back to article UK IT contractors slipping back into old ways of working now IR35 tax reforms delayed

Since chief secretary to the Treasury Steve Barclay confirmed a delay to the introduction of IR35, Brit contractors are opting out of the rules in droves – and many employers no longer care. A survey of 1,000 limited company contractors by contractor insurer Qdos shows 56 per cent who had been considered as inside the rules by …

  1. Cederic Silver badge

    "Inside IR35" jobs still being advertised

    There are still people advertising roles as 'inside IR35', presumably as a way of telling you that they don't want you to apply for them.

    Hopefully the 12 month deferral to the changes will allow them to rethink and find a way that properly prevents abuse of the tax system without removing basic employment rights.

    1. elsergiovolador

      Re: "Inside IR35" jobs still being advertised

      The penalty for getting the status determination wrong is disproportionate - the client will have to pay full PAYE tax plus fine and interest, even if the contractor has paid the tax already.

      Since HMRC is unable to get status determination correctly, they expect the businesses will get it.

      Nobody is going to risk taking on independent contractors when IR35 change gets implemented.

      The whole thing has been created to increase profits of large consultancies that some of them happen to be party donors. HMRC uses lies and deception to push this through.

      We should have national inquiry about this.

  2. Anonymous Coward
    Anonymous Coward

    FFS El Reg... AGAIN with this incorrect crap in your articles:

    "The IR35 rules are designed to make contractors who work with directly employed staff pay similar income tax and national insurance contributions"

    No, the IR35 rules are designed to ensure "Disguised employees" pay roughly the same.

    It is IRRELIVANT WHO the contractor works with, where-as it is ENTIRLY relevant HOW they work.

    Come on, its not like us PSCs haven't been reminding you of this for years!

    Anon PSC.

    PS - yes, the lack of "rights" when deemed "inside" is a bone of contention.

    1. This post has been deleted by its author

  3. This post has been deleted by its author

  4. elsergiovolador

    Under inside IR35 you cannot operate like a business and in fact you pay more tax than employee, because your company cannot for example offset the cost equipment against tax, but employer can do that.

    This change is constructed so that heavy penalty is applied only if company assess the contractor "outside" when in fact he or she is working "inside". There is no penalty other way around. That means when this "reform" gets implemented, there will be no market for small independent contractors that offer better rates and quality than consultancies that happen to be party donors.

    HMRC falsely claims the IR35 is about tax - since 2017 there is no tax advantage to operate via PSC.

    Given how Treasury ignored perfectly valid Lords report about plethora of issues with this ill legislation, I am convinced that there is under the table deal going on. We need national inquiry about what's going on with people behind that and why they push it so hard and don't listen.

    If this was a tax issue, they could just raise tax on dividends or make other small changes, without killing the whole market.

    Government has no problem when agency worker gets paid small salary + commission, but there is perceived problem when contractor pays small salary + dividend (that is double taxed). The difference in tax is nulled by the fact contractor has to do full accounting, pay for insurance and do other things employer should be providing. HMRC could just make dividends to be subject to NI and deductible from CT, so it is treated the same as commission.

    They won't do that, because the tax will be simplified, inspectors will have nothing to do, and party donor will have to compete with independent contractors and won't make their extra billions.

    1. james_smith Silver badge

      "HMRC falsely claims the IR35 is about tax - since 2017 there is no tax advantage to operate via PSC."

      There is - you can still pay yourself a basic salary and take the bulk of your income as a lower taxed dividend. You can also "employ" your spouse tax free up to the limit of the free pay allowance. You can also claim for the likes of having an office at home* (even when you don't work from home) and get the VAT back on any purchase that you can vaguely claim to be business related.

      * One of my fellow contractors claimed a tax deduction for the cost of a new carpet in his spare bedroom, since he pretended it was his home office and that the wear and tear on the old carpet was down to business use. And yes, he got that one past HMRC.

      1. elsergiovolador

        You are missing the fact that you also pay Corporation Tax on dividends. There is marginal difference between this way or PAYE since 2017.

        If he is indeed using his spare bedroom as an office and the carpet was worn, then I see no reason why this wouldn't be a valid expense. The same as employer would deduct that cost if the office he or she works in needs repair.

        Business owner can hire whoever he or she wants if it is needed for business. I am sure every business owner has a spouse and take her on the books to save few quid of tax. You can't be serious.

