Freelance Limited Company (FLC) offering from IPSE

[eek]

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Carry on consulting | Taxation

[eek]

Google (cache) is your friend

Carry on consulting | Taxation

Having only really skim read it, does it offer anything beyond employers NI should be paid regardless of employment method?

[jamesbrown]

Having only really skim read it, does it offer anything beyond employers NI should be paid regardless of employment method?

That seems to be the main thrust, and it doesn't stand up IMHO; employers may remit employer's NI, but this masks the reality. It also seems to have missed the point on SDC, namely that this is precisely what is most likely to change, i.e. the alignment of IR35 with the T&S and agencies legislation to have a common determination w/r to SDC. I like the spirit of the article, but the substance is lacking. The argument needs to focus on what's actually in front of us, not what we'd hope to be in front of us.

[eek]

That seems to be the main thrust, and it doesn't stand up IMHO; employers may remit employer's NI, but this masks the reality. It also seems to have missed the point on SDC, namely that this is precisely what is most likely to change, i.e. the alignment of IR35 with the T&S and agencies legislation to have a common determination w/r to SDC. I like the spirit of the article, but the substance is lacking. The argument needs to focus on what's actually in front of us, not what we'd hope to be in front of us.

Which in one sentence shows the flaw in both that document and the FLC proposal...

[jamesbrown]

Which in one sentence shows the flaw in both that document and the FLC proposal...

Right, I entirely agree, so this is where we are IMHO:

• Changing the focus to SDC is going to be the centrepeice of any revision to the IR35 rules, bringing it into line with the agency legislation and T&S (which will surely proceed)
• There is likely to be a requirement on the client as gatekeeper w/r to the application of SDC
• It's straightforward to outline the potential impacts of the above changes
• It's less straightforward to offer a workable improvement to the above (as opposed to something completely off base, like the FLC), but we either need to do that or express frustration and capitulate

Arguments about the details of the T&S or why the FLC isn't workable or why freelancers pay more or less tax than a notional employee is going to miss the point. Perhaps we can also address low-hanging-fruit through simpler rules (e.g. low-paid workers exploited by employers), but I don't think this is the most pressing problem for the average punter on CUK/IPSE (and we also shouldn't throw low-paid freelancers under a bus, I think we all agree). Clearly, HMG don't have a complete proposal w/r to clients operating payroll, and they will need to be put straight on that (I have no doubt this will be a common theme in the responses). I think any solution needs to aim for:

• A requirement that the client must have the contract and working practices reviewed professionally w/r to SDC (applicable to both IR35 and T&S). This wouldn't need to happen for every role and could be advertised in advance in most cases.
• If the review fails, and the PSC accepts the terms, the client notifies HMRC, via the new reporting rules (possibly extended to PSCs even when they don't have subcontractors), that a deemed payment should be operated by the PSC. Having the client operate payroll is completely unworkable (mechanistically and from an employment law perspective). The stated aim of the T&S consultation and the IR35 discussion is not to prevent people operating through a Ltd company, but to reduce the tax benefits of doing so.
• If the review passes, the PSC is responsible for retaining the review and any supporting evidence during the contract. The PSC operates payroll and T&S as usual. In the event that a status inquiry finds against the PSC, liability should be aligned for the IR35 and T&S legislation (two options were presented in the T&S legislation).

Now, I think there are some obvious problems with the above. First, it will be difficult to incentivize the client to make a reasonable judgment about SDC, as opposed to a blanket determination that (a right to) SDC applies. It's possible that HMG is actually aiming for this with agency contractors, although I'm not convinced (a "presumption" doesn't mean much). I'm not in any way naive about the likely outcome w/r to the action of clients, but this is the crux of the problem afterall. However, it may be possible to mitigate some of the downside risks. One possibility would be for the client to have a tax insurance policy in place for those contracts/working practices that are not subject to SDC (as some PSCs do currently). The practical reality, though, is that the bar will probably be sufficiently high, or the incentive for clients insufficiently strong in the long-term (e.g. by way of increased rates etc.) versus the short-term risks, to mean that many more PSCs would be caught under the new regime that wouldn't be caught at present.

