Guess who gets hit hard by IR35 tax clampdown? Yep, IT contractors IT contractors in Blighty could bear the brunt of UK government plans to clamp down on self-employed workers not paying the correct employment taxes - with HMRC targeting 20,000 public sector contractors. The taxman is currently consulting on whether to shift responsibility for compliance with the intermediaries legislation, …
Not quite... the rent-a-body from the "big" firm will be being paid a "market rate" and no dividend, the Independent service provider will likely take a pepper corn salary and the rest as divi.... and tat's the crux of what they are trying to stop... Global-mega-shaft-Corp - advise on Tax avoidance and tax policy while flogging "consultants" = OK, Fred Bloggs PSC ltd - use existing legitimate tax laws to minimise tax exposure = BAD!
Yeah it sucks.
AC 'cos Fred Bloggs PSC Ltd ;-)
it's easy as piss to contract in another non-EU country. Easier than contracting within the EU in a lot of ways, because there's a very obvious demarcation between employees and foreign contractors who can only spend so much time in the country. Don't let the whole smokescreen about "free movement of people" confuse you about this. There's a world of difference between movement of services - which includes foreign contracting - and speculative relocating before finding work.
"For contractors, it's a big world
Plenty of opportunities outside of the U.K., and a long way from HMRC."
OK, well bye then. If you leave when asked to pay tax, I don't really want you here in the first place. And you might find that other countries are often not quite as accommodating of tax avoidance as the UK.
... I don't contract via agencies or government departments these days. The last time that I performed a contract for a government department I was forced to jump through IR35 hoops all at my cost with ridiculous (and I suspect not very ethical) requirements for me to pay an agency to certify my IR35 risks. I was not permitted to use my accountant who was indignant that the government seemed to think he would be likely to lie about the issue. Fortunately the world is full of private companies in need of IT contractors and they all pay better than government as well.
"HMRC is building a "digital tool" intended to provide certainty to the status of contractors and whether they should be subject to the IR35 rules."
Please input your personal details. >
Yes you are subject to IR35. Arrange to pay all that money to us or go to jail.
That's not what gets asked - rather "do you believe your contractor is under your direct supervision and control.."
No, seriously, if you RTFM you'll find out that it is the engager (not the engaged contractor) who is asked to decide on things like supervision, the right of substitution and mutuality of obligation.
Clearly quite hard given the number of shoddy laws that have been passed. The politicians talk incessantly about "reform" and "modernisation" of one or other tangibly useful public sector, but have singularly failed to apply it to themselves. They were, however, quite efficient at manipulating their expenses system until they got caught with their noses in the trough.
Because the way HMRC do it is to chase the individual contractor. But IR35 only applies if the contractor is in "disguised employment". That means that there must be an employer. It can't be the contractor's own company because HMRC have ruled by declaring that the contract falls foul of IR35 that the company is just a vehicle for personal services, not a proper company. Yet, every time they nail the contractor for the dosh. Not the agency, not the shifty government department.
HMRC really seem to think they can have their cake, eat it and then have ten more cakes made from the crumbs.
If you hadn't already heard, if "hit by IR35" you get to pay the extra taxes but aren't expected to get any of the benefits. I vaguely recall reading about cases where one branch of gov (the taxman) says "employed - pay more tax" while another branch said "not employed - not entitled to <something>".
Put another way, TPTB see no problem whatsoever in someone being neither an employee nor not an employee - getting the worst of both and none of the benefits of either.
There is the famous case of <forgotten his name> vs Blue Circle Cement (BCF). There was an employee, and for some reason BCF wanted to reduce its head count. It was suggested that the employee went contract. BCF formed the company for him and the company accountant gave him some advice. In all other respects nothing changed. Along comes HMRC and says "employee, employee, pay tax". Employee promptly appeals to employment tribunal claiming that, true enough, he is an employee, and wins. Employee then goes back BCF and says, "If I am an employee then you should have paid all my tax, and by the way, how about holiday pay." BCF had to pay and were not at all pleased.
If you have an opportunity to work for the public sector, quote your rate so that your take home pay under IR35 is the same as it would be at your normal rate elsewhere, plus a little for the inconvenience. Then HMRC get their extra, but HMG are paying it, not you. What they collect with one hand is paid back by the other.
If they don't agree to the rate, tell them to go do one.
If all contractors stick to this rule when working with the public sector, the government may realise they are shafting themselves.
I contracted in London for 10 years but eventually stopped and emigrated. IR35 was one of the many reasons why I left the country as the tax HRMC wanted me to pay, including all corporate and personal taxes, was far out of proportion to my business income. I know other people who left for the same reason, so instead of getting the sizeable tax income from my business that they already had they lost it all.
the article started by asking who would bear the brunt of this. It should have started by looking at who benefits: the large consultancies. If they can remove many contractors there will be a bigger market for their overpriced people ... and, oh, it is not their workers who get most of the loot but the upper management.
I seem to remember that these same consultancies where behind IR35 in the first place.
