An IT contractor has been hit with a £99,000 tax bill after the High Court ruled that he should be taxed as an employee of the company he undertook work for. Jon Bessell, 50 per cent owner and sole director of Dragonfly Consulting, carried out work for motoring organisation AA for three years until 2003. Bessell is an IT …
Why always IT?
Accountants and Lawyers have been using the same loopholes for years, so why is IT the target of all this?
Several thousand IT workers have started banging their heads against the wall in disgust, while several thousand lawyers and accountants are punching the air at the work coming their way soon....
Just pay your tax & NI, sunshine. The rest of us on PAYE salaries don't get a choice about it, so why should you? Great decision closing off another loophole quite a few contractors leech off the rest of us. Bet he was more than happy to drive on roads, have a GP, use schools the rest of us paid for through tax. Sort out the whole 'salary as loan' and 'decreasing value currency' fudges whilst you're at it please, Special Commissioner.
so is tht the end of contractors
Well, is that the end of contracting in this country ?
Are we all going to have to be employed by a company, and not work for ourselves ?
I'm a small contractor and have been in employment with a local authority for 1 year with a 6 week break. I'm little worried. unless you can rake it in i don't think it's worth it (especially with my agent's fee). would rather be an employee with a pension, car and dental.
Apples and oranges
So he gets taxed as an employee, even though as a contractor he does not have the employment protection and other benefits that he would have had as an employee. Can't a value for that be offset against his taxable income?
crock of shite
The UK Government is run by monkeys and the IR35 is a crock of shite. I presume that if contractors are to be classed as employees now that they will also be entitled to sick pay, holiday pay, BUPA, redundancy etc etc etc … Why does it always seem that anyone working for a living rather than sponging of the government are being well and truly shafted up the back passage… Best thing to do is feck of from the UK and let it sink along with all the illegal immigrants swarming in..
Jon Bessell, my heart goes out to you and I hope you recover from this obvious pile of crap you have been dealt!
Not good for we contractors, but...
...does this mean that he can now sue the AA for not having provided him with paid holidays, pension contributions, training and the various other benefits that employees enjoy? And will the AA have to pay the Employer's National Insurance that would have been due if he had actually been an employee?
Headline is wrong
"Freelancers might be taxed as employees after High Court ruling"
No, this ruling only validates IR35. This guy's position is quite firmly inside IR35 and he should have known he would have been stung for the taxes. Having no substitution clause and no control over his work is a double-whammy no-one can expect to recover from. But freelancers who are sufficiently careful about working outside IR35 will have no additional problem from this ruling.
What I want to know is how much he was earning to avoid paying £99,000 in NI over three years. Sounds like it was a pretty cushy number.
As a Taxpayer, all I have to say is...
Diddums. [ducks to avoid slings and arrows of outraged contractors]
Paris because it is about time someone got shafted.
So was he legally an employee of AA in the eyes of the law now?
He should look on the bright side!
1) He wasn't given redundancy pay when his AA work ran out
2) He wasn't given annual holiday
3) Nor any of the other standard benefits that AA provides its employees
So what's the limit on contract lengths? Surely this ruling effectively kills off the ability to contract out a job to someone for more than 6 months without them being classed as an employee?
On the other hand, why should he be allowed to funnel money through a company and avoid paying NI and income tax, when it is clearly income even if he claims it is a dividend he only has to pay CGT on? This guy must have been earning around £80,000 a year to rack up such a tax bill over three years as well, so I have little sympathy.
Have I missed something?
How is this different from all the other IR35 stuff? We fought, we lost, we changed our working arrangements. It's a bit late to still be moaning.
Good news for the genuine freelancer?
I can just hear the howls of protest from the same brigade who cried Wolf at IR35!
But having spent 10 years as a genuine one-man-band (never an "employee-equivalent" role, and at other times worked as a wage-slave employee, I have no sympathy. The tax benefits of self-employment are (rightly) intended to help people deal with uncertain and intermittent income.
When pseudo-employees abuse the system, it damages it for everyone else. Concrete evidence for that is the rise of taxation on small business even as bigger business got a reduction in their corporation tax: the government is targeting abusers and hitting the legitimate along with them.