        If you are not aware, everyone has personal tax allowance. If the spouse is not working and can help with the business, I see no reason why he or she couldn't be hired.

        I think you are looking at this from a perspective of a hurt employee. Start a business one day, it's so simple, you pay virtually no tax and you'll get a spouse and new carpet!

        1. james_smith Silver badge

          "You are missing the fact that you also pay Corporation Tax on dividends. There is marginal difference between this way or PAYE since 2017."

          Tax on salary is still substantially higher than on dividends. On the lower rate it's 7.5% on dividends versus 25% on salary In the higher rate bracket dividends are taxed at 32.5% versus %40 on salary. Even taking into account the difference in the untaxed allowances and exact boundaries between lower and higher rates it works out substantially less tax for IT contract rates.

          1. Anonymous Coward
            Anonymous Coward

            And you've still missed the corporation tax...

            It's not like money goes straight from client to contractors pocket. There's no free lunch here.

          2. Dr. Mouse Silver badge

            I think you've got your numbers very mixed up there.

            Basic rate is 20%, or 32% including NI. Dividends may be 7.5%, but that's after 19% corporation tax, making 25% overall tax for dividends.

            Higher rate is 40%, or 42% including NI. Dividends are 32.5% but, again, taking corporation tax into account that's actually over 45%, so it's actually a higher marginal rate!

            The savings come from employer's NI. However, if the contractor is viewed as a "disguised employer" of the client, it is the *client* who is avoiding this tax, not the contractor. The contractor is already paying roughly the same amount of tax as an employee earning the same amount.

            1. Dr. Mouse Silver badge

              Edit: However, if the contractor is viewed as a "disguised employee" of the client

            2. elsergiovolador

              If government think there should be even more tax paid, they then should just raise tax on dividends or make them subject to NI and deductible from CT. There is absolutely no need for IR35.

              Well, except if you want to make your party donors rich.

          3. Anonymous Coward
            Anonymous Coward

            You need to include all the benefits of the low base salary.

            i.e.

            * Child Tax Credits

            * Decent tax free pension contributions

            * The higher rate of tax is 45% not 40% ... and your lose your tax free allowance as well

            and now contractors who don't pay NI but claim they get no benefit because they have to pay for there own insurance etc are claiming 2500 / month for the real tax payers. I'm sure there are some genuine contractors out there but everyone that I know is running some kind of fiddle.

            1. Dr. Mouse Silver badge

              "The higher rate of tax is 45% not 40% ... and your lose your tax free allowance as well"

              Actually, higher rate is 40%, from £50-150k. 45% is additional rate, for £150k+.

              The personal allowance is gradually removed from about £100k if I remember correctly.

            2. elsergiovolador

              You are incorrect. The NI and Dividend tax land it the same bucket, so it doesn't really matter how it is labelled. Dividend tax pays for those benefits just like NI.

              1. Dr. Mouse Silver badge

                I don't think that's actually true. NI goes into the national insurance fund, which is separate but for contributory benefits (and a small contribution to the NHS) only.

                If it's in surplus, the government can borrow from it for other things (like paying down debt), but it's still technically owed to the fund.

                However, the benefits he mentioned aren't contributory benefits so don't come out of that pot anyway, but from general taxation.

                1. elsergiovolador

                  I still think that is just labelling. I'll give you an example. Let's say you have a mortgage to pay that is X, you receive a salary and you have to pay X out of your salary to cover the mortgage. Now let's say that your employer tells you that Z of your salary is meant to pay for your mortgage and you cannot spend it on anything else and he or she gives you Z in a separate envelope. The you go home and mix all the money and pay X. Is there going to be a difference? If Z was lower than X, you would use the rest of salary to cover it. The NI is not truly ring-fenced, so it really is just a matter of label. If there is not enough NI to fund NIF, then it would come from other sources.

                  Only difference I can see is that NI contributions register your entitlement to benefits.

                  I would agree with you if NIF couldn't be funded by anything else than NI.

      2. Dr. Mouse Silver badge

        "One of my fellow contractors claimed a tax deduction for the cost of a new carpet in his spare bedroom, since he pretended it was his home office and that the wear and tear on the old carpet was down to business use. And yes, he got that one past HMRC."

