This is the end of contracting...

[Fab32]

born2bslow said:

Anybody who has always been an employee has no right to criticise contractor rates. They have the choice to take the same path if they think it's so much more rosy. When you have had a couple of spells with no work for months the grass doesn't seem so much greener.

I operate as a limited company contractor, the difference in take home pay versus an employee is legitimate tax avoidance (which is legal and really should be called efficient use of the tax legislation), not tax evasion (which is illegal). I also spend an awful lot of time filling in HMRC forms and submitting monthly and quarterly returns. It's all great fun, please come and join in...I recently applied for a mortgage to a high street bank, and because of the my employment status they said I couldn't borrow enough to buy the house I was living in. 3 months of trading information with a lender offering a manual underwriting process later and we finally got our mortgage, again great fun, come and have some.

The agencies I use take the annual salary for a perm in role, add on pensions and other benefits, NI, PAYE etc. and then calculate an equivalent day rate. The cost to the business is the same for a perm or contractor in the majority of cases, so zero impact but far less admin and headaches.

Another interesting though, if contractors go who is going to cover roles for maternity and long term sickness? If the company hires a perm employee who gets the job when the original person comes back to work? There is a legitimate need for short term interim staff, it's a shame that permanent employees always complain about the headline rates with zero understanding of the tax regimes that impact limited company contractors, please educate yourself before criticising others.

The moral objection to you paying as little tax as possible is a fair one.

I don't get why you paint such a bleak picture of being a contractor it's clearly better in your eyes as that's why you do it.

[0000]

Then why doesn't everyone else do it? Moral fortitude?

[Fab32]

0000 said:

Then why doesn't everyone else do it? Moral fortitude?

It's certainly not why I don't do it and I have considered it. I have done the maths and reckon I'd rather have the perks than the cash. When the children are a little older or the office politics get super silly I may reconsider who knows.

[98elise]

Fab32 said:

The moral objection to you paying as little tax as possible is a fair one.

I don't get why you paint such a bleak picture of being a contractor it's clearly better in your eyes as that's why you do it.

Do you pay as much tax as possible? Are you using ISA'a, a pension, an offset mortgage?

If you're not maximizing the amount of Tax you pay then you really have no objection if legal avoidance is used by contractors. Contracting is open to everyone, so its your choice.

There are pro's and cons of both, but every soon there will be few pro's to contracting. Its a shame to see the government crush a system which allows the individual to strike out on their own, take a few risks, but ultimately do better for themselves and the economy.

Personally I have so specialist skills and experience which is hard to find. The current company I work for are even struggling to find someone to do the BAU stuff when my project ends. Come April its likely I will be leaving prematurely leaving my client with no experience at all. There is no way I'm doing this role as a permanent employee (long and expensive commute). If I'm forced into a permie role, then it will be closer to home and something with career prospects.

[Nick Grant]

98elise said:

If I'm forced into a permie role, then it will be closer to home and something with career prospects.

And from what I've seen, few corporates can deliver to the expectations for career prospects of the type of person who is currently a contractor.

[Tuna]

Fab32 said:

The moral objection to you paying as little tax as possible is a fair one.

On the other thread I tried out the figures for a given set of contract vs. permanent rates. Usually the contractor pays significantly more than the permanent staff member - unless they really are taking the p**** with tax dodges. They still earn more (given the higher rates), but that's market driven - if there are only so many people willing to do it, then the rates are going to reflect the supply and demand. Clearly it's not so rosy as not that many people are willing to take the risk and endure the hassle, and that keeps the rates up.

[loafer123]

Tuna said:

Fab32 said:

The moral objection to you paying as little tax as possible is a fair one.

On the other thread I tried out the figures for a given set of contract vs. permanent rates. Usually the contractor pays significantly more than the permanent staff member - unless they really are taking the p**** with tax dodges. They still earn more (given the higher rates), but that's market driven - if there are only so many people willing to do it, then the rates are going to reflect the supply and demand. Clearly it's not so rosy as not that many people are willing to take the risk and endure the hassle, and that keeps the rates up.

I gave up on the previous thread having been accused of envy and anger, which isn't true at all.

But your interesting post has moved me to respond in the more sensible Business forum.

I agree that it is certainly sensible that flexible labour get's paid more for the lack of benefits and job security, and indeed that they should be able to deduct expenses where they would be borne by an employer were they employed, but that is no argument for the marginal rate of tax to be any different.

Should a contractor paid £100k for being flexible, only pay the same amount of tax as a permie on £50k and therefore a marginal tax rate of half the permie? Of course not.