Great, more victims
The only legitimate thief in the land, who just happens to have the most guns by the way, now has another cache of victims to prey upon.
Liberty? What liberty?
No effect then
"Not only does it affect my family and me, but all the other freelance professional consultants who are trying to earn an honest living,"
Has anyone met an honest freelance consultant, i.e one that has never claimed personal expenses as business costs?
Have I missed something here?
To be honest, this seems like yet another skirmish in the IR35 war. I don't see anything in this case that contractors haven't been warned about for the last several years.
3 years for one client, in a role that sounds like it was heavily directed by the client in terms of how the work was done, when, where and by whom. I have to say I'd be wary of trying to get that contract in my books as being outside IR35....
But it's a heck of a whack to be delivered in terms of a tax bill.
Bessell is an IT systems tester and worked almost exclusively
Important word there.. "almost". As in, not. As in, get your grubby paws of his dosh.
I think that is why you get a higher hourly rate.
contracting is not freelancing.
erm, I am a freelancer. I have about 5 regular clients that I visit, pick up project work, return a while later and hand it over. I am not in the slightest concerned. This doesn't affect freelancers.
I mean, you are clearly not a consultant are you if you spend 3 years in the same place (regardless of what you own company name is)? You know the rules, stop crying. At least he'll have his memories of the good times and the high cash flow.
get off the gravy train, and then you might get some sympathy with this IR35 nonsense.
What is it with apostrophes?
"...assessment of his work undertaken by AA manager's was..."
I think you'll find you mean "managers"....
Score one for The Man
Its not uncommon for large and reputable organisations (*cough* BBC *cough*) to use large numbers of "freelancers" - who basically work the same job as permanent staff, get taxed like permanent staff, except they don't have the pay, job security, benefits or protection employees have.
I'm quite sure the AA will be able to ....
... hire a lawyer and prove they owe Mr. Bessell and the Inland Revenue zero redundancy, zero PAYE, zero Employers N.I., etc., etc. Isn't it odd how the little guy gets fucked in the ass, while the big corporation gets away with anything they want.
/Fat PAul, because, like the law, he's an ass too !
They'll get you in the end!
When I went contracting after 12 years as a permie, I went straight to reputable umbrella company, with wife, kids and mortgage I didn't need the taxman taking his pound of flesh when it got my sums wrong. It cost me a little more in admin fees, but at least I slept well at night!
It isn't always IT.
Tax office have been trying to do this to couriers for even longer not to mention contract builders. As soon as an industry appears to be avoiding tax they go for it regardless of the intent.
Without trying to protect the IR if they continue it might just stop abuses in various industries like stopping the pay cuts that are going through the IT job scene at the moment as contractors will have to be treated as staff.
@ anonymous coward
I don't claim for my own personal expenses.
I wonder how much less he'd have to fork out if the tax relief on mileage/fuel rose in line with price hikes.
Tax & NI
for the non-contractors out there : In my experience, once you pay yourself a reasonable salary and take the rest as dividend for example, you end up paying about the same in tax (you pay less on your salary but you pay corp tax which usually ends up around the same level).
What you save on is the NI contributions only. Add to this the accountants fees, lack of paid leave or sick pay, and no other benefits apart from being told to go home with two weeks notice and no requirement for redundancy, no pension contributions or being able to claim unfair dismissal, it doesn't sound _too_ rosy does it?
Still, the government gets shafted by IT quite regularly, perhaps this is just payback? Anyone else complaining is just jealous and either too cowardly or not good enough to contract.
For example, even after the odd nip and tuck in the overall tax liability I still end up paying more tax than most people earn. Work that into your calculations (for the person who said "quite a few contractors leech off the rest of us")
Should've seen this coming
I'm an IT contractor. The way I see it is that contract roles are about filling in short term needs within a company: they have a project to deliver, they hire in contractors. They're short staffed due to permie issues, they hire in contractors. They need a specific skill they don't have in house, they hire in contractors.
This guy was there for THREE years. However he tries to explain it, that *was* a permie position he was filling. In that time he couldn't have maintained true autonomy over his own career, he has to have "gone native" within that company, it's inevitable.