        I don't see how this is relevant. If he has falsely claimed something as a business expense, then this is fraud. It is not a tax advantage of being a contractor.

        And any business owner can do similar things. For instance, the MD of a company I once worked for had some of his warehouse staff use the company van to pick up a load of his furniture from his house and store it at the warehouse for several years. He paid nothing for this (except in any reduction of profits), the company basically providing him the services of a mover and a storage unit for free. IMHO, this is no different to what your fellow contractor did.

        1. james_smith Silver badge

          "I don't see how this is relevant."

          My point was that most of the contractors I've worked with claim these deductions fraudulently, quite openly boasting about it and mocking those that didn't. As for IR35, it's been clear for a long while that a lot of companies employ contractors because it's cheaper than employing permanent staff for what are really permanent roles. For instance, on my last contract in 2016 the head of development had been a contractor at the same company, in the same role, for over ten years and was still outside IR35. In a programming and DB support team of roughly thirty people all but two were contractors and almost all working on BAU stuff, not short term or specialised development .

          1. elsergiovolador

            If you think they evaded tax then you should have reported them.

            In 2017 the tax on dividends changed and there is no more tax advantage to work through PSC.

          2. Dave K Silver badge

            At my place, contractors are more expensive than employees and for the work we do, we have a mixture of about 60% employees to 40% contractors. Why do we have contractors if they cost us more? Flexibility. Workload and demand are constantly changing, and contractors are far easier to source and release than employees are.

      3. Doctor Syntax Silver badge

        "You can also employ your spouse"

        I've removed your superfluous quotes. Although, AFAIK, it's not necessary for small companyies to have a Company Secretary these days it's still an option. SWMBO was my CoSec and it was she who signed contracts on behalf of the company. The CoSec has legal responsibility for the company and should be entitled to be paid for that responsibility. If accepting that legal responsibility isn't genuine employment I don't know what is.

        1. james_smith Silver badge

          I hope you explained SWMBO the legal responsibilities and possible consequences of being your company secretary,

          1. Androgynous Cupboard Silver badge

            I looked into getting a business loan a while back. The bank had a non-negotiable requirement that a lawyer sit me down and go through the contract with both me and my wife, who is also a director.

            The lawyer (who happened to be a mate of mine) explained this was due to a case where the husbands company (the wife was also a director) took a loan out, then later divorced. The bank chased both for repayment. She successfully argued that although she was a company director, she was not aware of her husbands loan application and had no liability for it.

            So there are very real legal responsibilities for SWMBO.

            1. Dr. Mouse Silver badge

              "She successfully argued that although she was a company director, she was not aware of her husbands loan application and had no liability for it."

              As far as I am aware, she wouldn't. If the loan was to the company, the company owes it. It's a limited liability company, so unless she signed a personal guarantee she would never have any liability.

              There could be financial consequences to it (lower company profits or value of shares) which could affect the divorce settlement, though. It shouldn't matter whether she knew about the loan or not in that case.

    2. Doctor Syntax Silver badge

      "consultancies that happen to be party donors"

      I always reckoned that when IR35 was introduced we should have had a whip-round and see if we could raise half a Bernie to contribute to Labour to get it rescinded. Then it could have been found out (with a few hints to the media) and they'd have had to give it back.

  5. alain williams Silver badge

    HMRC's CEST is deliberately flakey

    and gives different answers at different times to IR35 rules that are vague/hard-to-understand. The inevitable result of that is that companies will take the path of least risk to them: push people into IR35, even if said risk is very small. So: the winners get what they want, the winners being the large consultancies who get to push their underqualified staff at inflated prices.

    One way of (partly) fixing this would be to force a company (if asked) to take someone 'found' to be within IR35 fully onto their payroll complete with holiday, etc, benefits. This might also benefit the lower paid gig workers such as Deliveroo riders.

    1. Anonymous Coward
      Anonymous Coward

      How many companies used this for "cost saving"

      Many companies made a permie "offer" along with the determination, that was significanlty lower than that contractors worth on the permanent job market. Iff there was a "disguised employee", shouldn't the "employer" be paying that tax? Of course there were umbrella routes with major consultancy firms too...

      It's all quite fishy.

  6. Dr. Mouse Silver badge

    There are many things which bug me about IR35, but here's one few seem to have brought up in the past.

