IR35 and rate reductions

ece9600

Since summer 2019 I have worked two days a week for a client, contracting through an agency and my PSC. This arrangement was chosen by the client.

I fall within the IR35 regime so from April the agency will be deducting tax. No problem with this- it's definitely an employment-type relationship.

What I hadn't realised is that they intend to cut my hourly rate to cover the costs to them of the new arrangement. I'm paid £50 an hour and they want to reduce this to cover their liability for employers' NICs and holiday pay. This seems completely outrageous to me: I've no problem with being taxed as an employee but don't see why I should also bear the employer's costs.  I'm on a rolling one year contract with a two week notice period so presumably, if I don't agree to the rate reduction, they can just give me notice (in theory).

I'm not happy with this at all and don't want to accept the lower amount. I just wanted to get a sense of whether I'm being reasonable in feeling outraged by it.  The agency is trying to present it to me as a natural consequence of IR35 but, as I see it, it isn't a natural consequence at all and they are simply trying to strong-arm me into taking a lower rate.

Hopefully I can agree a new rate with my client that will mean I'm not out of pocket.  I just wanted to get a sense of whether I'm being unreasonable or the agency is, so that I can negotiate fully informed.

Thank you!

DoctorStrange

Um, from what you've said your bigger issue is that you've not being paying the ENIC up until now. 


The rules aren't changing (only who makes the decision is changing). So,  if you're inside now,  you've been inside all along and you can expect HMRC to come looking for previous missing payments.


That aside,  they can't legally deduct ENIC from your rate,  but they can offer you whatever they like once your current contract expires  - it's obviously up to you whether or not you wish to accept that offer.


Sorry this ain't what you wanted to hear...

Grumpy_chap

Have they given you an option to go "on the books"?  
Being caught "IN" IR35 but not gaining any employment benefits could be the worst of all worlds.
What would a staff equivalent salary be with the same employer?

Your current £50 per hour is the total cost to the employer (ignore the agency fee as that won't change).
8 hour day, so £400 per day
£2k per week (FTE - I note you only do 0.4 FTE)
If you do 45 weeks per year, that is £90k / year cost to the employer
Why 45 weeks?  52 in a year.  5 weeks annual leave makes 47.  1.8 weeks banks holiday.  0.2 weeks sickness.  Makes 45.

An equivalent employee, say £50k
Plus car / allowance, £5k
Plus pension contributions, say £4.5k (assume 9% typical for senior roles, not the statutory minimum)
Employer's NI, £7.5k
Total cost to employ £67k

Your current contract basis gives the employer certainty of cost plus flexibility.

If you were to go staff, lower costs, but staff accrue rights (parental, redundancy, notice, more sickness than contract staff), less flexibility.

If your current £90k is to be plus NI, then the cost to the employer increases widening the differential to staff.

What I don't know in this example is whether the £50k staff salary is a fair equate to your £50/hour contract rate.

ece9600

Thank you, both.

Dr Strange, don't worry- I'm an employee of my PSC so am paying NICs (for the amount I earn there's not a huge difference tax-wise so I've never been tempted to take a dividend instead), but the PSC can claim deductions for business expenses (for things like indemnity insurance, stationery, phone etc- I work from home)- all costs I'll still have after April but which I won't be able to deduct. I'd thought (maybe foolishly) that I'd lose the deductions but that I'd no longer be paying employers NI. There's been no suggestion that the agency (as employer) or the client will reimburse me for this stuff.

Grumpy chap, that's really helpful- thanks. That's definitely an option I'd be interested in so might be something I can talk to the client about.

DoctorStrange

That reduces your risk somewhat as you've been paying the ENIC and IT/NIC all along,  but it may raise the question from the client that "if you've always been paying ENIC, why dispute it now?"

The main difference going forward it seems is your expenses - is it possible to speak to the client on those grounds? Like they may be able to help with genuine work expenses, as they presumably do with any other employee? 

If not,  I'd still try to negotiate a rate increase to offset the costs but avoid reference to ENIC and focus on your costs, as that may  be received more sympathetically.

ChuckMountain

Prior to IR35 it was up to you how you paid yourself, a lot of contractors would have paid themselves just over the NI threshold and the rest in dividends.  That's your choice though and your accountant should have at least advised you of this.
Above £12,500 personal allowance, you would be paying roughly 19% Corporation Tax + 7.5% Dividend so 26.5% on earnings up to £50k, which as you were doing 2 days a week and assuming no other income would be still under.
By paying yourself a regular wage you would have paid 20% income tax + 12.5% NIC + 13.8% ENIC = 46.3% on earnings over £12,500.
It's probably cost you around £5k a year in additional taxes by doing it the way you have.

In moving to inside IR35, the client will be still paying £50 an hour but the agency with have to pay ENIC.  That depends on your actual earnings, so it shouldn't be a flat 13.8% reduction as you they don't pay any until the thresholds.

What is the agency saying is the % reduction?