Not *the* DPP? Nick Grady's bunch?
I was one of their first consultants, back before India crashed into Asia.
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 …
Not *the* DPP? Nick Grady's bunch?
I was one of their first consultants, back before India crashed into Asia.
> Accountants and Lawyers have been using the same loopholes for years, so why is IT the target of all this?
Ever known an accountant or a lawyer who holds a practice only work for *one* client?
He was a nitwit. IR35 has been around for long enough for everyone to understand what the IR will tolerate and what they will not. Anyone who fails to take proper advice or act on is simply asking for trouble.
that's a point I forgot to make. if the "contractor" was found to be "employed" then surely the "employer" should be prosecuted for failing to meet it's statutory obligations under employment law?
as a large company controlled by a very rich private equity fund (who don't get taxed for some bizzare [possible corruption?] reason) it isn't going to fucking happen is it?
Was it a little company in Chichester to which you are referring?
It is important to listen to advise from your accountant on what it takes to be an independent business:
1. Have more than one client in the long term. Do not have just one major end-client year after year after year. Do not restrict yourself to being represented by just one agency.
2. Set your own hours to the extent possible. You might be at the client's only during the client's office hours, but you set your own hours for marketing and training.
3. Provide your own training on marketing, programming tools, and systems software.
4. Pay for your own memberships in professional organizations.
5. Maintain some kind of home office.
6. Keep receipts for everything you pay for yourself that would be paid for by the company if you were an employee.
When IR35 was first proposed, a small band of us got together to convince the government that they were making a disastrous mistake. For over a year we campaigned, petitioned parliament, paid for expert studies, tried to inform the press, tried to make the professional institutions understand what was going on ... everything we could think of. I had my face plastered over the newspapers several times. It soon became obvious we were talking to a brick wall. Repeated sham "consultations" with government officials (primarily the cronies of "Red" Dawn Primerola), in which our representatives were invited to make presentations to parliament and then shut out of the very meetings we were invited to. It became clear that this was not an honest exercise in closing a tax loophole, but blatent class warfare.
The end came for me when my MP told me that, basically, I was being punished for having prospered under Margaret Thatcher. He also warned me that, being so conspicuous, I was a prime target for a revenge attack from Red Dawn and her gang. He advised me to flee the country while I had the chance. I closed my business (which had been contributing a fortune in tax to the Revenue), sold the house and took my family to Australia.
Many thousands of others took the same advice. The "Brain Drain" resumed in earnest, and the best and brightest of Britain's engineers and IT specialists took their talents overseas. (It's debatable as to whether I was part of the "Brain Drain" or the "Freak Leak")
I wonder if anyone will know for sure how much damage was done to Britain by that act of vindictive stupidity. Even now, I keep bumping into new "IR35 refugees" over here in Australia - I met another one only last week.
I briefly visit the UK on holiday last year. It's a very pretty country, but I don't belong there now. The country's leaders said loudly and clearly that my kind are not wanted there, and the voters confirmed their verdict at the next election. I don't think I'll return. It's not my country any more.
I bet the Beeb's "employees" don't have this issue such as their highest paid, a Mr Ross, who our license fee pays, but he's "freelance" from what i recall.
In total agreement!
I dont contract, I am aware, of the benifits that contracts dont get as perm empolyees, its horse for course and works out about even at teh end of teh day, so get a life and stop moaning about what you dont understand.
Because, the cost if living is much higher in Switzerland. I've just returned to the UK after living in Zurich for 4 years. Plus (and even my Swiss friends agree), the Swiss government would tax air if they could get away with it. Don't make Switzerland to be the land of milk and honey - it isn't.
Many Swiss-Germans, cross the border and do their monthly shopping in Germany due to the price differences. Infact many Swiss live in Germany and work in Switzerland due to the difference in costs.
Living in Switzerland was an experience. But the Swiss-germans are nationalist and racist (not all, just mainly the older generation). Their SVP party (which gets the most votes) makes the BNP party look timid.