    There are a fair number of digital agencies out there who supply development services to clients on a man-hour basis. They will bill out their staff to the client for an inflated rate: One I know of charged their client around £500 per developer day, with their staff devs being paid around £175/day (£45k/yr). They employed support staff, too, and paid for office space and the like, but made a hefty profit which was partially paid out in dividends.

    Many of these arrangements I have seen would fall inside IR35. The client has significant control of the developers, they insisted on particular, named devs (no substitution), there is a contract in place with a retainer for a set number of dev-hours (MOO) etc.

    If these were considered to be inside the reformed IR35 rules, the entire £500/day charged to the client would need to have income tax and national insurance deducted by the client, regardless of the other expenses incurred by the agency. The payments for those other expenses would have to come from already-taxed funds, including paying other employees (which would be taxed again).

    A digital agency is allowed to operate this way without IR35 applying, yet a contractor is not. How is this right?

    1. elsergiovolador

      You hit the nail on the head. Some of these agencies are party donors.

      Such agency would charge much more for a developer per day - area of £1000 per day is more realistic. This will provide a developer hired as an employee at about £50-70k, so there is no IR35 involved, as the worker is on PAYE.

      Imagine how much money these agencies made when changes to IR35 were introduced in public sector. They can't wait for this to be introduced in private sector now so they can make a killing.

      Company can take a contractor on £500 and risk heavy fines if they get contract and status wrong, or they can take on agency at slightly higher cost, but no risk of crossing HMRC.

      The result is that small companies providing IT services can pack their bags, as no company is going to risk getting the IR35 status wrong.

    2. Doctor Syntax Silver badge

      'Twas ever thus. It's called body-shopping. Back in the day the IR even had a standard contract as a PDF on their site which included a "key man" clause which is what you're referring to. Oddly enough this specimen contract disappeared from the site some time after IR35 was introduced but not before I'd taken a copy in case I ever needed to use it a evidence.

      As civil cases, which includes tax cases, are decided on the balance of probabilities it seems quite wrong to me that the probability that the relevant clause in a freelancer's contract isn't such a commercial "key man" clause isn't considered.

  7. Doctor Syntax Silver badge

    "Brit contractors are opting out of the rules in droves – and many employers no longer care."

    Employers of whom? The employers of the contractors are the contractors' own companies and they care very much.

    1. Mike 137 Silver badge

      Employers of whom?

      That's the entire point. A limited company contractor is not an employee of the client. They're an employee of their own limited company. They have a contract of service with the client, not a contract for services. That's what HMRC has overthrown, essentially unlawfully.

      I'm amazed that this fundamental error is still being perpetrated after all this time.

  8. Anonymous Coward
    Anonymous Coward

    I've heard that there's some sort of global crisis going on that might crash the economy. Perhaps it's best to make hay any way you can

  9. sabroni Silver badge

    but without the same holiday and sick pay benefits

    They're all empoyed by their own companies and could provide themselves with the same holiday and sick pay. If that isn't affordable they're not charging enough or not worth enough.

    1. elsergiovolador

      Re: but without the same holiday and sick pay benefits

      If your engagement is determined as "inside IR35" then your company will not have any profit to provide you with those benefits, because you have to take entire fee as salary (there is 5% allowance in private sector for company costs)

      Imagine an employer would have spent all available company cash on salary. That's what IR35 does.

      You can't run business under those circumstances.

      Also because the fines are so disproportionate for classing someone as "outside" wrong, companies will not bother and class everyone inside or stop using contractors and we had evidence of that as the April was approaching.

      1. Dr. Mouse Silver badge

        Re: but without the same holiday and sick pay benefits

        Note that even the 5% allowance disappeared once the reforms come in.

      2. sabroni Silver badge

        Re: You can't run business under those circumstances

        So it's not financially viable and you'll have to get paid like everyone else? When you're so special?

        Nightmare.

        1. Dr. Mouse Silver badge

          Re: You can't run business under those circumstances

          No, it's not financially viable to run a business inside IR35. However, that also means your own company cannot provide you with employment rights and benefits, and the client or agent isn't obliged to, making "inside IR35 contractors" into "zero rights employees".

          When the contractor is making this determination himself, this can be understood. They are making a business and personal decision about the circumstances. Where the client makes this determination, the government are effectively allowing and legitimising their ability to opt out of providing basic employment rights.

