End of IT contracting this June?

[jamesbrown]

When you say it shouldn't be arbitrary, you are effectively saying government policy should be neutral, that there shouldn't be tax incentive, there should only be tax compensation for what is quantifiable.

No, I'm not saying that it should be neutral, I'm saying that it should be justified. However, I fear the difference between justified and quantified is dancing on the head of a pin; afterall, once an incentive exists it is "quantifiable". The issue is that the current incentive has not been thought through or justified adequately.

Once you move into the realm of "incentive" or "encouraging" it is always going to have an arbitrary component. How valuable is the thing you are encouraging to society, and how much should you encourage it? Those things are impossible to quantify.

The starting point is to determine what needs to be encouraged. This hasn't been expressed with sufficient clarity. Currently, the system favours dividend income for contractors that operate through companies, not business growth/investment or flexible working per se. If we want to encourage flexible working, the critical starting point is to ensure that sporadic income can be deferred for tax purposes and, therefore, taxed at more representative (fair™) marginal rates. Clearly, IR35 fails on this point by introducing an overly burdensome and subjective test on which businesses should be allow to make and defer payments to their shareholders (vs. their "disguised employees"). I think there's a very clear and convincing case for eliminating IR35, but it's undermined by having large differences in the way various forms of income are taxed. It shouldn't be about the marginal rates, but about which marginal rates are paid. Flexible work implies sporadic income, and fair™ use of income deferral. It also implies a fair™ system for offsetting business expenses and supporting R&D. It doesn't imply a large bonus w/r to marginal tax rates just because a shareholder can receive a dividend.

tax credits

PC approves this sentiment

[cykophysh39]

Fake news

Is that the fake news I hear Donald bang on about so often?

That is one massive spammy affiliate website, and you must be desperate to get links!

[SussexSeagull]

Problem is Civil Servants suggest these things and they know next to nothing of the reality of self-employment.

Most of us are basically freelancers who had to go create Limited Companies out of necessity. Once we had a corporate entity we started looking at ways to reduce tax liability (admittedly some more keenly than others!). In exchange we basically signed away employment rights and job security.

So far so good but everyone fancied a piece of the pie and too many of us started behaving like employees with slightly different contractual and renumeration arrangements. If a contractor is sitting at the same desk for years on end people are going to start asking why they get a better deal to the permanent employee next to him. Eventually the HMRC was always going to call time on it.

Sadly genuine consultants and those of us who go out of our way to stay out of IR35 will be caught up in it.

We really can't say we didn't see it coming.

[SueEllen]

Problem is Civil Servants suggest these things and they know next to nothing of the reality of self-employment.

Most of us are basically freelancers who had to go create Limited Companies out of necessity. Once we had a corporate entity we started looking at ways to reduce tax liability (admittedly some more keenly than others!). In exchange we basically signed away employment rights and job security.

So far so good but everyone fancied a piece of the pie and too many of us started behaving like employees with slightly different contractual and renumeration arrangements. If a contractor is sitting at the same desk for years on end people are going to start asking why they get a better deal to the permanent employee next to him. Eventually the HMRC was always going to call time on it.

As an employer why would you hire someone permanently if your project was only for 8 months? You may as well get a contractor in and then wave bye bye to them after 8 months.

As a public body including HMRC why would you hire someone permanently and have their pension liabilities for life? You may as well get a contractor in and wave bye bye to them after 5 years.

[SussexSeagull]

As an employer why would you hire someone permanently if your project was only for 8 months? You may as well get a contractor in and then wave bye bye to them after 8 months.

As a public body including HMRC why would you hire someone permanently and have their pension liabilities for life? You may as well get a contractor in and wave bye bye to them after 5 years.

They are both valid scenarios (well any scenario is valid if you are willing to pay for it but you know what I mean).

It is a problem of perception. We know that we are saving the client money in ways other than pay/invoicing and the accounts and HR departments get it as well but to the untrained eye a lot of contractors come in at the same time as everyone else, do the same job then leave with everyone else. This isn't helped by a majority of contractors who want to keep their heads down, not rock the boat by trying to stay out of IR35 and rack up the renewals.

[WordIsBond]

No, I'm not saying that it should be neutral, I'm saying that it should be justified. However, I fear the difference between justified and quantified is dancing on the head of a pin; afterall, once an incentive exists it is "quantifiable". The issue is that the current incentive has not been thought through or justified adequately.