[jammy_basturd]

loafer123 said:

Should a contractor paid £100k for being flexible, only pay the same amount of tax as a permie on £50k and therefore a marginal tax rate of half the permie? Of course not.

Yes they should. Because the extra amount that the contractor gets to keep has to pay for the loss of things like holiday pay, downtime between contracts, redundancy, sick pay, etc, etc.

Though your example doesn't seem to add up. A contractor earning £100k a year would pay around £25k in tax. A permie earning £50k a year pays £14k in tax.

[98elise]

jammy_basturd said:

loafer123 said:

Should a contractor paid £100k for being flexible, only pay the same amount of tax as a permie on £50k and therefore a marginal tax rate of half the permie? Of course not.

Yes they should. Because the extra amount that the contractor gets to keep has to pay for the loss of things like holiday pay, downtime between contracts, redundancy, sick pay, etc, etc.

Though your example doesn't seem to add up. A contractor earning £100k a year would pay around £25k in tax. A permie earning £50k a year pays £14k in tax.

Agreed, and the headline rate is not one to work from. Its very easy to assume its the day rate x 5 x 52, but you need to factor in;

2 weeks holiday
9 days public holidays
3-4 days over Christmas (normally pushed by clients)
5 days sick (contracting is great for your health though!)
20 days on the bench (roughly a month between contracts)

You could take no holiday, but that just not healthy or sane! You could also find yourself out of work for longer periods. My record is 3 months when finishing in November, picking up a new role in Jan, but needed to pass security clearance.

[loafer123]

jammy_basturd said:

loafer123 said:

Should a contractor paid £100k for being flexible, only pay the same amount of tax as a permie on £50k and therefore a marginal tax rate of half the permie? Of course not.

Yes they should. Because the extra amount that the contractor gets to keep has to pay for the loss of things like holiday pay, downtime between contracts, redundancy, sick pay, etc, etc.

Though your example doesn't seem to add up. A contractor earning £100k a year would pay around £25k in tax. A permie earning £50k a year pays £14k in tax.

No.

Contractors rightly get paid more than permies to recompense them for the loss of things like holiday pay, downtime between contracts, redundancy, sick pay, etc, etc. I have already said that.

Those are not reasons why the tax rate paid by the contractor should be reduced, they are reasons why the contract rate is greater than the permie rate.

To put it another way, why should the taxman subsidise the benefit to the contractor in the form of higher pay and company in the form of flexibility and lack of benefits? Why should that contractor pay less tax than someone employed in a different industry earning the same amount?

[Tuna]

loafer123 said:

To put it another way, why should the taxman subsidise the benefit to the contractor in the form of higher pay and company in the form of flexibility and lack of benefits? Why should that contractor pay less tax than someone employed in a different industry earning the same amount?

The taxman is subsidising nothing. Rates are agreed between contractor and client and reflect what 'makes it worthwhile' for the contractor and what it's worth to the client. If the taxman changed tax rates specifically for contract roles, do you not think that the contract rate would also change?

[0000]

How about because the tax man gets more tax that way?

I can't earn £100k as a permie, but I can as a contractor. A few years ago as a permie I was only a little more than £30k. Which was maybe £4k in income tax - HMRC are doing remarkably well out of me now!

[loafer123]

0000 said:

How about because the tax man gets more tax that way?

I can't earn £100k as a permie, but I can as a contractor. A few years ago as a permie I was only a little more than £30k. Which was maybe £4k in income tax - HMRC are doing remarkably well out of me now!

That doesn't make any sense at all.

I have a stressful job. I could get a less stressful job and earn half as much. Do I expect a lower tax rate for my stressful job? Of course not.

I used to earn £50k pa. I now earn £100k pa. Should I get a lower rate than someone else earning £100k pa because, in a relative sense to my previous earnings, HMRC are now doing remarkably well out of me? Don't be ridiculous.

[loafer123]

Tuna said:

loafer123 said:

To put it another way, why should the taxman subsidise the benefit to the contractor in the form of higher pay and company in the form of flexibility and lack of benefits? Why should that contractor pay less tax than someone employed in a different industry earning the same amount?

The taxman is subsidising nothing. Rates are agreed between contractor and client and reflect what 'makes it worthwhile' for the contractor and what it's worth to the client. If the taxman changed tax rates specifically for contract roles, do you not think that the contract rate would also change?

It is possible we are saying the same thing. Contractors should get paid more gross income to take account of their lack of benefits and job security, but should pay the same tax rate as anyone else? Or are you saying they should pay a lower tax rate and, if so, why should HMRC charge a lower rate for contractors?

