New IR35 business tests - opinions?

rrobbo

BaconandEggs wrote: »

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?

To be honest, I have absolutely no idea about the applicability of IR35 to truly self employed people who aren't incorporated. I suppose the same principle applies that there might be 'disguised employment', in this case the employer's 13.8% NI contribution isn't being made and the lesser rate of employee's NI is being paid (ultimately everything is about HMRC getting every penny that it thinks is due to it). However, I don't think that the mechanism exists for you to pay in any other way if the employer doesn't want to put you on PAYE. At least you have an accountant who should be able to direct you in the best way.

It may differ from company to company, and probably industry to industry, but the clients that I've had would not have dealt with me on a self-employed basis - they would only engage on a company to company basis.

PlutoinCapricorn

IR35 doesn't apply to Sole Traders, who operate as themselves rather than though a limited company, but as rrobbo said they too are in danger of being classified as an employee if certain criteria are met: HMRC is cracking down on "false self employment". HMRC's website gives full details of what they look for, but a regular payment over the long term is something likely to trigger them.

The issue is that some people try to avoid the risks of being ones own boss while getting the benefits e.g. tax relief, and some employers try to avoid responsibilities such as sick pay.

rrobbo

As much as IR35 (and the new BETs in particular) are a very poor way of addressing the problem, there is a problem with people exploiting loopholes created by badly structured legislation and it's worth understanding what that is (apologies to all those who know this inside out already). The figures probably aren't 100% but it just serves to show the general issues involved.

If an employee works for a company on a £75k salary, they will likely pay £4,850 NI and £19,880 tax and the employer will pay £9,300 NI (total tax take of £34,030). The employer will likely also pay at least another 10% in other benefits (£92k in total) and will probably get about 44 weeks work (after annual leave, bank holidays, sick leave, etc.).

The same person ends employment on the Friday and starts the same job as a contractor through a Ltd company on the Monday being paid £50 an hour for a 40 hour week - a cost of £88k for the same guaranteed 44 weeks (the employer likely has other reasons for wanting fewer permanent employees going through the books). VAT is probably charged but will probably just get claimed back by the employer, so no nett difference.

The contractor probably incurs an extra £1k in expenses and is able to claim an extra £2/3k in expenses (travel, home office, etc). They may pay themselves a director's salary of £7k (no NI to pay) and then pay £15,600 in Corporation Tax on the remaining £78k of profit. If they pay the full amount as a dividend then they'll pay around £8k in personal tax for the amount that falls into the 40% tax bracket.

This means a total tax take of £23,600 rather than the £34,030 for the same job in direct employment, a loss of £10,430 in tax take.

If the contractor gets creative then the lost tax take can be bigger. If their spouse doesn't work then they may make them an equal director/shareholder and both take a £7k director's salary. This means Corporation Tax of £14,200 on £71k. If this profit is split as equal dividends then 40% tax can potentially be avoided altogether. This means the tax take drops to a total of £14,200, a loss of £19,830. It's easy to see why HMRC can take exception to husband/wife set-ups that aren't fully justified.

The recent changes to child benefit payments can further compound the problem. For 3 school age children the child benefit can be £2,450 a year (tax free). This likely wouldn't be paid on a primary salary of £75k but would probably be paid if the dividends were split equally.

John_Pierpoint

,,,,,,and the two of them work out of a shed in the garden, so no expensive office rents and no expensive business rates, so that is even less tax being paid.

Look out we will be back to the swinging 1960s when the government machine only took 27% of GDP (and actually owned many wealth producing enterprises like my local electricity company, now owned by Hong Kong.)

This country has been eating its own seed corn for the last 40 years.

http://dunsterhouse.co.uk/article/361/what-is-a-u-value

rrobbo

All this background to why HMRC is (quite understandably in some cases) chasing after Ltd Company contractors brings us back to the general discussion on the new BETs. Because the current legislation is open to interpretation (and therefore abuse) and is as likely to trip up a 'true' contractor as it is a tax avoidance contractor there was pressure to better qualify the rules to make it clear where everyone stood. Instead of improving the legislation that was already in place, HMRC has added another layer of guidelines (of questionable legal significance) that references risk levels in a pretty pointless way.

At best the new BETs simply offer those Ltd Company contractors of questionable status a means of manipulating their status to avoid a full-on IR35 investigation. With absolutely no bearing on the actual way that they're working (possibly even if they were a Friday to Monday contractor who switched over a year ago) they can set up a basic office (10 Pts), take out basic insurance (2 pts), manufacture some advertising (2 pts), have business plan (1pt), make sure they invoice (2pts) and have a substitution clause (2pts). This gives 19 points straight away. If they can somehow add in a repair at own expense clause in such a way that it's pretty risk-free, they get an extra 4 points, taking them to 23 in total - they could even forget about the advertising and still get 21 points, which puts them at low risk. In theory this means that if they get pulled for an IR35 investigation they just need to prove each of these points and they get a free rein to do what they like for the next 3 years. Does this mean that even husband/wife companies are back in play again if you can get enough points?

If you're a Ltd Company contractor who is really a disguised employee who is pulling in £10k a month and potentially saving £2k a month in tax and NI, spending £400 a month on a basic office (£320 a month after tax allowance) to keep yourself safe is probably the best investment you've made.

That's why this is a very badly thought out set of tests that can only benefit the very people that it's supposed to be placing the focus on. If you give people opportunities to pay less tax then they'll take it. If you give people a means of getting immunity from tax investigation then they'll definitely take it. Does anyone at HMRC ever bother to think out how their proposals will work in the real world. Anyone who is validly a Ltd Company contractor potentially won't bother manufacturing their BETs score and will rely on just fighting their case if they get pulled up - which potentially means an even lower average return from IR35 cases.

Jemma130

IR35 can be such a minefield sometimes, theres guides about it and an IR35 compliance guide on this page - http://www.qdosconsulting.com/freelancer-contractor

and an article about what to do about the new IR35 letters here: http://www.qdosconsulting.com/qdos/news/2012/06/20/new-ir35-letters-our-guide

Jemma130

I think most sensible contractors actively make efforts to comply with IR35 anyway, like having PI insurance or even tax liability cover, just in case. I found this IR35 compliance guide helpful - http://www.qdosconsulting.com/docs/default-document-library/ir35-guide-with-contract-assessment-notes.pdf?sfvrsn=0 - http://shop.qdosconsulting.com/
I don't think the test will make that much difference - it is only used as a guide, and intended for the contractor's use, it won't be used by HMRC thankfully. The actual IR35 legislation hasn't altered, but there may be an increase in investigations, however needless or pointless they may be!