it would drag on contractor compensation. It's a small enough amount that clients won't automatically say, "Ok, we need to slash the rates we're going to pay." Ultimately, supply and demand would determine rates.

The IR35 deemed payment already does this to some degree (when compared to the total cost of employment through PAYE w/ both NICs). In other words, you're somewhat better off operating an IR35 deemed payment versus PAYE umbrella (for example), and you still have the option to take other contracts that are outside IR35. This will further improve w/ the zero-rated dividend tax allowance, because the 5% allowance w/ IR35 (or a fraction thereof) can be taken as a dividend and the dividend allowance applies to all marginal rates (except 45% IIRC).

[eek]

Yes, I agree with that assessment, but I think it will be easier to sell if any proposal has broad applicability (i.e. across several pieces of legislation).

Although the T&S consultation is much further along, it seems to me that one or two simple rules could eliminate quite a lot of the abuse there. However, the SDC and others aspects strike me as a done deal because they tie in too nicely with the agency legislation (deals with earned/employment income subject to SDC) and what they're planning for IR35 (deals with unearned/dividend income subject to SDC). Any screening rules will probably sit on top of the SDC rules in terms of identifying scenarios that are SDC by statute (i.e. no T&S relief and IR35-caught), but it will be tougher to argue for scenarios that are not SDC by statute, because HMRC operates on FUD, and it will be near-impossible to convince clients to take a risk without that clarity.

Yep, SDC is a done deal because its the only bit of the employment law that is left standing that HMRC win on.

I do however wonder if we are looking at this too deeply and whether something as simple as the tier 2 visa rules will work...

1) does someone in the organisation already do this job Y/N - (solves the specialist contractor issue there before you go any further)...
2) when you advertised the vacancy as a permanent / fixed term contract did viable CVs come in (simple third party check there)..
3) if not then potentially not under IR35 subject to additional checks....

The advantage of the above would be that it can be shown to both protect HMRC from IR35 abuses (the examples in the discussion document are caught) while promoting a flexible economy when a company needs to solve a skill / capacity issue. It ain't great but as these are the rules already used for skill shortages in two departments its not something they can really argue against..

[WordIsBond]

I think any person caught as under new IR35 would end up paying the full amount because HMRC are not and actually legally cannot settle for less than the full amount. So bang goes that class 5 NI example.

We're discussing replacing the current IR35 fiasco with something that A) involves the engagers in enforcement and B) dumps some liability onto the engagers and C) actually works. That's what the consultation is talking about.

If the government wanted to pass legislation that made clients liable for Class 5 for SDC contracts, and said there is no longer employers NI under IR35, it certainly would be legal. Sure, it would require legislation to change the current rules, but that's the whole point. They are going to change the rules.

My expectation would be no special treatment full tax (somehow or other by either the contractor's company or the end client) including Employers NI would need to be paid...

If end client paid 8-9% of contract amount it would be very close to full Employers NI on a deemed payment, after expenses, pension, and monthly NI allowance are deducted. I'm not proposing the government get less money. Under my proposal, they would get more and it would cost them less to administer it.

I can see how an insurance policy would fix that problem however I really can't see it being affordable in the first few years... Given the amount of money that would need to be insured and the difficulty of winning an no SDorC case I can't imagine many insurance companies will be creating affordable (£200 or so) policies that cover the possible tax...

Really? If the employer's liability is 8-10% of the contract amount?

We're wrapping up a 60K contract right now. Under this scenario, engager liability would be maybe 6K or so. Sure, if the ruling went against us in 4 years it might climb to 12K, maybe even £15K, with interest and penalties. What is it going to cost to insure that amount? Less than £1K, easily.

Would you pay £500-1000, if needed, to get a £60K contract outside of IR35? I would. Simple business decision. If a client says you have to have so much PII, you go get it. If they said you had to have NI5 Indemnity Insurance for them to certify the contract non-SDC, you'd go get it. It wouldn't be that expensive because it wouldn't cover that much. It would only cover 1/3 of the current TLC35 cover (the employers NI portion).

QDOS would lose a lot of clients on their current IR35 cover, but they'd make a killing on this new insurance.