Everything in Switzerland is to the benefit of the companies not the public. Trying to move out of an apartment (outside of the official leaving months - remember you are only allowed to "officially" move out of an apartment is in two months in the year. April and September "i think"). If you want to move out on any other month you have to do the job of the landlords (advertising of the apartment, finding a suitable applicant - which has to be vented by the landlords and they can easily reject - and as such the process starts again). You have to get professional cleaning done (expensive), the walls will generally have to be painted by professionals (expensive) - before the landlord will even accept the apartment is suitable to be handed over.
Even if you have caused no damage at all to the apartment, your deposit will be void, as you will have to spend a good portion on that for the cleaning.
Add all this above, and that Zurich only had 57 available apartments 6 weeks ago (was in both Blick and 20 minutes), and that everyone tries to move out on the official months... it ain't pretty.
Now add that Switzerland hardly ever runs stories about the problems inside the country (one of the highest sucide rates in europe), a teenage who brought his swiss army gun home (but also took some bullets as well) shooting and killing another teenage at a tram stop... no mention in the regional newspapers. A young boy threw himself infront of a train right in front of me (i had bits of his... flesh... on my jacket, and watched his shoe roll passed me with his foot still inside)... no mention of this in the regional news.
As a drunken swiss bloke told me in the pub in Zurich - "You expats are nothing but slaves to the Swiss people. We only let you live here to make us money. If you didn't make us money you wouldn't care about you".
The best thing about Switzerland? The expat community. Go figure.
Disclaimer: All the above is regarding the Swiss-German side of Switzerland, the Swiss-French were completely different and far more laid back.
"Yeah, you're PAYE. And you get vacation, benefits, and all sorts of legal protection including sick time and mandatory notice periods. Meanwhile, the IT contractor gets FUCK ALL in terms of legal protection, and can be terminated with 5 minutes notice. So why the hell, since the contractor is taking ALL the risk, should they also shoulder ALL the taxes involved?"
May I suggest that part of the blame for that is with the contractors as a whole - If everyone upped their rates to cover the extra risk then that would be one thing, but unfortunately contractors are not one unified mass and hence you get a chase to the bottom on rates in a lot of areas.
I've done contracting, the low paid pseudo-consultantcy someone alluded to above, and am now in a permie role.
In my 12 years in IT I've see the rates for the lower end of the market stagnate for quite some time - the agency may be charging more, but precious little of that makes it through to the guys at the 1st and 2nd line positions.
In my current place we have approx 40% contractors manning our servicedesk, most of whom have been around for more than a few months. Talking to these guys it's the same story, working through an umbrella company and clearing the same, if not less, than some of the permies they are working next to - and this is repeated across many places up here in Scotland.
The salad days of picking up contracting and clearing Texa$ money every week are gone for a lot of guys - the whole flexible workforce scenario just means drop people at a minutes notice and to hell with the consequences.
I'm a financial advisor, I'm fed up with seeing Sole Traders tax "shifting" and all sorts of other tax dodges. I pay 31%/40% tax on my earnings. Sole Traders don't. I've had clients tell me to shove it and go to someone else who will close their eyes.
Any whining about "Yeah, but being a Sole Trader means I need to earn more to keep even" I'm not interested in. Work for a company if it's so good.
I've advised clients against this for years, nice to see someone who either was badly advised, or who thought he could get away with it getting caught.
It's morally right to pay your taxes, thinking that it's "the government" who lose out is living in a fantasy. The government piss our money up the wall, sure, but if you dodge your taxes then everybody else ends up paying more.
to claim otherwise is sheer lunacy, and just advocating theft.
Oh well, taxes are set to drop and government jobs set to haemorage, such is the beauty of a recession, it just brings back in common sense.
It is the government and their workers that take from an economy, see they produce nothing of value, that is why tax is wrong, it encourages recession, they are parasites. You get a recession when the parasites outweigh the good honest contributors to an economy, and that is what has happened. The parasites cannot be supported so they just end up being fired. And trust me most in business know where to put the blame for a recession, it is government taxation, it is that simple.
Lordy, lordy economics 101.
Surely the accountant should have been able to avoid this happening. If there was no accountant, well it just goes to show why it's worth paying a professional.
As for all the people complaining about how hard contractors get it, tough. That was your choice; You sacrifice the 'stability' of a fixed job for better pay, choice and flexibility, not for the chance to avoid taxes.
