New IR35 business tests - opinions?

chrismac1

As per my earlier quote, name me a UK business and I'll show you one that gets a low score on these daft tests. If you are deemed to be employed, HMRC normally come after you for the PAYE and employee's NI becuase they prefer to pick on the small guys. Then once they've secured that from you, they might go after the employer for employer's NI.

The threee main tests accepted by the Courts are:

1. Ongoing relationship.
2. Control and direction.
3. Substitution.

There are numerous sites which deal with this issue, mine is one and I can send you a link if you PM me your details. If you get insured, make sure it's comprehensive cover.

For example, the one claim I've had this year was for 3 hours I spent dealing with a "fishing trip" letter from HMRC. After my 3 hours they wrapped up the case. Some policies would not have covered that 3 hours, which in turn might have led to the three hours becoming 15 or 20 due to the interaction becoming a full blown visit.

BaconandEggs

Hi Chris,

Many thanks for your message. Does your site provide the insurance. Is the comprehensive cover £80/annum? Would be most grateful for further info pm'd.

Cheers,

prowla

Just goes to show - the Tories are as bad as NuLab were.
(I voted Tory for the last time last election.)

rrobbo

prowla wrote: »

Just goes to show - the Tories are as bad as NuLab were.
(I voted Tory for the last time last election.)

The reality is that whichever political party is in power will have very little impact on how IR35 is administered. The politicians deal in little more than soundbites and high-level direction, the civil servants will simply dress up their own agenda to fit with this. With the best will in the world very few politicians will have the interest, experience or ability to assess the impact of proposed legislation of this nature.

Even if the legislation is a failure it can always be dressed in unqualifiable statistics along the lines of 'IR35 dissuades tax avoidance, which is why so little tax avoidance is found'. It always reminds me of the joke where a man is wandering around scattering powder and another man asks him what it is. "Anti-Elephant powder" he replies. "But I've never seen any elephants around here". "Yes, good isn't it?!!".

Ultimately there are lots of different individuals operating through Ltd Companies in a variety of ways for a variety of reasons. A significant proportion of them are probably incentivised to structure the way that they pay themselves in such a way that it reduces/removes their exposure to what has to be considered the onerous burden of employer's/employee's National Insurance. If they provided exactly the same service on a self-employed basis then they'd likely pay a reduced level of NI to standard employees.

As long as current taxation legislation massively penalises those individuals who take the risk to work for themselves (and potentially generate business that wouldn't be there otherwise) and at the same time leaves a wide door open to avoid those penalties with the caveat that anybody who takes that option may or may not be prosecuted out of business based on some vague and inconsistently applied rules we'll have issues surrounging the way that this whole process is administered.

BaconandEggs

chrismac1 wrote: »

If you are deemed to be employed, HMRC normally come after you for the PAYE and employee's NI becuase they prefer to pick on the small guys.

Hang on - as a sole trader, I'm paying the same tax and NI as I would be if I was emplyed anyway - and as I am via my PAYE work.

John_Pierpoint

The self employed can get to charge expenses against tax that an employee would have to try to get his master to pay.
For example his place of business can be his home, thus making travel to the work an expense.

rrobbo

BaconandEggs wrote: »

Hang on - as a sole trader, I'm paying the same tax and NI as I would be if I was emplyed anyway - and as I am via my PAYE work.

I think that this is where it isn't as clear cut as it might be. I'm not in an way an expert on this but I believe that if you're an employee of a company then you get paid through PAYE and have Class 1 NI deducted, which is now 12% (subject to alowances and limits of course). Options to reduce this are limited - pensions, etc. The employer also pays NI, which I think might be 13.8% now.

If you're truly self-employed, i.e. working for yourself but not incorporated, you are subject to Class 2 NI at £2.65 per week and then Class 4 NI at 9% above a set limit. There's more scope for deduction related to carrying out your business.