HMRC: We can't go after Google or Amazon or Starbucks, their lawyers are too good. But we need £400m to make up our shortfall. I know, lets go after contractors. People don't like them, expecially the ones who are too scared to try it themselves, so they're a soft target. Even if we don't get £400m (because we pulled that random figure out of our collective arses) it looks like we're doing something.
You know the law isn't fit for purpose when private companies are insuring against it and beating HMRC, IR35 status should be simple to determine but it's even different if you are a PSC or an Umbrella Contractor.
That's definitely one of the things that burns. A few years ago in a government department one of the permies used to attack me every morning with snide comments about my car, my income etc. Always ending up with a comment about "lazy contractors ripping off the government".
This was someone who, as far as I could tell, had not done a stroke of work in the last twenty years and whose main contribution to the economy was to booze, smoke fags and take holidays in the West Country ("None of that foreign, we're British!"). He'd also let his skills atrophy to the point that he didn't realise that su and sudo have a purpose. oddly the department regarded him as "indispensable" despite the fact that a fag smoking chimp could have done his job with less fuss.
I complained to HR about the personal attacks, not their problem. I'm just a contractor so apparently workplace bullying is fine for us. I once asked him if he thought contracting was so easy and so well paid and his skills were so much better than the contractors' why he didn't join the collective. Absolute silence, pink face, ran away and hid in the lavatory for three hours.
The consultation documents etc. can be found here
https://www.gov.uk/government/consultations/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation
If you are in business or intend to be in business and may hence be engaging contractors eg. to satisfy the substitution clause in your contract, I'd recommend you respond...
From the consultation: "This is both unfair to those who pay the correct taxes on their income" - what's the 'correct' tax? Whats the one, simple calculation, with no exceptions or speclal cases, that applies to every single working person (especially including MPs, the First Division etc), and includes a compensatory factor for job security/paid holidays/leave, final salary pensions (etc, etc, )?
There is an exemption that allows directors & board level people at public sector bodies to use PSCs, but others lower down the food chain are being "discouraged".
The questions also include different treatment for those outside the UK, but no mention of the EU, and EU rules still apply.
There's also no obvious way to recover the increased risk put on contractors by this new proposal - specifically, if you want to put money aside in case the change to the rules means a contract is terminated, tough, the new rules make no provision for that. So senior HMRC officials, in nice cushy tax-avoiding offices with index-linked final salary pensions, can increase their "fair" (HA!) tax share, simultaneously increase the risk of a contract being terminated, and leave you with no recourse?
HMRC engage contractors in breach of IR35, they always have done. They will only consider the use of contractors sourced via an agency - no direct hires. Starting about a decade ago they refused to accept sole traders as contractors, despite the fact that sole traders pay all of the "taxes they owe" and operate legally and fully within the tax system. They direct the work, they don't permit substitution, they refuse to put people on payroll and they certainly refuse to pay the employer's NI.
I left the UK and contracting for exactly this reason, Australia has similar rules to IR35 but they aren't a massive shower of bastards about it, the rules aren't as ambiguous as they are in the UK - generally if you are paid as a project then it doesn't apply, if you are paid hourly / daily and don't receive 80% of your income from one client - then it doesn't apply, if you use your own equipment then it doesnt apply etc etc.
Check out the ATO tool to determine your status and compare it against similar UK tools: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=PSI&anchor=PSI#PSI
One of the things I am going to mention in my response to the document is the ridiculous tests they use.
Using your own equipment simply isn't an option in IT, most Public Sector organisations won't let personal devices anywhere near their network and quite rightly. Similarly the "Right of Substitution" clause is also nonsense in much of the public sector as HMRC (for example) would require SC Clearance or similar and a vetted (by them) contractor.
"Similarly the "Right of Substitution" clause is also nonsense in much of the public sector as HMRC (for example) would require SC Clearance or similar and a vetted (by them) contractor."
Incorrect. I am currently in a contract indirectly working for the MoD (Hence Annon) my contract has a substitution clause. The only difference is that it has a few conditions such as the substitute must be SC cleared already (SC can be transferred between companies) and that my company bears any additional costs such as getting the substitute up to speed on the tech/and additional clearance needed.
Now that has never been tested as part of an HMRC investigation, but as a substitution clause, it works - I know this because I have used it already for holiday cover last year.
This post has been deleted by its author
I am glad someone has managed to get a substitute past their engager on an SC Cleared Contract, cos I never have and neither has anyone I ever worked with on one.
I worked with a guy who broke his leg, and was told not to bother arranging a substitute as he would be back before the substitute (already SC Cleared) was cleared for the site.
I have substituted on an SC contract and have had someone substitute for me. It's made easier in my case because there's a relevant professional qualification for the job and that mandates SC clearance as part of the membership of the profession. Keeping in touch with ex-colleagues is a good way to find someone suitable to substitute.
"But IPSE has said the rule changes will deter contractors from working in the public sector, while organisations will be less likely to “risk” engaging contractors, damaging their ability to deliver vital projects."
If the UK is anything like Western Australia, most departments over here actively gave staff redundancies then hired them back for 10's of thousands more, to keep their full time employee numbers down.
So them being less likely to "risk" engaging contractors is absolute BS, because the alternative would be to hire them, which I just cannot see happening.