I wonder if I'll be able to buy his house for peanuts now he has a £99k bill to pay???
Would Sir like cash or a cheque?
of a financial 'advisor', if you don't know the difference between a "Sole Trader" and a "Limited Company".
Remind me not to come to YOU for financial advice!
The government's tax-hoovering machine is getting steadily greedier and less discriminating. If anything is happening anywhere, they want their cut - and it better be a big one, and they want it NOW (if not sooner). Laws? They've heard of them, but they don't pay much attention to them. Either get a court to decide that, according to the best legal opinion money can buy, black is white. Or - failing that - it's easy enough to change the law, retrospectively if possible.
Bottom line: we're the rulers, you're the serfs; shut up and do as you're told. And give us half of everything you earn.
I don't quite understand why this has made the headlines here. This is a straight IR35 fight ... these have been going on since circa 2002 (2 years after IR35 was introduced). He played the odds and lost.... and to be brutally honest ... it looks like he deserved to lose as he did not have adequate provisions in place to combat IR35. IR35 was created to nail cases like this. I bet you good money the other 50% shareholder would be his wife and that dividends were paid to her.
The headline is in a way misleading. It is not taking into consideration the Corporation Tax that would have already been paid by his own Limited Company. Looking at those figures I would wager that he paid about £20,000 a year on Corporation Tax as he needed to do this in order to get the money out as dividends. This money is owed back to him. Thus the real figure is £33,000 - £20,000 = £13,000 * 3 equals a total figure of £39,000 not £99,000. Of course £99,000 makes a much better headline.
Of couse the real argument should be ...... ok I am a disguised employee .... so lets be having the money for the missed holidays, sick days, pension etc. What a lot of Permies (I am one myself now after 15 years contracting) do not understand is that contractors like this guy end up paying way more tax than their true employee equivalents as they have to pay Employer NI. Surely paying both Employee and Employer NI entitles such a person to at least the same benefits as the real employees.
Lets face facts. This is only the tip of the iceberg. For all you boys and girls who have moved abroad ..... all I can say is well done. I would do it myself but family matters do not allow it. This country is both morally and financially bankrupt. The country has passed the point of no return. The government need more money in order to pay for the immigrants now over here and our own lazy bu88ars who won't do any work. Its all well and good the government saying that the immigrants add to the economy but what they don't explain is what the heck are we going to do when these poorly paid people reach retirement age .... they will not have anywhere near the pensions they need themselves and so the richer poeple will have to pay yet more taxes. Add to this the problem that your average immigrant has more children than your average British couple and things get even worse. Its an effin disaster... not in the making ... but right here ... right now. There is NO way out. Taxes are going to have to go up massively.
It's not clear to me who is liable for the £99k bill
Is it his limited company or him personally? Anyone care to explain why?
If the former, I'd sugest that HMRC are unlikely to see the money. If the latter, he could well find a charging order on his house, assuming he doesn't have £99k spare change.
I also saw the writing on the wall in 1998 when IR35 was proposed, I was a contractor for over 10 years and payed a fair amount in tax and NI in those years. Even had a VAT inspection (which I passed without problems). I now work in Europe, so what has HMRC 'gained' from me in the last 9 years? nothing!! and the UK has lost another IT/Software contractor. Any modern country has to have a vibrant technology sector to compete in the world today. Glad I left says it all.
He's personally liable.
The company setup is essentially a sham vehicle in the eyes of HMRC, even though it's insisted upon by agencies before they will supply a contractor to a client.
The company income minus allowed expenses is treated as deemed salary on which employers NI, employees NI and income tax is assessed.
I was employed by PriceWaterhouseCoopers for many years. As a senior consultant, substitution was not allowed without client approval (the project was sold based on me being the technical lead). We worked on site for long assignments (up to 3 years for an SAP implementation).
Are the government saying that all the PwC consultants on-site were actually employees of the client. If so, £99,000 is a drop in the ocean. PwC consulting turnover is in the billions.
I look forward to all the consultants on the recently cancelled PA contract being declared employees of the government and demanding their public sector pensions.
As he was deemed to be an employee then surely he was entitled the benefits that an employee would get? So, holiday pay, sick pay, training, out of pocket expenses etc. Also, the AA should contribute to the NHI as a normal employer would.