Of course.

If we want to encourage flexible working, the critical starting point is to ensure that sporadic income can be deferred for tax purposes and, therefore, taxed at more representative (fair™) marginal rates. Clearly, IR35 fails on this point by introducing an overly burdensome and subjective test on which businesses should be allow to make and defer payments to their shareholders (vs. their "disguised employees"). I think there's a very clear and convincing case for eliminating IR35, but it's undermined by having large differences in the way various forms of income are taxed. It shouldn't be about the marginal rates, but about which marginal rates are paid. Flexible work implies sporadic income, and fair™ use of income deferral. It also implies a fair™ system for offsetting business expenses and supporting R&D. It doesn't imply a large bonus w/r to marginal tax rates just because a shareholder can receive a dividend.

Agreed.

fair™

But what is that? How do we get there?

We're up against several difficulties in eliminating the imbalances, in part because we don't have a flat tax. One example of the problem is with corporation tax.

If you want to roughly equalise taxation for different kinds of income, you have various problems. A portion of the taxation of every shareholder is corporation tax, but that's the same for everyone. It applies to the pensioner who doesn't even have the personal allowance in income -- he gets hit with CT, effectively, against his shareholding. It also applies to the additional rate taxpayer -- and at the same rate.

You could eliminate CT entirely and increase dividend taxation accordingly. That would solve part of the problem, but it would mean non-UK shareholders in UK companies would be tax free. Well, maybe the inward investment would be worth it. Or maybe you require companies to withhold a 25% tax on any dividends paid to non-UK taxpayers. That would add a complication but getting rid of corporation tax would compensate them nicely for it.

If you did that you'd have to significantly reform ER, obviously. And you'd have to look carefully at capital gains tax, because companies would have a strong incentive to retain funds (tax free) rather than disburse dividends, which would push up share prices, so you'd have income being pushed into capital gains rather than into dividends.

But if you tax capital gains exactly the way you tax dividends, to solve that problem, then you have the problem that some of the capital gains aren't really gains at all, they are just inflation. So are you going to tax people heavily on what is effectively just inflation? You can inflation-index gains, to counteract that, but then why aren't you inflation-indexing interest?

And round and round we go. There's a reason why equal treatment of all income hasn't just happened. It's pretty hard to do equitably unless you have a flat tax, and the great British electorate isn't going to go for a flat tax.

[jamesbrown]

Of course.
But what is that? How do we get there?

It's what I described above. To me, income deferral is justifiable and adequate. If you want to take more in a given year, you pay more tax. Tax all forms of income equivalently, and allow business taxes, R&D and other business expenses to be fully offset. Reform being "hard" is basically a disguised argument for maintaining the status quo. How difficult would it be to dramatically improve on what we have now? Not at all. By definition, a fair system would encourage business growth and investment for business reasons, primarily, and not tax reasons (tax = tail wagging the dog). Let's face it, tax remains an important driver behind the choice of business structure for many contractors.

Anything else (e.g. improved marginal rates for dividend income) is just a "bung". I'm not against that, per se (because I do think the tax system has some role in encouraging entrepreneurship), but it's inherently more difficult to quantify, so you can expect a polarised debate with the IFS, Resolution Foundation and many others on the opposite side.

[jamesbrown]

Oh, and by the way, my natural instinct is to achieve equivalence by lowering employment taxes, rather than increasing taxes on the self-employed and company directors

[WordIsBond]

Oh, and by the way, my natural instinct is to achieve equivalence by lowering employment taxes, rather than increasing taxes on the self-employed and company directors

We certainly agree there.

And I agree that it wouldn't be hard to improve the current mess. But I don't think "tax all forms of income equivalently" is possible unless you go to one of the following: 1) flat tax rate 2) 0% corporation tax or mandatory look through. If you have a progressive tax system, and corporation tax is part of the picture, you have to make corporation tax progressive, which is not really feasible. So you have to remove CT from the picture. But mandatory look-through undercuts your income deferral principle (which is of course sound).

"Tax all forms of income equivalently" is fine in principle. In practice, I don't think it is politically palatable.

[eek]

"Tax all forms of income equivalently" is fine in principle. In practice, I don't think it is politically palatable.

Employers NI makes that impossible.