          As this status is legitimised, how long do you think before companies stop recruiting staff and only take on "inside IR35 contractors"? They can avoid all those pesky rights, like sick pay and holidays, and the government has said it's OK to do so.

          1. elsergiovolador

            Re: You can't run business under those circumstances

            This "reform" also allows companies to fire existing staff and give them take it or leave it offer of "inside IR35" contract. To work in a such way the staff will not be required to start a company, but only to join designated umbrella.

          2. Anonymous Coward
            Anonymous Coward

            Re: You can't run business under those circumstances

            My contract didnt extend due to brexit, IR35 and company moved development to Europe.

            No new high pay IT jobs now due to COVID-19. I got a job from Outside IR35 , changed to permanent to Inside IR35 in between the interviews. So a permanent job moved to Inside IR35 and another person who got a permanent offer and that person was not willing to join Inside as he has kid. I came to know of this after joining. Short Story: Inside IR35 is profitable to Clients compared to Outside IR35 and Permanent employee. The downside of IR35 is no holidays paid, no benefits as pension, bonus and employers NI, employee NI, taxes, umbrella fees, tax levie to be paid.

            1. elsergiovolador

              Re: You can't run business under those circumstances

              Don't forget by working inside you cannot offset any business costs against tax, so it is actually taxed more than employment.

  10. Anonymous Coward
    Anonymous Coward

    Goodbye gravy train

    Hopefully this sees an end to contracting and more permanent jobs, with no special cases, everyone paying proper tax.

    I know ego will stop people agreeing with me, but you don't "deserve" to pay less tax.

    1. elsergiovolador

      Re: Goodbye gravy train

      You believed in an HMRC lie and seem very salty, but be careful what you wish for. The "reform" has also something for permanent employees. The day it gets implemented, companies will be able to fire all their permanent staff and offer them "inside IR35" contracts instead.

      Employers will not have to care about employment law any more. This "reform" even removes provisions like equal pay or discrimination. Got sick at work? Employer will be able to wave you good bye legally.

      1. Anonymous Coward
        Anonymous Coward

        Re: Goodbye gravy train

        Yikes. OK then thanks for that. I'll check it out, if it's true its horrible.

        Employment rights for all! Vote Labour

        1. elsergiovolador

          Re: Goodbye gravy train

          Google norightsemployee - there is a website that explains this issue concisely.

          Funnily enough it is Labour who invented this and Tories took it to next level.

    2. Dr. Mouse Silver badge

      Re: Goodbye gravy train

      "Hopefully this sees an end to contracting and more permanent jobs, with no special cases"

      And what of those of us who do not want a permanent job?

      I like being a contractor. I enjoy being able to pick and choose my clients, to move from one to another, to always have a new challenge. I work differently to employees, and like doing so.

      I don't really care about the taxes involved, as long as I am able to work the way I would like. If declared inside IR35;

      1 - The role would not be one I would want (if it has been assessed correctly). It would be an employee role, exactly what I wanted to avoid by becoming a contractor.

      2 - I would not have the business flexibility needed to be able to work as I wish.

      The other things is that being declared inside IR35 would, effectively, be calling me a liar. As you can probably appreciate, I take exception to that.

    3. Jimmy2Cows Silver badge

      Re: but you don't "deserve" to pay less tax.

      Ego has fuck all to do with disagreeing with you. There are a few chancers, sure, same as any other sphere, but mostly not. You do realise dividend tax was increased in 2017, so PAYE and contractors pretty much pay the same amount of tax overall, on the same gross income?

      This whole "pay less tax" thing is bollocks these days. And no, I'm not a contractor.

      All this does is create conditions whereby people can be fired then rehired (or not) on "inside IR35" terms - no rights, no sick/holiday/pension pay, no employment protection.

  11. Spanners Silver badge
    Big Brother

    They are not reforms

    They are a power/money/etc grab.

    If you have to use the word, please put it in inverted commas as below

    IR35 "reforms" on hold for a year.

    This shows that whilst some officials may choose to use the word, they ay ot e as described.

  12. Anonymous Coward
    Anonymous Coward

    Big Blue are digging their heels in. The projects i'm working on continued to move us all inside IR35 and onto Unbrella schemes...

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