They cannot have it both ways.
I'm glad I quit contracting before IR35 came in. This sure is a mess!
"I was never an employee of the AA and I simply cannot understand how the High Court has reached its decision."
Its amazing how people still believe we live in a country of an honest justice system.
This is how its done:
Ruling against him means more money for government.
The High Court is more corrupt than a FAT file system after 3 months of Windows ME running on it.
The High Court serves the government.
HC: "We *could* rule in favour on the plaintiff, which would be just"
GOVT: "Yes, but then we would lose money"
HC: "This is a point, but we wouldn't see said money..."
GOVT: "Well, swing things our way and you might..."
HC: "Ah. Your drift is caught with aplomb."
PLAINTIFF: "So, what say?"
Seriously. This happens. This is why the recent case against the Lisbon treaty was chucked out. Not because it was "politics dressed up as law" (it wasn't, treason is a crime), but because the government didn't like it.
Cambodian police force? Pure, in comparison to Britain these days.
I have worked as a contractor both in the UK and in Holland. This kind of debate doesn't occur over there because they have laws in place that specifically define who is and isn't a limited company and how they can arrange their finances.
Instead we get situations whereby a contractor will follow the letter of the law, as in the Arctic systems case, and still find HMRC on their case.
If the gov could be clear as to what we can and can’t do rather than hiding behind ambiguities then things would be a lot better all around….or would that tread on the toes of Barristers, MPs, footballers, etc. who use the limited company system to reduce their tax bill.
not that anyone is going to read this far down, but i have to say ALL PERMIE'S are jealous. There's no question about it. Contractors take all the risk, get paid to do complex mission critical work and to take on the responsibility to get work done that permies can't or won't necessarily do.
We are expected to know everything and know it without any company training.
Hell yes we should earn much much more and do what we can to avoid paying taxes, we take all the risks so we should get the rewards.
/Paris because I wouldn't say no..... ;o)
I know Jon, I worked with him for a number of years as a contractor at the AA.
The AA uses a number of ways to get resources, as most companies do, employees, large consultancies and contractors.
The large consultancies have long contracts with the AA, the same as some of the contractors did. So what's the problem?
The AA did not want the risk of taking on inflexible staff, or paying the rates for a large consultancy so they went to the contract market.
The large consultancy's consultants are not deemed *employees* of the AA and Jon has a legitimate business the same as them, just on a smaller scale.
I had the right of substitution in my contract and exercised it, I also had about 10 or so contracts with other companies whilst I was there, and I was found to be outside or IR35.
Also, im not arguing about the rates charged, as it's irrelevant to this conversation. That's one for bitter permies to get the chip of their shoulder.
Contractors are essential to our IT industry.
I hope Jon has been saving and this won't hit him too hard..
Take it to the house of lords..
I left contracting, shortly after IR35 came about. I had a lot of clients that sat as 'clients' but required bits of work performing once in a blue moon. This arrangement was made feasible by having a 'bread winning' primary contract that filled the main part of the day.
In general the contracts lasted from weeks to a couple of months, and were highly paid.
From this, I had to pay corporation tax, accountancy fees, sort out my own salary (gave myself a reasonable salary, so I did play fair with the NI payments), pay my own pension, spend time OUTSIDE the usual work to take care of the books, and other arrangements, pay my liability insurance (and people who have never contracted, I DARE you to say that stuff is cheap), pay for my own training to make sure I was up to speed on all the latest systems, pay for my own software licenses for applications that I was specialising in, or anticipating meeting at the next contract, pay for my own computer hardware, work in advance of contracts (for no pay, apart from that coming from the "company reserves" I'd worked for already), and keep my skills current in all the areas of my smaller clients, so I'd actually be useful to them, and could provide the consultancy/work they required to a good standard.
At one point, I went to work for an employer on a 6 month contract to do some security/system work. During that time, I brought a lot of new processes into the place (and trained the staff in how to implement them), but had the company request that I stay on for another 6 months, as my approaches were bringing a lot of value to the table, and the project was expanding due to its success. I agreed, with the anticipation of being freed from that in 6 months.