@DaveE: Read before you print
You might want to brush up on IR35 before you spew your crap. IR35 goes well beyond treating contractors as employees including providing an artificial 5% cap on expenses – an limit that normal PAYE folk do not get limited to.
I left the country in 2001 rather than pay the 55%+ IR35 would have imposed on me in taxes.
Walk a mile in someone else's shoes Dave before you show what a dickhead you are…
/Paris, ‘cause she's apparently about as intelligent as Dave
Calm Down !
Yes, this may be bad news indeed. However, the Arctic Systems case went all the way and it took many years.
This muppet was with the same client (AA) for 3 years, as a testing resource he was under their direct control and they confirmed this.
Companies do have a choice - hire permies (and they, and the permies pay higher tax) or bring in freelance, disposable resources (i.e. more expensive but easy to dismiss, low overheads, no HR issues - turn the "services" on and off at will). Consultants do take risks - I'm still waiting for 6 months fees from a company that went into administration several years ago - the permies lost 1 month's pay and are top of the list of creditors when the administrator gives out anything.
So another nail in the coffin of the "Flexible Workforce" that this government touts as the "great asset" of GB Inc. Does the DWP, the BERR & HMRC actually have either a communications policy or 3 brain cells to rub together?? If they want a flexible workforce & a growing economy they don't need to push incentives like this on us.
Ex Contractor now a wage slave..
Coat is the one with the "IR35 proof" contract in it (not!)
@all the envy brigade
I'm not an IT contractor, but I do work in IT.
All I can say is, I hope the government will be happy when there will be no such thing as a flexible workforce.
Sure, some of these people can earn a lot of money, but it's not all a bed of roses. They take the risk that they will be out of work for an indeterminate length of time, and they have to fund their own training and pension. And neither is cheap.
The way the government (HMRC in particular) has constantly moved the goalposts on IR35 (and section 669) is underhand and downright dishonest. Changing interpretation of law is unforgiveable.
If this were benefit claimants having the rules changed on them and backdated, the do-gooders and scroungers would be rioting.
In fact Mr. Brown, why don't you just save us all the hassle of putting up with you for the next 2 years. Just fuck off to Barbados with your index-linked guaranteed pension and paid-for-life personal protection, and give us all peace, will you?
1) Vote conservative and *hope*
b) Stick within the framework of IR35 and not get stung
iii) Leave the country
Having left as a contractor in '95 and doing admin every month to eva....sorry....avoid tax, I moved to Switzerland where tax is fair and progressive. Now it's £100 or so for an accountant once a year and I pay a reasonable and fair amount of tax.
Don't forget your coat!! :-)
@ Steven Raith and the first AC...
I read through your comments and I can only presume that you are both as thick as shite as you obviously didn't give your points any balanced consideration before posting them? This case is all about unpaid NI contributions rather than income TAX deductions or road tax avoidance, although I'll partly conceed the point re the doctor, but it will be a slim concession at that.
Whilst I can understand your bitterness at contractors earning a lot more than your timid middle ranking salary, we do as a rule pay FAR more income tax overall than you are likely to... ever. Deductions also include paying both employees and employers NI. Despite these large deductions though, most IT contractors CHOOSE to be so for a reason, take myself... I became a contractor to avoid becoming an ignorant, bitter and unhappy career desk rat similar to that which you both seem to be.
Another reason was that it suits the lifestyle I want to live and I'm back to a new contract next week. I take six months holiday (or more if I choose to) every two years. How's your prescribed 20 something days a year?
He must have been raking it in
To work for 3 years and owe 33k in tax!!!!!
I for one am glad that this theiving bastard got this judgement.
Too many people get around paying towards the upkeep of the country.
So, he owes £99k in tax and NI for 3 years' work? He must have been pulling in at least, what, £70k a year for those 3 years? My heart truly does bleed for this "little" man and his tiny income.
I worked as a freelancer for 6 years (in publishing, in case that matters) and it's trivial to avoid being hit like this. The rules are basically the same as they always were - work for multiple clients and always retain control over how you work. If you work for just one client and do precisely what you're told, when you're told, then you can't be surprised that you're treated like an employee by the tax office. If you feel that a contract is likely to be treated as employment by the Revenue then do the honest thing - talk to the Revenue and see what they say, then talk to the client.