[WordIsBond]

The IR35 deemed payment already does this to some degree (when compared to the total cost of employment through PAYE w/ both NICs). In other words, you're somewhat better off operating an IR35 deemed payment versus PAYE umbrella (for example), and you still have the option to take other contracts that are outside IR35. This will further improve w/ the zero-rated dividend tax allowance, because the 5% allowance w/ IR35 (or a fraction thereof) can be taken as a dividend and the dividend allowance applies to all marginal rates (except 45% IIRC).

Agreed. If we all end up permanently IR35 caught, Osborne actually did us a favour with the dividend tax change.

[eek]

We're discussing replacing the current IR35 fiasco with something that A) involves the engagers in enforcement and B) dumps some liability onto the engagers and C) actually works. That's what the consultation is talking about.

If the government wanted to pass legislation that made clients liable for Class 5 for SDC contracts, and said there is no longer employers NI under IR35, it certainly would be legal. Sure, it would require legislation to change the current rules, but that's the whole point. They are going to change the rules.

If end client paid 8-9% of contract amount it would be very close to full Employers NI on a deemed payment, after expenses, pension, and monthly NI allowance are deducted. I'm not proposing the government get less money. Under my proposal, they would get more and it would cost them less to administer it.


Really? If the employer's liability is 8-10% of the contract amount?

We're wrapping up a 60K contract right now. Under this scenario, engager liability would be maybe 6K or so. Sure, if the ruling went against us in 4 years it might climb to 12K, maybe even £15K, with interest and penalties. What is it going to cost to insure that amount? Less than £1K, easily.

Would you pay £500-1000, if needed, to get a £60K contract outside of IR35? I would. Simple business decision. If a client says you have to have so much PII, you go get it. If they said you had to have NI5 Indemnity Insurance for them to certify the contract non-SDC, you'd go get it. It wouldn't be that expensive because it wouldn't cover that much. It would only cover 1/3 of the current TLC35 cover (the employers NI portion).

QDOS would lose a lot of clients on their current IR35 cover, but they'd make a killing on this new insurance.

My fear is that its currently fairly easy to win an IR35 case. You show Moo or substitution and your done.

Proving a negative and showing that you were never under the hypothetical threat of SDC is a far harder task. Even when the cowboy companies have tried to cover all three employment tests in their scheme designs I can't think of one that has managed to convince a tribunal that their non-"employees" were not under SDC...

Insurance may work as its rarely required, and so it may be cheap. My fear is that it won't be because the test needed to avoid paying out is far, far harder to pass.

[jamesbrown]

Yep, SDC is a done deal because its the only bit of the employment law that is left standing that HMRC win on.

I do however wonder if we are looking at this too deeply and whether something as simple as the tier 2 visa rules will work...

1) does someone in the organisation already do this job Y/N - (solves the specialist contractor issue there before you go any further)...
2) when you advertised the vacancy as a permanent / fixed term contract did viable CVs come in (simple third party check there)..
3) if not then potentially not under IR35 subject to additional checks....

The advantage of the above would be that it can be shown to both protect HMRC from IR35 abuses (the examples in the discussion document are caught) while promoting a flexible economy when a company needs to solve a skill / capacity issue. It ain't great but as these are the rules already used for skill shortages in two departments its not something they can really argue against..

Yes, I recall you mentioned this before, and I see what you mean now. What I'm about to say should be taken with a pinch of salt because I'm not an average contractor w/r to how I work, and this would benefit me, but anyway... I can definitely see the elements of scenarios that are not SDC caught along the lines of your (1) and (2) because they point to a distinct need for a specialist competence that is not readily available within the organisation. I think that's pretty clearcut w/r to SDC. Likewise, I can also see the case for a scenario that involves 100% working offsite, i.e from a site that is not under the control of the client (the same scenario puts you outside the agency legislation, along with being an entertainer and a couple of other things).

So I think there are some clearcut scenarios that could be developed, but they are so narrow in scope as to be useless for the majority of contractors, and the bulk of those contractors are still nothing like employees; I also hate the divide and conquer aspect of making these distinctions. At the same time, I'm struggling to see any scenarios being acceptable unless they meet two conditions: 1) they are exceptionally clearcut in terms of SDC; and 2) they are relatively simple to demonstrate on request or by making third-party checks.