Freelance Limited Company (FLC) offering from IPSE

[jamesbrown]

I'll refrain from talking specifics until the documents are public, but I'm afraid this comes across as hopelessly defeatist and optimistic at the same time. The specifics of the FLC don't really matter unless the fundamental premise bears scrutiny, and it doesn't. Look at this from the perspective of HMG. There's a presumption here that: 1) the new rules being discussed openly and envisaged internally will be unable to address the problems as HMG sees them; and 2) that HMG aims to give freelancers a more "benign" operating environment. I actually think that both of these assumptions are wrong.

First, the rules being discussed and implemented (notably those on expenses and IR35) have the potential to dramatically reduce incorporation for tax purposes. Second, while HMG may desire to reduce the red tape on SMEs (and they don't have a good record on this), this isn't a one-way street. They will not want to increase their own administrative burden, and that's precisely what an FLC proposes to do; as an optional structure, it cannot eliminate the need for IR35, and it will surely need to be policed alongside IR35. One is left asking: what (and, crucially, whose) problem is the FLC trying to solve? The answer, of course, is that it's trying to solve a perception among (some of) us that the operating environment for freelancers should be more benign. We should not be collateral. Whether you take that view or not (and despite some warm words, pre-election, about SMEs and freelancers), this isn't the problem or priority as HMG sees it. The deficit is the priority. The objective is to minimise incorporation for tax purposes by adopting a very high bar, regardless of the collateral (and some of that collateral isn't perceived as such).

Notwithstanding those general criticisms, from HMRC's perspective, there are some rules outlined in the discussion document that may be considered worthy of application to all PSCs. Here be dragons. If this is put forward, IMHO, the concept will be rejected outright, but some of the detailed suggestions will be misappropriated (i.e. suggestions that we were perhaps viewing as "concessions" in a broader context).

Of course, it's very easy to criticise IPSE, but they (and contractors more generally) are in a very difficult position here. I don't think there's a over-arching solution, and I certainly don't believe it can take the form of an FLC. The various parties are not in agreement about the problem. I think the best we can do is to respond forcefully to the various consultations and discussions in an evidence-based way, in order to highlight the potential impacts of adopting the approaches outlined, because I don't believe that HMG is fully apprised of these impacts. We should also offer alternatives or suggestions on the specific points raised. In putting forward anything from this FLC document, great care is needed, as some of the simple criteria mooted to distinguish between "businesses" and "disguised employments" are emphatically bad. If these were intended as some form of concession to maintain the broader simplicity of the FLC, they won't appear that way when misappropriated and applied to PSCs more generally.

[TykeMerc]

We must do something. This is something. Therefore, we must do this.

Ah so it's better to do something stupid and appear to use the (for want of a better term) "Membership Mandate" to support a bad proposal and hand a sizeable weapon to HMRC and HMG than keep quiet until a good option is available.

[eek]

Let's be honest any proposal being created at the moment needs to solve two problems

1) HMRC's need to reduce people claiming that they are self employed when they are not. Removing expenses when under sdc is part of their plan, attaching it to all agency payments is another. Any new legal entity has to be created in such a way that people won't be forced to move by their employer from an umbrella to an flc.
2) an flc doesn't fix the IR35 problem. It may increase the tax take but it doesn't ensure those people who HMRC Believe to really be employees are taxed and treated as employees.

So with 2 problems that HMRC are trying to address where is the detail in the proposal that shows how an FLC solves those issues.

[jamesbrown]

an flc doesn't fix the IR35 problem

Yep. Not only is it unable to resolve IR35, it has the potential to worsen the problem by producing a parallel set of rules. Let's face it, if those parallel rules were any good, they would be adopted more generally. This isn't a question of missing detail, it's a question of missing the point, namely that the rules surrounding IR35 are going to be overhauled and, if anything, the FLC could undermine these rules (or be perceived to do so) by offering an alternative "get out".

Although I don't like the concept of distinguishing between different types of SMEs as it may suit our narrow audience (of generally very well-paid contractors), I would be open to some form of turnover requirement as a prerequisite, along the lines that you and Lisa have suggested. I would not be open to any rules that are contrary to good business practice, along the lines of the failed BETs, or rules that are established, through case law, as being unable to distinguish between employees and the self-employed, such as length of contract or fraction of income from a particular client within a particular period. Such rules have no basis in employment case law and artificial structures will be put in place to circumvent them. No, any prerequisites must be considerably simpler than that.

However, for precisely the same reason, SDC is almost certainly going to feature prominently as well. Let's not pretend otherwise. If there are changes (and it's likely there will be changes), they will almost certainly include SDC. It is becoming central to several different pieces of legislation. I don't have an answer, but I'd like us to consider the conditions (if any) under which a client could be gatekeeper on SDC and not adopt a default position that leads to false employment in many cases, i.e. the incentive to adopt a position that is backed by a professional review. Obviously, the end user is a more realistic prospect for servicing any debt that comes due, so this needs to be addressed too. Perhaps there is scope for insurance here. In the absence of solutions, we'll probably need to adopt a principled position (and I'm not against that) and be prepared for defeat on the client as gatekeeper.