"If the UK is anything like Western Australia, most departments over here actively gave staff redundancies then hired them back for 10's of thousands more, to keep their full time employee numbers down."
That happened in the UK many years ago. There has been a long period of consolidation since then with many of the new contractors failing because they weren't very good and Darwin taking a hand with the rest so that, more or less, the current crop of contractors are high skills and highly motivated to work compared to permies. Since those days government rules have changed and it's supposed to be impossible for someone to leave work on Friday and return as a contractor on Monday.
Simple truth is that being "self employed" give you such a tax advantage that it is really long over due for being change. Simple truth is that the average self employed pays a quarter of the NI that someone on the minimum wage pays and ultimately get the same access to medicare and a pension at the end of the day. By 2020 there will be 4 million self employed and to move them to paying the same level of NI would generate around the 4 billion pound that is desperately needed for the health and education system. Morally should they not pay more?
"ultimately get the same access to medicare and a pension at the end of the day."
We don't get paid for sick days, when we take a day off to go to the doctor, if we break a leg or get the flu or long term illness we don't get paid, if we're made redundant we don't get paid, if we're fired or let go for any reason whatsoever at the complete whim of the hiring manager, we don't get paid or any notice, if we want a holiday we don't get paid, if we're having a child we don't get maternity pay, if we screw up we're liable and have to pay a lot of money for insurance policies to mitigate this, if we get called for jury duty we don't get paid, if work has a powercut or they close the building for whatever reason and people are sent home we don't get paid, we don't get matched pension contributions or work bonuses. If a contract ends we can be out of work for months during which time we don't get paid.
We shoulder a huge amount of risk. Ask some bitter person like yourself who has a family of 2 kids if they'd risk losing their job at a moments notice or being unable to feed their family if they get sick while burning through savings and suddenly they'll have very little to say about how 'fair' it all is.
@SimonC
Fully agree, its also worth noting that the Tax disparity isnt anywhere near as much as people like this seem to think, especially not now with the new dividend tax rules.
I addition to the lack of benefits that you mention:
* No Job Security
* No Sick Pay
* No Holiday Pay
* No Maternity/Paternity Pay
* No Redundancy Pay
* No Notice Period
There are also things that are distinctly NOT benefits that employees don't have :
* Accountancy Fees (£1200 a year)
* Various Insurances (£1000 ish a year)
* Have to meet the costs of our own training (Which coupled with loss of earnings if its during business hours makes it very expensive)
* Supply our own hardware and software licences (To be fair this is uncommon, but I like resharper and some other tools that I now own licences for to use on clients machines)
But back to my original point, and the point of the article. TAX.
As a contractor my day rate is not the money I get paid, it is the money my company is paid for providing me as a resource to the client. Form this my company pays my wage (minimum wage) and its expenses. It then pays 20% corporation tax on the remainder.
I can then take all of what remains from the company as a dividend and pay 7.5% tax on it (for the sake of argument Im assuming that Ive already used the 5k tax free allowance and am still under the higher rate threshold).
So as an example, imagine a contractor earning 6k a month its not quite average, but its a round number so should make it easier, the amounts are not spot on but should be close.
Contractor bills company £6K + VAT Totaling £7200
From that the contractor has to pay :
VAT to HMRC : £1200
Accountancy : 100
Insurance : £85
Wage : £800
Totaling : £2185
Leaving £5015 in the company account.
The contractor then has to pay corporation tax at 20% (£1003)
Leaving £4012 in the company account which can be taken as a dividend.
The contractor (Accounting for holidays and sick pay leaves 1000 from this and takes 3000 as a dividend)
The contractor then has to pay 7.5% on that 3k (225)
Giving a take home dividend of £2775
And a take home wage of 800
A total take home of £3575
And a total tax outlay (ignoring VAT) of £1228 This makes the contractors effective tax rate 20.4%
it also gives them a gross annual income (Assuming continuous work) of 45,600
Hardly a earth shattering amount... in fact only a few K a year more than I got as a permie.
Of course, Ive written the above and forgot to include pensions... Im not going back and changing it now, so just pretend they dont have one.
There are of course other expenses which will reduce the tax burden such as travel expenses etc, I have left these out as its hard enough trying to explain this without bringing additional things into it.
@SimpleTruth lover
"ultimately get the same access to medicare and a pension at the end of the day"
Medicare? This is a UK story. Id point out that EVERYONE qualifies for free heathcare in the UK no matter how much they pay in... I'd also point out that the NHS is not funded solely from NI payments but from general taxation... As I pay more tax (£ not %) than you does this entitle me to more/better care? Does it F*&k
Also, Pensions.. Are you having a laugh? Do you know how much a state pension is NOW (approx 8k)? How much do you think it will be in 40 years when I retire?
How much do you think it will be in 40 years when I retire?
Wrong question! Do you really thing you will be entitled to claim your state pension in 40 years time?
Given the changes that have happened in the last 30 years and the ticking time bomb that hasn't been defused, it would not surprise me if it becomes means tested and restricted...
So I suggest ignore it in your planning and treat it as an extra if you actually get to receive it.
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