Again, successes led to a request that I extend by another 6 months. I ended up there for a smidge over 3 years until the project was complete in its final form, at which point I was entirely surplus to requirements (having been there to do the technical architecting, and solving implementation issues). This was before IR35 (just).
Now, from that, the company got a great deal. It paid me a lot, but it needed specific skills for a while (definitely not permanently). They had the flexibility to monopolise my time for 3 years (IR35 would have killed that), and by doing so, they implemented a project that saved them millions a year in wasted effort, and more efficient working (which ended up being taxed, and putting a lot more in the coffers of the Government anyway).
But all the way through this, I had no 'paid for' holidays, no pension (that I didn't pay), not administrative support, no right to continue working past 2 weeks notice without any required explanation. I needed to pay for my own training, updated software, new software and so on (which came out of the company coffers).
The old way let me work hard, play hard, and be flexible depending on the needs of the contracting company at the time. If I'd had to leave after 6 months, the next contractor would have had to revisit everything I'd done (taking a month or so out of 6 available months).
With IR35, I went permanent, and have exactly the same lifestyle with less than half of the pay, a lot more security, and without the very stressful requirement to stay right at the front of things. After working in both environments, and seeing what IR35 does, I rate it as nothing more than a malicious grab at money made from jealousy, ignorance, and the complete lack of understanding of long term flexibility.
Personally I believe that the day rate for contractors should be at a level that takes into consideration the irregular work (gaps between contracts) and often the higher distances and costs associated with travelling long distances for specialised work (I have to pay 4 nights a week in a hotel because not only am I staying away from home but for short term contracts the availability of rental accommodation is very limited).
With that rate in mind, there should then be one tax system that does not offer an advantage of company Vs Personal status and then IR35 would not need to be a consideration. The reason why companies pay such a low rate of tax is because the government wants to encourage enterprise and does not want companies basing themselves overseas to reduce their tax liability. However, this then places a disproportionate burden on employees meaning that they are taxed at a higher rate at 40% and National Insurance as well.
If the government did something about the differential between corporate and personal allowances, corporate and personal tax and corporate (ie double) national insurance and individual national insurance then these sort of issues would not arise and the relevant pay rate for contractors would be reflected in the day rate they earn.
I wonder how the government would get on if all the contractors stopped working until there was a fairer deal with less red tape?
So if he has to pay the tax, does he also have to pay the NI? And if he pays the NI, does the AA also have to pay their NI contribution?
One of the problems with IR35 is the way many agencies insist upon keeping the contractor in the dark about the contractual details between the agency and the client, and these can affect the contractor & his/her IR35 standing. HMRC get to look at both contracts when deciding if IR35 applies (Contractor-Agency, Agency-Client).
I have been in a contract where the client and I found the agency were blatantly lying to both of us, bigtime.
How did we find out? Well God bless the UK education system - a work experience bod left a badly addressed agency fax intended for the client on my desk because my name appeared at the top under the client company name!
(Probably another work experience bod at the agency.)
"So if he has to pay the tax, does he also have to pay the NI? And if he pays the NI, does the AA also have to pay their NI contribution?"
The AA pay nothing. He has to pay the deemed income tax based on what HMRC theorised he should be taking home (regardless of what income he did actually pull out of the company profits), plus both the employee's and employer's share of NI.
He still has had to fund his holidays, sick, pension, expenses and all other benefits.
At the end of it his take home will likely be less than if he was an "equivalent" employee of the AA. He'll be considered by HMRC an employee of the AA but with no rights or benefits from them. Worse in his case because of some monumental screw up in accounting by the sound of it.
To get the equivalent take-home inside IR35, considering the costs to him, he will need a much higher rate now. Fine you may say, but the client may just opt for an employee instead. He may of course not want the binding level of contract that a full employee gets, along with the politics and corporate events that go with it.
Vote with your feet - if you don't like the system, choose a different one.......
wasn't there mummerings on El Reg a few weeks ago that IT industry in the UK is dumming down because of overseas out-sourcing.... I wonder how quickly things will also change when IT professionals start boycoting the UK system and look to work in places with more favourable conditions..... and business are unable to fill the niche roles contractors often provide, it's a big world out there, go and try some of it !!!!!
"What a plonker ... loophole ... the trick ... not ... like this loser ... thick as sh*t ... badly advised ... should have seen this coming ... gets what he deserves."
