This is the end of contracting...

[jammy_basturd]

Does anybody know what constitutes a contractor and what constitutes a business providing services? Or will all businesses have to take this test if they provide services to a company for more than X months?

[Sonic]

jammy_basturd said:

Does anybody know what constitutes a contractor and what constitutes a business providing services? Or will all businesses have to take this test if they provide services to a company for more than X months?

HMRC have been trying to figure that one out for a looonnnggg time

[Eric Mc]

When IR35 was first introduced in 1999/00, it was assumed that ALL businesses would apply the various tests in order to ascertain the nature of any relationships it had with its customers.

The legislation was primarilly targetted at "personal service companies" i.e. limited companies which predominately consisted of a single director set ups i.e.individuals providing their personal skills through a limited company arrangement instead of a "!normal" long term or short term employment contract.

However, the legislation was couched in such a general way that the scope of IR35 goes beyond simple "personal service companies".

For a start, IR35 constantly refers to "intermediaries" - which can be ANY sort of set up. So a limited company, a partnership, an LLP or a trust could all enter into an arrangement where IR35 might be applied.
Also, it covers contracts rather than businesses.

So, a legitimate trading/professional business which has multiple customers may find that a number of its contractual arrangements could be caught under IR35. The example that was given way back in 1999/2000 was a situation where an accountancy firm allocates one of its senior staff or a partner to a large client on a semi-permanent basis.
If the staff member/partner was handled under normal PAYE as an employee of the accountancy firm, there was no issue. However, if the individual received some or all of their income in the form of a partnership share of profit, HMRC stated that this income might have to be treated as falling under IR35 and full PAYE and NI would need to be applied.

Now, in reality, in the intervening 17 years since this was put about I do not know of a single case where HMRC tried to pursue a professional firm using this particular set of circumstances as a tool to extract IR35 deductions.

From what I have seen or read, all the latest talk about changes to contracting does not seem to be saying anything significantly different to what was said in 1999.

[Granfondo]

Ean218 said:

Dr Jekyll said:

If you are running your own business, who pays your holiday pay and sick pay?

Errrr, the business does of course.

You seem to be confusing ownership with employment.....

That's because the one man band ltd co's are a business in name only, in reality there just short/long term employees!

[Eric Mc]

Granfondo said:

That's because the one man band ltd co's are a business in name only, in reality there just short/long term employees!

Some are - some aren't. The problem is differentiation.

[Granfondo]

Eric Mc said:

Granfondo said:

That's because the one man band ltd co's are a business in name only, in reality there just short/long term employees!

Some are - some aren't. The problem is differentiation.

Of course ,painters plumbers sparkles etc with loads of different customers YES, guys in the oil industry and IT etc working for one company for months years on end NO.

[worsy]

Eric Mc said:

When IR35 was first introduced in 1999/00, it was assumed that ALL businesses would apply the various tests in order to ascertain the nature of any relationships it had with its customers.

The legislation was primarilly targetted at "personal service companies" i.e. limited companies which predominately consisted of a single director set ups i.e.individuals providing their personal skills through a limited company arrangement instead of a "!normal" long term or short term employment contract.

However, the legislation was couched in such a general way that the scope of IR35 goes beyond simple "personal service companies".

For a start, IR35 constantly refers to "intermediaries" - which can be ANY sort of set up. So a limited company, a partnership, an LLP or a trust could all enter into an arrangement where IR35 might be applied.
Also, it covers contracts rather than businesses.

So, a legitimate trading/professional business which has multiple customers may find that a number of its contractual arrangements could be caught under IR35. The example that was given way back in 1999/2000 was a situation where an accountancy firm allocates one of its senior staff or a partner to a large client on a semi-permanent basis.
If the staff member/partner was handled under normal PAYE as an employee of the accountancy firm, there was no issue. However, if the individual received some or all of their income in the form of a partnership share of profit, HMRC stated that this income might have to be treated as falling under IR35 and full PAYE and NI would need to be applied.

Now, in reality, in the intervening 17 years since this was put about I do not know of a single case where HMRC tried to pursue a professional firm using this particular set of circumstances as a tool to extract IR35 deductions.

From what I have seen or read, all the latest talk about changes to contracting does not seem to be saying anything significantly different to what was said in 1999.

Hear hear Eric. Just hoping that ham fisted legislation does not push it too far the other way.

I know of a contractor who is a pilot. A pilot for an airline. How that can not be direction and control etc is beyond me.

[Eric Mc]

Granfondo said:

Of course ,painters plumbers sparkles etc with loads of different customers YES, guys in the oil industry and IT etc working for one company for months years on end NO.

If only it was as simple as that.

[Eric Mc]

worsy said:

Hear hear Eric. Just hoping that ham fisted legislation does not push it too far the other way.

I know of a contractor who is a pilot. A pilot for an airline. How that can not be direction and control etc is beyond me.

Every set of circumstances is different and HMRC simply does not have the manpower to investigate all these marginal cases.

[Dr Jekyll]

worsy said:

Hear hear Eric. Just hoping that ham fisted legislation does not push it too far the other way.

I know of a contractor who is a pilot. A pilot for an airline. How that can not be direction and control etc is beyond me.

Where do you draw the line though?

An air taxi pilot?
A ferry pilot?
A flying instructor?

[Frankthered]

worsy said:

Frankthered said:

Isn't the "worst case" here that everybody becomes a PAYE contractor?

I've worked that way a couple of times in the past and in both cases there was still a significant financial advantage, offset by the usual drop in benefits.

The difference in rate between PAYE and Limited Company was (IIRC) about 11% which represented the employers NI contribution.