This leads to the second and related problem. Unless there are many more caught under the new regime (by virtue of many more reviews taking place that wouldn't have happened previously or many instances where reviews failed), it is unlikely to be workable w/r to the stated objective of the IR35 discussion (i.e. increasing the tax take for IR35). Of course, many contractors that currently take the p*ss would no longer have that option, but that doesn't mean it's fair. We cannot lose perspective on what is happening here. We are being asked for ideas about how HMRC can increase their tax take through IR35. Either we point to IR35 (and son-of-IR35) as an unmitigated policy failure (whether directly or tacitly through something like the FLC) or we propose something that is squarely accepting of the broad outlines of the approach that HMG is looking to implement, while trying to make sure it's done as "fairly" as possible.

[BolshieBastard]

Ah, pcg, sorry, IPSE shafting contractors again. Who'd have thought it, eh?

[WordIsBond]

Kirk's article points to one of the biggest problems with IR35 -- the whole risk of employers NI has been transferred to the worker. Addressing that could be a major part of a workable solution. What do you think of this?

1. Any Ltd company contractor that within a two year period A) has more than one client and B) is engaged for less than 9 months by any one client is NOT an employee of that company and is not subject to IR35. (Everybody knows that anyone who is bouncing around between clients is not an employee, they are running a business. Quit pretending that you can twist their working practices into employment. Tweak the 9 months to 12 if you want, the two years to three, whatever. But these people are not employees, they have their own business, with multiple clients. And they can deduct their travel expenses, too. Give me a break.)

For those with a single client for longer engagements:
2. Clients either certify that a contract is not subject to SDC, or pay the employers NI for a deemed payment. (Assume 5% expenses, and 5% pension contribution. Or create a new class of NI contributions and make it a flat 8% or whatever, of the contract.) This gives clients at least some incentive not to automatically throw contractors into IR35, but shields contractors from the worst of the damage if they do.
3. Contractors could offer to indemnify the client against IR35 claims by purchasing insurance (on a contract by contract basis). If a contractor thinks a contract is safe, they can offer the insurance and then the only real risk to the client of losing a case is reputational. QDOS and others will quickly offer two products, one that covers the client only, another that covers both client and contractor. If clients want to be indemnified, or want to take the risk, or want to just pay their NI payment, if contractors want to try to persuade the client with an insurance contract or just want to go within IR35, well, it's a business decision for both parties and a matter of negotiation.
4. Forget the travel expenses change. Just bury it. It's a grave injustice to anyone who is truly running a business. Shorten the 24 months to 18 or even 15, if you think you need to. (There does come a point when you say, "No, you shouldn't be getting travel expenses if you are going to be there forever." I don't think 24 months is a bad cutoff line, but whatever. People would survive if it were 18.) Just because someone is under supervision or control in their work doesn't mean they should be told they either have to move home or can't take a contract at some distance from home. Come on. Join the real world. These are not people who have a permanent job that justifies moving house to be within a reasonable commute. Just stop. The people who are proposing this abominable idea are bureaucrats with lifetime jobs and great pensions or MPs who get THEIR expenses paid. When MPs have to pay taxes on their expense reimbursements then they have the right to think about this. THEY are under SDC, "they do just what their leaders tell 'em to."

This works. HMG is happy, because a lot of clients will just say, "No hassle, pay the tax, move on." A lot of contractors will be content to work under IR35 if the client is paying the employers NI. I would. I'd hope to avoid it half the time or so, but whatever. They will have a LOT of contracts that suddenly begin to operate under IR35.

Those contractors who are fortunate enough to have a client certify that a contract isn't SDC will have a strong case that they are not subject to IR35, and they'll be happy. They won't have clients undermine them in an investigation years later if the client has certified "no SDC." HMRC will probably almost never waste time investigating those cases because they will almost always lose.

Those contractors whose client pays the NI, but who think they can still beat an IR35 case, can take the risk if they want, based on no MOO and/or right of substitution or sheer chutzpah. They probably won't be able to buy insurance, though, and they risk heavy penalties, not just interest.