The big discussion point is with incorporated sole-traders. These are simply individuals who provide their services to one or more clients through a limited company. The client pays the limited company and not the contractor and is therefore not responsible for any National Insurance payments as they're not actually employing anyone. What happens next is really at the discretion of the contractor. They may pay themselves all of the salary that they receive as PAYE as an employee of the company and pay both employer's and employee's NI (nearly 26% on a chunk of earnings) in addition to normal tax. What the contractor may decide to do though is pay themselves a smaller salary (possibly even above the Lower Earnings Limit but below the primary NI threshhold which means that they pay no National Insurance but get credit towards future benefits as if they had paid NI). The remainder could be paid as a dividend, which would attract tax (no extra needed at the basic rate, as Corporation tax already paid). What the contractor may do is try to split the dividend over multiple people (often their spouse) to use multiple tax allowances (but this has obviously always been a bone of contention with HMRC) and possibly carry revenue over to future tax years to try to keep under the higher rate(s) of tax. It's really the number of different ways that it's possible to distribute earnings from the Ltd company (and therefore manipulate the tax and NI commitments) that's at the crux of all of this legislation.

prowla

Well NuLab introduced IR35 and for a time the Tories said they would abolish it - but not any more, apparently.

Anyway, I'm not contracting at the moment, so it's not as important to me these days...

rrobbo

prowla wrote: »

Well NuLab introduced IR35 and for a time the Tories said they would abolish it - but not any more, apparently.

Anyway, I'm not contracting at the moment, so it's not as important to me these days...

I think that there's simply no political stomach at the moment to remove anything that could be interpreted by the press as giving the highly paid further tax avoidance opportunities. Recent press coverage relating to the use of the Ltd company structure to provide services (including cases such as Ken Livingstone's) have specifically referenced incorporation as a means of avoiding higher rate tax, a more sensationalist statement that's politically sensitive (headlines relating to employer's and employee's National Insurance contributions don't have quite the same impact). As recent events have shown, the press won't let the facts get in the way of a good story.

My personal view is that the issue arises because, in some cases, employers are manipulating the current tax system to restructure employee contracts into Business To Business transactions where they reduce their commercial and legal responsibilities. For me it makes more sense to review the legislation surrounding B2B transactions rather than chasing individual contractors. A blanket sales tax (non-recoverable) on the provision of services between two businesses (possibly only applying if the consuming business has a minimum level of turnover) and paid by the consuming business may make more sense in many cases. Not only would this reduce some of the benefit of 'Friday to Monday' scenarios (by maintaing the overall tax liability) it would also help to reduce the attraction of offshoring some services where all PAYE revenues are completely lost to HMRC. This would potentially impact demand for some 'real' service providers and would undoubtedly generate new ruses for tax avoidance but seems a better way of getting to the source of the problem.

BaconandEggs

rrobbo wrote: »

I think that this is where it isn't as clear cut as it might be. I'm not in an way an expert on this but I believe that if you're an employee of a company then you get paid through PAYE and have Class 1 NI deducted, which is now 12% (subject to alowances and limits of course). Options to reduce this are limited - pensions, etc. The employer also pays NI, which I think might be 13.8% now.

If you're truly self-employed, i.e. working for yourself but not incorporated, you are subject to Class 2 NI at £2.65 per week and then Class 4 NI at 9% above a set limit. There's more scope for deduction related to carrying out your business.

The big discussion point is with incorporated sole-traders. These are simply individuals who provide their services to one or more clients through a limited company. The client pays the limited company and not the contractor and is therefore not responsible for any National Insurance payments as they're not actually employing anyone. What happens next is really at the discretion of the contractor. They may pay themselves all of the salary that they receive as PAYE as an employee of the company and pay both employer's and employee's NI (nearly 26% on a chunk of earnings) in addition to normal tax. What the contractor may decide to do though is pay themselves a smaller salary (possibly even above the Lower Earnings Limit but below the primary NI threshhold which means that they pay no National Insurance but get credit towards future benefits as if they had paid NI). The remainder could be paid as a dividend, which would attract tax (no extra needed at the basic rate, as Corporation tax already paid). What the contractor may do is try to split the dividend over multiple people (often their spouse) to use multiple tax allowances (but this has obviously always been a bone of contention with HMRC) and possibly carry revenue over to future tax years to try to keep under the higher rate(s) of tax. It's really the number of different ways that it's possible to distribute earnings from the Ltd company (and therefore manipulate the tax and NI commitments) that's at the crux of all of this legislation.

I'm not doing any of that you mentioned in the last paragraph. I', paying tax and NI just as I am on my PAYE work. My accountant said that there would be benefits to setting up a limited company, but that there would also be greater risks (in terms of ir35). These risks aren't worth it for the amount I earn on a self-employed basis - so I decided to go via the sole-trader route. Would people agree that this minimises risk from problems via ir35 and negates the need for any ir35 insurance?