Originally posted by madame SasGuru
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Roughly speaking, the value of employment rights is calculated by taking the price a client would be willing to pay for a contractor, and subtracting from it the things they would be willing to pay for an employee of equivalent value -- wages, Employer NI, pension contributions. The difference is what it is worth to them to not have to give the contractor employment rights -- security/MOO, holiday pay, sick pay, redundancy pay, etc. That value, whatever it is, is something that the employee receives and is not taxed on it. The contractor does not receive those things but he does receive money (a higher rate) to compensate him for them, and is taxed on it.
In the example I gave above, ABC Ltd was willing to pay £50K (tax, pension, salary) for Thomas, but £70K for Charlie. There's a £20K differential there, and it is all about the value of employment rights. Maybe £20K is too high, they'd only pay £65K for Charlie, and the employment rights are only worth £15K. Doesn't matter the amount, the point is that it is worth SOMETHING and Thomas doesn't have to pay tax on it and Charlie does. If Charlie has to pay tax on the same basis and at the same rates that Thomas does, AND has to pay tax on the money he gets in lieu of employment rights, he's being unfairly taxed. Thomas gets the employment rights tax free.
If HMRC would give PSCs an "employment rights allowance" where a certain percentage is not taxed because they are compensation for employment rights, IR35 would be more equitable/less punitive and compliance would be better. If you really think you only have 10% compliance and 90% non-compliance you are admitting that you've structured the thing very badly. Either you've made it so complicated that it is too hard to comply, or you've made it so imbalanced that people have such a strong incentive to cheat that 90% of them will. There are few areas of life where 90% will cheat.
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