The big problem? Engagers won't like it because you just added maybe 10% to the cost of a longer contract, unless they want to take the risk (or make sure insurance is in place). But it isn't an uncertain expense that could mount over time, it's just part of the cost you budget to begin with.

Will it hit contractor rates? Perhaps some, because some clients may look to recover some of that 10%, and some contractors will have to buy insurance to cover their clients. But it is relatively straightforward, prevents the destruction of the flexible workforce, brings in more revenue, and ends a lot of uncertainty and stupidity.

It's more fair -- if engagers want to exercise control over contractors the way they do over employees, they have to say so and pay for it. They don't have to give full employment rights, maybe, but they have to pay much of the tax hit.

If it is a close call between hiring a permie or getting a contractor, this would drive some companies to hire a permie. There would be fewer contracts. But if it is a close call between taking a permie job or becoming a contractor, some would choose permie who wouldn't have otherwise. The market would adjust. Supply and demand usually wins, unless government horribly twists the market, and this wouldn't horribly twist it. It would actually rebalance it.

[jamesbrown]

What do you think of this?

There's quite a lot to respond to there, but my basic problem (and, more importantly, I think this would also hold for HMG/HMRC) is that you will find many contractors that are subject to quite a high degree of SDC that fit into the first category. In other words, it really wouldn't be appropriate to screen on the basis of these simplistic rules alone, as they bear no relationship to how real businesses (or, indeed, disguised employees) operate. It may be your opinion that contractors who operate a sequence of short-term contracts are very different from employees, but it isn't an opinion that's borne out by case law. The actual indicator you're alluding to is being part-and-parcel, but it's a secondary indicator, and the aim is to prioritize SDC.

I appreciate the clamour for simple rules, but there are no simple rules that are good rules (form either side of the fence) and so it comes down purely to which group of true/false employees you'd prioritize with those simple rules and where the avoidance strategies develop (e.g. unscrupulous employers moving low-paid employees around between entities). I think any workable strategy for HMG is going to focus on SDC, and it will be applied without fear or favour. I suppose it's possible that they may further elaborate on cases that are squarely subject to SDC and hence inside IR35 (i.e. all agency contractors in the worst case scenario), but they are not in the business of identifying scenarios that are squarely outside.

I also wouldn't completely dismiss the T&S elements (although I agree it isn't the worst of what we face) because: 1) this will make all the difference to a significant minority; and 2) the rules are heading in a common direction, so the absence of SDC should, in principle, support T&S and an outside IR35 position. In other words, it's not a concession that has any real purpose or value once it becomes aligned with IR35. Of course, you can ignore all of this if agency contracts become de facto SDC.

I agree with some of the things you are saying elsewhere. In terms if indemnification, I think that would need to operate on the client side. In my view, one of the primary reasons that HMRC will be aiming for joint and several liability is that clients are easier to pursue and are less likely to fold leaving debts (including to HMRC), whereas any insurance policy will die with a PSC (leaving the unrealistic prospect of pursuing a director if possible).

[eek]

There is far too much to read there to provide a short reply I'll try tomorrow night...

I have however gone back and reread the IR35 discussion document again.

The first thing that leaps out at me is that if they move the compliance checks and responsibility for payment back to the end client an FLC or limited company instantly becomes untenable for the end client. The end client will need assurance that all tax has been paid and the only way to do that would be to ensure that all payments are done via a trusted 3rd party...

But as the document makes clear HMRC wants clear and simple, practical solutions they can implement.... So we need to highlight the unworkable bits and endeavour to find a solution that might just work...

[Zero Liability]

I wonder if the "protected yield" figure will be revised downwards to account for the changes to dividend taxation and, if so, what will remain of it once that is done. One would have thought this would have been sufficient for HMG to lay their avaricious paws on much of this "protected yield".

Also, good comments JB and WiB, certainly a lot of food for thought, and thanks to Lisa and eek for taking it upon themselves to organise a response to this whole mess.