Freelance Limited Company (FLC) offering from IPSE

[eek]

Maybe part of HMRC's argument is also that the "employer" is dodging tax, by not having to pay NI for Ben - as in the AccountingWeb article earlier. If he was employed, then both LawCo and Ben would have to pay more (everything else being equal).

Why IR35 should be scrapped now | AccountingWEB

Nope because the entire story is about how Ben is saving money compared to Jo... If that was the sole complaint they wouldn't have example 2 where 1 is paying NI and the other receives the full amount...

[BlasterBates]

HMRC do have a point in that people are making a decision to contract because they don't have to pay NI. The decision should be based on whether you want to be a contractor and whether you can make enough money.

The intention of the law was that you setup a Ltd and pay yourself a decent salary, but that's not what happened everyone payed themselves a salary of a toilet attendant and the rest in divis.

So I'm afraid this was a loophole and was always coming.

[WordIsBond]

Maybe part of HMRC's argument is also that the "employer" is dodging tax, by not having to pay NI for Ben - as in the AccountingWeb article earlier. If he was employed, then both LawCo and Ben would have to pay more (everything else being equal).

Fair enough. But they still aren't paid the same, not even close. It's extremely optimistic to assume only two weeks of bench time a year, for instance.

[eek]

Fair enough. But they still aren't paid the same, not even close. It's extremely optimistic to assume only two weeks of bench time a year, for instance.

The thing I thought about when I first saw the study was sickness and maternity pay which would rapidly reduce Ben's £70,000 income downward... I'm not sure bench time is accurate as both examples are imaginary permanent roles so no bench time may be valid...

[WordIsBond]

HMRC do have a point in that people are making a decision to contract because they don't have to pay NI. The decision should be based on whether you want to be a contractor and whether you can make enough money.

The intention of the law was that you setup a Ltd and pay yourself a decent salary, but that's not what happened everyone payed themselves a salary of a toilet attendant and the rest in divis.

So I'm afraid this was a loophole and was always coming.

The intention was to avoid double taxation by not taxing dividends when corporation tax had already been paid, and also to encourage investment, since investment strengthens the economy and creates jobs, with a reasonably favourable tax regime for dividends.

In that regard, the general idea of a FLC isn't bad in concept.

A one-man band isn't really an investment vehicle in the same sense most corporations are, and it is generally only creating a job for one person. Government doesn't have the same vested interest in encouraging one-man bands as it does other job-creating investments.

But it is more of an investment than IR35 allows. IR35 says it is all employment, and draws no distinction between the one-man contractor and the employee, even though there is risk, investment, potential for hiring, support for other industry (accountants, insurance), etc.

An FLC that tries to reflect the middle ground, that this isn't a normal job-creating business and it isn't regular employment either, in concept would be reasonably fair. But you don't have to have a new structure. All you have to have is an agreement from HMG that if a one man band pays themselves a PAYE salary of, say, 1/2 of net contracting revenue (after expenses), they are outside IR35. The rest could be retained to build a reserve for future bench time, or paid in dividends, whatever -- because it IS a business, not normal employment.

If they did that, a lot of people would just pay the salary and the PAYE taxes, and have done with it. Their tax situation would still be better than the permie. HMG would get more revenue than they are getting now, and HMRC could focus its investigations on those who choose not to take that option.

There are a lot of easy ways to simplify this thing, get more revenue, and actually be somewhat reasonable. They don't include trying to drag everyone into IR35.

[WordIsBond]

The thing I thought about when I first saw the study was sickness and maternity pay which would rapidly reduce Ben's £70,000 income downward... I'm not sure bench time is accurate as both examples are imaginary permanent roles so no bench time may be valid...

Presumably, with Ben, it would be paternity.

I didn't realise we were discussing a permanent contract. In that case, Ben would surely end up inside IR35 before long anyway, so you just need to enforce what you have.

[Zero Liability]

There are a lot of easy ways to simplify this thing, get more revenue, and actually be somewhat reasonable. They don't include trying to drag everyone into IR35.

Ultimately, they will have to come to grips with merging PAYE/NI (and by this I include ErNI), which is one cause behind all these so-called abuses. We all know why they don't want to, but I am hoping Osborne is genuine in keeping an open mind towards the concept and gets the wheels moving sooner, rather than alter.