He deserves to keep his 99K for simply being busy getting on with the real job while people like you were too busy jumping through stupid arbitrary unfair hoops just to avoid paying more.
""Contractors" have been using this loophole for years to avoid tax"
It was never a loophole. Anyone has and can be a shareholder of a company and take an income from it in the form of dividends.
The fact those dividends are taxed at 10% instead of 20% at the base rate, and with no NI, is no one's fault except the government's.
The solution is very simple. However it means more than just the target contractors will have to pay a lot more tax, and that would make the government even more unpopular.
Instead they use a shambles system called IR35 to "deem" contractors as employees as a way of taxing dividends as salary income (which seems fair to me), in way that ensures one group pays and another don't (which seems highly unfair to me).
The fallout from this I see is just a further push towards badly skilled outsourcing, which are akin to contractors in their temporary status and no need to provide benefits, very cheap, and outside of UK law.
The upside is 10 years from now the UK IT industry will be in such a mess from failed projects driven by outsourcing that demand for decent skills will rise and we'll perhaps be paying top rates for home-grown skills at employee level. Either that or it all goes down the pan.
I'll probably have left the country by then, taking with me my business skills I've learnt from contracting and contribute to the economy of another, better, country.
Yes, you can be both employed and not employed, since tax laws and employment laws differ.
This guy was a "deemed" employee under tax law, but not under employment law.
Heads you lose, Tails we win.
The other thing that's certain is Death ...
If I recall, the PCG did that, the Lords sympathised, but would not go against the law of the land.
This cost in the region of 500k , to take it to the european court would be an estimated 1M, HMRC of course funded the defence costs out of the taxpayer.
Time to go!
Oh and @Lozzyho: You do realise that the whole reason that Gordon Brown is destroying the economy is so he can afford a huge chunk of real estate in the south of England? No Barbados for him: He's a Scot with a Scot's appreciation for real weather (i.e., rain), which England seems to have more of than Scotland these days.
Nano nano: you can also be married and not married. Back when there was a married person's tax allowance (and the shifting of personal allowances between spouses) I was not elegible for this because I was not actually married. However when I tried to claim benefits I was refused because I was technically "common law" married.
The main problem I have is expenses. Sure some contractors try to take the piss but a blanket 5% only for expenses is not necessarily acceptable. Training can cost thousands, IT gear will also cost thousands plus travel / hotels / insurances etc.
And all of these are things that you are likely to get as a permanent employee, but without having to pay for them. It would be far fairer is expenses were only limited by having to be legitimate rather than just capped.
This guy looked stupid though, he must have known IR35 would catch him but he didn't change the contract or pay the dues.
Good point about the 5% expenses cap Lee, as this perfectly illustrates NuLabour & Gordon Brown's understanding of small businesses, or should I say contempt for small businesses. If NuLabour wanted to support IT then expenditure on training and re-certification would be allowed as an additional expense under IR35.
If a contractor's skills are in current demand he or she will typically work as hard as possible to bring in as much income as possible, knowing there will be dry spells some time in the future. This does not leave much time for training & certification exams, even though the 5% cap may be sufficient to cover all the associated expenditure.
When work starts to dry up and new skills/certifications may need to be acquired and marketed, although there may be time available there is no longer enough money in the 5% cap to fund all this.
At exactly the time when investment has to be made in the contractor's small business is the time NuLabour have reduced available funds.
I believe when NuLabour were confronted with this their response was that contractor's could fund such re-skilling out of their own pockets, just as any permanent employee could.
<Irony> And we all know that permies pay for all their tech training, tech exams, equipment etc out of their own pocket.</Irony>
With bitter humour I'll point out that, in a worst case scenario, compared to a large company that only has to bring in £1000 income to pay for £1000 of training, a contractor may have to bring in enough to cover tax, EE's NI, ER's NI and VAT before the £1000 is there for training; possibly nearly three times as much! Hence 'Education, education, education'. The buggers aren't supporting learning they just want to charge three times as much from people wishing to make some effort for the future.
(Currently permie, but over 50 now so expecting to have to go contracting again soon.)
I belive intependent truck drives have the same problem.
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