[0000]

Are tax rates set by some notion of what makes sense, or what takes as much money as possible?

[loafer123]

0000 said:

Are tax rates set by some notion of what makes sense, or what takes as much money as possible?

Probably the latter, as long as the government can still get itself elected and you don't go over the apex of the Laffer Curve.

That is entirely unrelated to the point about differential tax rates, however.

[Sonic]

I really can't understand this notion of contractors somehow cheating HMRC out of tax they deserve.

In my experience i am paying significantly more tax now as a ltd than i was as a perm - HMRC haven't lost anything, in-fact they've done remarkably well out of it versus just staying as a perm.

The taxes are just different by virtue of running a business versus being an employee of somebody elses - rather than paying the majority of tax as Income Tax/NI it's now paid as Corporation Tax and Dividend Tax. My corp tax bill alone for last year was more than the entire tax intake HMRC received from the year before when i was a perm and this kind of insensitive to work harder, earn more money and pay more tax should absolutely exist.

With the mindset of running a business now versus being an employee this has also allowed me to serve multiple clients and simultaneously work on multiple projects, some for clients and some internal for the business. The result? Increase income for the business, increased profit, increased tax...

Again, i fail to see how HMRC don't benefit from this entrepreneurial mentality and from those with the ambition willing to take the risks necessary.

[Eric Mc]

For any given level of income, a comparative employee will generate more tax and (most importantly) more NI revenue for HMRC than a non IR35 affected individual operating through a limited company.

If IR35 is applied, then the differential is drastically reduced (that's why they invented IR35 in the first place)

With the new rules coming into effect regarding the taxation of dividends, the differential will go down yet more - but not by a massive amount.

[loafer123]

Sonic said:

I really can't understand this notion of contractors somehow cheating HMRC out of tax they deserve.

In my experience i am paying significantly more tax now as a ltd than i was as a perm - HMRC haven't lost anything, in-fact they've done remarkably well out of it versus just staying as a perm.

The taxes are just different by virtue of running a business versus being an employee of somebody elses - rather than paying the majority of tax as Income Tax/NI it's now paid as Corporation Tax and Dividend Tax. My corp tax bill alone for last year was more than the entire tax intake HMRC received from the year before when i was a perm and this kind of insensitive to work harder, earn more money and pay more tax should absolutely exist.

With the mindset of running a business now versus being an employee this has also allowed me to serve multiple clients and simultaneously work on multiple projects, some for clients and some internal for the business. The result? Increase income for the business, increased profit, increased tax...

Again, i fail to see how HMRC don't benefit from this entrepreneurial mentality and from those with the ambition willing to take the risks necessary.

You take the risks, you deserve to earn more money from your employers. No question.

That has no bearing on why you should get a lower tax rate. There are plenty of people in both safe and risky permie jobs out there.

[Tuna]

loafer123 said:

It is possible we are saying the same thing. Contractors should get paid more gross income to take account of their lack of benefits and job security, but should pay the same tax rate as anyone else? Or are you saying they should pay a lower tax rate and, if so, why should HMRC charge a lower rate for contractors?

In a way I think we are agreeing - I don't see the tax thing as being a key part of providing contract services. I absolutely agree that 'Disguised employment' and excessive tricks to reduce tax are not a good thing.

However, these rule changes aren't about preventing tax avoidance, they're crude rules trying to make freelance and contract services look like employment. Whilst contractors are upset about it, employers should also be concerned for the way it changes their relationship with the workforce. In fact I think employees should also be worried - if employers are encouraged to view short term, specialist services as 'just like employment', they're likely to view employees as a much more mobile work force. Things like zero hour contracts and 'trial periods' with short notice periods are a part of this culture of disposable staff.

The bottom line is that a 'one size fits all' solution to employment is inefficient, crude and unlikely to solve the headline problem that they're selling it on, particularly when it's built on a taxation system that is riddled with holes, inconsistencies and exceptions. Here's a chart of how much tax you pay at different income levels - what rate exactly is the fair one?



Finally, I'll say it again - a given professional working in the same role will be almost certainly be paying significantly more tax if they are a contractor than if they are permanent. If the moral imperative is to pay the most tax, then the contractor has absolutely met that requirement. Arguments about 'fair proportions' are (to my mind) far less justifiable - after all, how do you judge the value to society of a £100K a year specialist compared to a £10K a year shift worker? Why is one proportion of taxation more 'fair' than another?