Stop evading taxes and pay up like honest folks.
Re: Pay up @DaveE
He did pay tax, probably at 40%, he also payed NI at the standard rate so he is entitled to drive on roads, have a GP, use schools like the rest of us.
The tax man wants him to pay employers NI and wants him to pay tax on money he has used for expenses which may or may not include money paid to his spouse (who would have paid tax and NI on that money).
While at the AA he never got paid holidays, paid training, paid sick leave, paid pension, paid medical benefits all of which those on PAYE get to some degree or other.
When his contract was over he never got redundancy pay and never got unemployment benefit.
Wish the Tories would vow to get rid of IR35
The whole thing is a socialist ploy to "protect" workers from themselves, poor things.
Also to collect more taxes from "hardworking families" who don't get the 'benefits' of PAYE employment, poorer things.
More detailed info
can be found here
It really does look like the guy should have done his homework rather than wing-it and hope he was overlooked.
<ducks back into shadows>
Re: So was he legally an employee of AA in the eyes of the law now?
Dividends are not taxed as CGT they are taxed as income. The dividend is basically added to your income and taxed at whatever band it falls into which would probably be the 40% tax band.
closing the gap
and this is how the government intends to close the gap when things are looking down, by keeping the poor poor and making the well off poorer.
old news is no news
Hang on, this story is from 2003.
We've recently had Google resurrecting a years old tale (about an american airline going/not-going bust), is this another case of a time-warp?
I thought IR35 stopped being newsworthy many, many years ago - most of us just paid the tax and upped our rates to make up the loss. Why are we hearing about this guy now.
To be fair, if the 'Revenue is squeezing him for £99K for 3 years work, then even with interest over the past 5-8 years, it does sound like he was paying zilch to the 'man and has finally been caught.
So far as I can make out from the story, there's nothing that hasn't/wasn't chewed over from every angle at the time. Move on now folks, nothing to see here.
...purely to help fat well-connected shite companies from having to compete with the cheaper, more flexible, more knowledgeable contractor. Still, I blame the latter for being spineless when IR35 was first proposed and then subsequently introduced. And as for the distinction between "freelancers" and "contractors", ie, number of clients/ length of contract, etc, etc, I have to conclude that the former do pissy little jobs and are shy of any projects with meat on them. "Knowledge Economy" LMFAO... more like an army of half-wit MS "professionals".
its all in the contract
Having no substitution clause and having apprails isnt any help in being a contractor.
Feel for the guy - £99k is heck of alot of dosh
And all the other nearly-freelancers, like footballers?
Looking forward to HMRC creaming large amounts off every footballer in the Premier League, since I'm led to believe they all have personal Limited companies, and I'd love to see them try to get right of substitution for their choice of player in the middle of a game!
And the actors, the horde of celebrities, and all the other personal companies, all now get to cough as well? Or do they get left alone because the press might care about that?
Pirate icon, for HMRC sailing in, looting the bank account, and sailing off into the sunset.
I'd like to hear
The BOFH on this one
Skull and bones because there is bound to be a tragic accident
Missing a trick here?
Are we missing a subtext here?
The whole IR35 debacle was just that, a debacle. Trying to use existing law to shovel in new working practise was always destined to lead to a mixed situation where some comply, and some do not.
What is depressing is that the only winners will be Lawyers and Accountants. We used to be a nation of shopkeepers, now we are a nation of ambulance chasers.
PH because she doesn't bother with briefs.
You should be made aware that many contractors do pay tax (personal & corporate) and ni (employers & employees), are subject to the companies act (if they are running a limited company), and act as tax collectors for the HMRC.
You should also ask yourself is it fair under these circumstances that a small limited company should be treated any differently that a large one?
You should also understand that many companies will only use the services of a limited company, this is to absolve them selves of any liability for tax.
Perhaps now you will comment a little more sensibly?
I handed in my notice to the company I work for on Monday. I'm a consultant.