[FK1]

...
It's easy to destroy. Jo gets a lot more than Ben.
...
It really doesn't matter if Ben and Jo do the same job. Their total compensation isn't close, and it is perverse for HMRC to argue they should pay the same tax.

I would add the bench time and uncertainty as the major factor. It is not fair to compare them while they both working, it makes sense to see the bigger picture than a contract duration.

A time between contracts could eat all savings and it is rather stressful time than relaxed holidays. That is a main difference between them.

P.S. They do not mention a contract duration. How would a particular tax inspector interpret that? It might be 12, 24 and 36 months as well. It is not a clear example without time. And does it mean if a contract less than 12 months then it is not under a radar? https://www.gov.uk/government/upload...n_document.pdf

Case study 1: A legal company hires two lawyers in 2015-16 who do the same job and work on the same cases.
The company pays the lawyers gross payments of £70,000 per year.
Jo works as a direct employee. The company deducts income tax and employee NICs from her salary and pays
employer NICs on top. The total tax and NICs paid on Jo’s salary is £30,612 (£22,071 by Jo and £8,541 by the
company).
Ben works through a PSC and does not operate IR35. He pays himself the most tax advantageous remuneration
strategy combining a low salary and dividends. His total tax and NICs liability is £16,900.

[WordIsBond]

Ultimately, they will have to come to grips with merging PAYE/NI (and by this I include ErNI), which is one cause behind all these so-called abuses. We all know why they don't want to, but I am hoping Osborne is genuine in keeping an open mind towards the concept and gets the wheels moving sooner, rather than alter.

Absolutely, that is a big part of the solution. (I'm a lot less optimistic that it will ever happen, and I'm not a believer that Osborne will ever do something that can be demagogued as unfair to workers, as that would be.)

Absolutely, as long as you have disparities in the system, people will find ways to move income into the low-tax regimes, and if you block them you will defeat the purpose of the disparities.

The NI/income tax merger won't solve the whole thing, though, unless you remove the investment incentive from the tax system, and that would probably be disastrous as well as punitive for a lot of pensioners.

[BlasterBates]

The intention was to avoid double taxation by not taxing dividends when corporation tax had already been paid, and also to encourage investment, since investment strengthens the economy and creates jobs, with a reasonably favourable tax regime for dividends.

In that regard, the general idea of a FLC isn't bad in concept.

A one-man band isn't really an investment vehicle in the same sense most corporations are, and it is generally only creating a job for one person. Government doesn't have the same vested interest in encouraging one-man bands as it does other job-creating investments.

But it is more of an investment than IR35 allows. IR35 says it is all employment, and draws no distinction between the one-man contractor and the employee, even though there is risk, investment, potential for hiring, support for other industry (accountants, insurance), etc.

An FLC that tries to reflect the middle ground, that this isn't a normal job-creating business and it isn't regular employment either, in concept would be reasonably fair. But you don't have to have a new structure. All you have to have is an agreement from HMG that if a one man band pays themselves a PAYE salary of, say, 1/2 of net contracting revenue (after expenses), they are outside IR35. The rest could be retained to build a reserve for future bench time, or paid in dividends, whatever -- because it IS a business, not normal employment.

If they did that, a lot of people would just pay the salary and the PAYE taxes, and have done with it. Their tax situation would still be better than the permie. HMG would get more revenue than they are getting now, and HMRC could focus its investigations on those who choose not to take that option.

There are a lot of easy ways to simplify this thing, get more revenue, and actually be somewhat reasonable. They don't include trying to drag everyone into IR35.

I fully agree, should really have been done sooner. In my view contractors should have been paying approx 50% maybe 60% to themslves as PAYE and you say keeping the rest in the business etc, with dividends being a small part of their earnings.

I suspect if there was no NI advantage, that's how it would have been.

Basically you can see the point, a contractor is a high earner making minimal contributions. The task is to come up with a figure that would reflect a fair contribution.

I think really contractors should be pushing this, because if this doesn't get sufficient momentum everyone will be inside IR35 and not being able to offset expense.