OK, I kept a smaller percentage of the gross because I had to pay more tax (and NI), but in both cases I was earning significantly more than I had as a permanent employee with the same companies.

If it is the government's goal to make everybody go PAYE, it makes the changes to dividend tax make even less sense!

Issue for me is that I like the way I can tweak my dividend based on my personal circumstances. I leave money in the company for any rainy days/training courses etc. If I am forced to operate PAYE then leaving money will attract 20% CT PLUS the PAYE element when I eventually draw it.

Agree with what you sat, but that's not what I was getting at - I was thinking in terms of people winding up their limited companies and simply being paid directly on a PAYE basis by their client. Absolutely, it's not as flexible, but it's a lot less hassle!!

[Dr Jekyll]

Frankthered said:

Agree with what you sat, but that's not what I was getting at - I was thinking in terms of people winding up their limited companies and simply being paid directly on a PAYE basis by their client. Absolutely, it's not as flexible, but it's a lot less hassle!!

A lot more hassle for the client though, which is why they take on contractors in the first place.

[Bikerjon]

I suspect this is all just "testing the water”. 1 month obviously isn’t workable but maybe 12 months or 24 is more realistic?

In the past I've had my own Ltd Co, used umbrella's and been a PAYE contractor. To be honest being a PAYE contractor really wasn't that bad, but running a Ltd at the same time was just a burden. I think there needs to be a massively simplified tax setup for freelancers - having to setup and run a Ltd company just to earn a living seems a strangely complicated way to operate.

[Eric Mc]

The simple answer is to allow the individuals to be genuinely self employed i.e. they would prepare sole trader accounts and submit everything under the self assessment system.

However, "Employers" have always been reluctant to engage "self employeds" because the onus is on the employer to operate PAYE and NIC correctly on the people it hires. They just don't want to take the risk of having to cough up big tax and NI bills for undeducted PAYE and NI years down the line. It has happened.
Employers sometimes put pressure on individuals they want to hire to set up their own limited companies - because that removes from the employer the risk of large tax and NI bills .

However, up until now, if IR35 could be avoided, a contractor would also be better off running their affairs through a limited company - especially if their personal income was over the higher rate Income Tax threshold.

[worsy]

Dr Jekyll said:

worsy said:

Hear hear Eric. Just hoping that ham fisted legislation does not push it too far the other way.

I know of a contractor who is a pilot. A pilot for an airline. How that can not be direction and control etc is beyond me.

Where do you draw the line though?

An air taxi pilot?
A ferry pilot?
A flying instructor?

in cases of 1 and 3 the individual is likely to be sourcing his own work, can perform that work as and when he wants etc etc. My friend is a contractor because his employer likes 50-50 split of permies and contractors in case of a downturn.

Frankthered said:

worsy said:

Frankthered said:

Isn't the "worst case" here that everybody becomes a PAYE contractor?

I've worked that way a couple of times in the past and in both cases there was still a significant financial advantage, offset by the usual drop in benefits.

The difference in rate between PAYE and Limited Company was (IIRC) about 11% which represented the employers NI contribution.

OK, I kept a smaller percentage of the gross because I had to pay more tax (and NI), but in both cases I was earning significantly more than I had as a permanent employee with the same companies.

If it is the government's goal to make everybody go PAYE, it makes the changes to dividend tax make even less sense!

Issue for me is that I like the way I can tweak my dividend based on my personal circumstances. I leave money in the company for any rainy days/training courses etc. If I am forced to operate PAYE then leaving money will attract 20% CT PLUS the PAYE element when I eventually draw it.

Agree with what you sat, but that's not what I was getting at - I was thinking in terms of people winding up their limited companies and simply being paid directly on a PAYE basis by their client. Absolutely, it's not as flexible, but it's a lot less hassle!!

You think that a client co will pay a dev c100k salary for a 3 month project when their permies are drawing 50k? Even if it is capex vs opex the numbers on the payroll will raise an eyebrow.

Edited by worsy on Sunday 22 November 10:37

[worsy]

Bikerjon said:

I suspect this is all just "testing the water”. 1 month obviously isn’t workable but maybe 12 months or 24 is more realistic?

Just finished 5 years with one client co. Could give you rhyme and reason why IR35 won't apply so I'm not sure if time is necessarily an indicator.

Similarly someone performing a 3 month piece of work could simply be caught under IR35.

The only thing that I feel will help HMRC is that after a period of time the contractor is required to complete a survey regarding his/her working practices which would force those taking the pish to operate IR35 and those close to the wire highlighted to HMRC for review.

[Frankthered]

worsy said:

You think that a client co will pay a dev c100k salary for a 3 month project when their permies are drawing 50k? Even if it is capex vs opex the numbers on the payroll will raise an eyebrow.

Edited by worsy on Sunday 22 November 10:37

Not sure what industry you work in, but in my experience, contract rates are set by market demand and will always be significantly higher than a permanent salary. And as I said in my earlier post, the difference between PAYE and LTD rate is the employer's NI contribution.

Funnily enough, when I left my last permie role, I was being paid £46k and, through an odd set of circumstances, I went back as a contractor within a few weeks on a PAYE rate of £49 per hour, as I would have fallen foul of IR35.

Business as usual, nobody raised any eyebrows.

As Dr Jekyll said, it is more hassle for the client and not all will do this and insist that their contractors go limited.

[AndrewO]

I remember the first time ir35 came about, the talk was about max 3mth assignments and a test.

If you took the test hmrc would say you failed so no one did it. All sounds very familiar.

[pbg2770]

We'll see soon what emerges but these guys claim to have sight:

http://www.contractoruk.com/news/0012310leaked_ir3...

[Eric Mc]

That doesn't actually say much more than what we were supposed to be looking at under current rules.