[mudskipper]

...I would be open to some form of turnover requirement as a prerequisite...

Forgetting "us" for a moment, a turnover requirement would exclude, say, a freelance photographer starting out, charging low rates to get their name known, and needing the limited liability that a LtdCo offers. Even for us there's periods of benchtime, holidays, periods of part time etc. I can't see how it could work.

[eek]

Forgetting "us" for a moment, a turnover requirement would exclude, say, a freelance photographer starting out, charging low rates to get their name known, and needing the limited liability that a LtdCo offers. Even for us there's periods of benchtime, holidays, periods of part time etc. I can't see how it could work.

That is a bad example, a photographer by definition would rarely be under sdc and also clearly on a project by project basis withe most work being short term.

I don't know where you think I'm suggesting a turnover based approach. The entire point is to give simple rules and processes that an agency can follow so

1 it's not based on turnover
2. The payment levels would be based on payments made by an agency using the payment type (hourly, daily, weekly, monthly) x specified number of hours at x times the national living wage.

The reason for that approach is that it would be possible to argue that if you are earning less than £x an hour chances are you are being supervised.

Also remember what I am looking at here. The current expenses proposal would not pass a judicial review because it treats me differently as an associate of blue chip consultancy compared to employee of same company. The turnover approach solves this issue while also fixing the reason why the unions forced limited companies into scope

[LisaContractorUmbrella]

Having read through the document quickly it seems as though the cornerstone of the proposal is that there be a minimum PAYE salary of, say, 30% of turnover - everything else is just fluff. This would up the tax take for the Treasury and would keep the quiet for a while no doubt but I wonder how long it would be before the 30% became 40% and then 50%? As a business model it only works if IR35 is scrapped or working through an FLC makes you immune from investigation under IR35, otherwise you're in the same position as you are now only worse off.

The document seems to just accept that single person Limited Companies are a tax avoidance vehicle which I think is an unfortunate concession. Some companies call themselves umbrella companies but they're not - some people incorporate who shouldn't but that doesn't mean that the vehicle itself is flawed.

HMRC have said that they have a problem with the number of workers, especially low paid workers, who are operating through umbrella companies and single person Ltd Co's who shouldn't be - the simple solution is to take away that option. If a worker is on Living Wage + 20%, or less, then an umbrella company or a single person Ltd Co should not be an option. Legislation such as this would not need to be constantly reviewed as it is aligned with Living Wage, it would be simple to police through RTI and agency reporting and, if Government had the gumption to ban zero hours contracts, vulnerable low paid workers would be back in safe, protected, permanent employment.

The downside will be the increased cost to business but that could be offset in any number of ways e.g. tax concessions for offering private health care to staff which would then relieve pressure on the NHS

[stepping off soapbox and going back to work now]

[mudskipper]

As a business model it only works if IR35 is scrapped or working through an FLC makes you immune from investigation under IR35, otherwise you're in the same position as you are now only worse off.

I read it that it would make you immune from investigation, as long as you complied with the operating criteria. If, for whatever reason - choice or circumstance, you failed to meet the operating criteria, then you would again be at risk.

[mudskipper]

That is a bad example, a photographer by definition would rarely be under sdc and also clearly on a project by project basis withe most work being short term.

I don't know where you think I'm suggesting a turnover based approach. The entire point is to give simple rules and processes that an agency can follow so

1 it's not based on turnover
2. The payment levels would be based on payments made by an agency using the payment type (hourly, daily, weekly, monthly) x specified number of hours at x times the national living wage.

The reason for that approach is that it would be possible to argue that if you are earning less than £x an hour chances are you are being supervised.

Also remember what I am looking at here. The current expenses proposal would not pass a judicial review because it treats me differently as an associate of blue chip consultancy compared to employee of same company. The turnover approach solves this issue while also fixing the reason why the unions forced limited companies into scope

But we are talking about the FLC proposal, rather than the IR35 review (although I do believe the two overlap)

[jamesbrown]

Forgetting "us" for a moment, a turnover requirement would exclude, say, a freelance photographer starting out, charging low rates to get their name known, and needing the limited liability that a LtdCo offers. Even for us there's periods of benchtime, holidays, periods of part time etc. I can't see how it could work.

Yes, this is my basic concern too (i.e. I'm trying to think beyond what makes sense for us as, generally well-paid, contractors). On the one hand, you do want to screen out the large number of low-paid workers that are being guided into using Ltd companies for a mixture of tax purposes (benefits on both sides, but mainly the employer) and employment law purposes (benefits the employer). A turnover approach (and I use this as a shorthand) is quite a crude way of doing this, but I'm willing to listen.

I think we're just looking for a prerequisite or screening mechanism, rather than an over-arching solution (i.e. SDC will still be needed). However, we're trying to address the symptom (too many companies) rather than the cause (unscrupulous employers). It would be better to address the cause somehow. For example, is there some way of imposing a meaningful penalty regime on employers that require or otherwise guide low-paid workers into incorporation for tax/employment law purposes (i.e. penalties that require them to be seen to be doing the opposite, if anything)? In the new joined-up environment, one would think that it would be fairly straightforward to identify candidates for investigation.