(Anonymous Coward, I've been working as a full time consultant for a consulting company for a third party for 3 years, prior to that I have consulted to various companies ranging from days to a year)
I have 3 months notice to work out but after that I intend to go out contracting. During the last 3 years I've been contracted out to the third party for a reasonable daily rate, more than the daily rate I will make as a contractor.
I've NEVER avoided paying taxes or national insurance, I've always been a full time employee. I get treated as a contractor when I'm on third party site, always have been always will be, yet I pay my tax the same as everyone permenantly employed.
I don't think I've ever worked with a permenant employee (other than those employed by other consulting companies as well as the one I work for) who has put in as much effort or brought as much experience and knowledge as temporary employees.
The difference for me is motivation, up until very recently I was motivated to work for my current company, the company were accomodating and were compensating me reasonably, with promise of holding a stake in the company in the future and profit shares etc.
Employees simply get comfortable, when they get comfortable they have greater resistance to change and detest anything that changes their workload, it's incredibly visible in the unions, particularly local and national govt. employees, with union backing they basically do no work while their managers hire in contractors to perform the function of the employee.
The contractor remains there effectively as an employee, but without many of the benefits and they are never comfortable because they don't have union backing and they can't slack off.
I don't see a problem with this guys tax bill if he's going to be compensated in the same way as an employee for the 3 years he was employed, e.g. paid holiday, pension, paid sick leave etc. of course you can't really do that as it's retrospective and he's not going to get sick in the past.
The only people going to benefit from this are the people at the top of the large corporations, I'm not sure I understand the mentality of the employees like DaveE, who is clearly jealous of the financial rewards afforded to the more willing and able.
I've seen many times before where contractors are the first out of jobs when a company decides the work is not there, how can a contractor who is going to suddenly be back taxed as an employee be compensated for a risk that they've been taking up to that point?
Clearly they can't, so how can it be justified that a contractor who is at grater risk than an employee should pay the same in tax as a regular employee?
It's totally unfair on the guy, in this financial climate the contractors will be the first out of their jobs and yet their going to be taxed as employees?
I wanted to be a contractor so I have more control over who I work for and when I work for them and if I'm at risk then it's a risk of my own making, now I'm not sure there's any point.
What's he going to do when the AA cut jobs and he's out of a contract and there's no work available to him? The £99,000 which would have kept him going a couple of years has been chewed up by what I consider a stupid judgement.
Sounds reasonable to me
If he was working for just one company for several years then yes, he was an employee and yes, to all the moaning bastards above, he would be entitled to all the same benefits (and constraints) of an equivalant employee within the same organisation.
does anybody know the suitation regarding an overseas customer (all work is done for and with overseas - but invoice is sent to financial unit that is UK based - although invoice is signed off in americas/apac)
I work mainly with Americas and APAC arms of the business but am UK based - people have my number - they call me if they want a job done. My contract does not have a substituion clause as the level of work has built up over time (i.e. I take the chance to take more work on if it comes up) so at the time of the contracts formation, I did not realise it would be sensible to put in such a clause.
I charge VAT. If I deliver something that doesn't meet requirements then I am responsible for fixing it at no cost to my client. If I want to get help doing the work that would be my lookout - people check the deliverables I submit of course but they are not concerned with how I got the work done.
My company does other work - I release applications on the web - some have been commercially successful - most have not. And I have another regular client and the rest are very small jobs in comparison.
If I thought for a second that my largest contract was not outside IR35 I would leave the UK - as I could forfill any of my obligations from whereever I like and I incure costs like Holiday and Sick pay, Indemnity insurance not to mention the basics like light and heat, equipment, software etc.
Anyone have any insight here - I fear I may be in slightly murky waters.
I would leave this country if I got hit with this - as I work every hour god sends, My life = work. If I put my prices up, they would simply go elsewhere - and replace my company with one based in APAC or Americas - at which point an IR35 bill could make me bankrupt. So the recurring VAT revenue I generate would be lost.
I am worried about this - not because I feel I've done wrong - I will always pay my dues if I am able to. But that said, our country's finances are buggered. I think they be taking the shirt off all our backs if they get half a chance.