HMRC Leaks IR35 Plans for Private Sector

[Guvernator]

I guess it was inevitable, rumours have leaked that the new IR35 implementation which hit the Public Sector this year could soon be implemented in the private sector too.

http://www2.cipd.co.uk/pm/peoplemanagement/b/weblo...

It's in the Times paper too but that's behind a sign up\pay wall.

I know there are a lot of contractors on this forum, get ready for the shaking down of your life. Massive tax hike plus no expenses. I've done some rough calculations and I reckon I'll be at least 25% worse off if the new rules come into effect, lovely!

[deggles]

Guvernator said:

I know there are a lot of contractors on this forum, get ready for the shaking down of your life. Massive tax hike plus no expenses. I've done some rough calculations and I reckon I'll be at least 25% worse off if the new rules come into effect, lovely!

Only if your client decides you meet the criteria for inside IR35, and why would you if you don't at the moment?

The biggest problem in the public sector, particularly the NHS, was the blanket approach of deciding everyone was automatically 'inside' regardless of circumstances. That didn't work out too well, resulting in legal challenges, U-turns and rate increases which ultimately came back out of the public purse anyway.

Private sector clients, certainly those I've worked with, won't be as incompetent/stupid.

Seriously, people just need to insist that contracts are properly assessed and carry on as is. Or walk.

[silent ninja]

Sounds like the Tories. Go after the little guys, the independent freelancers, money that is the equivalent of weeing up against a wall. In the meantime, give the super rich billion pound tax breaks, bribe them at every turn, don't ever punish them even if they nearly bring the country to it's knees (how many bankers went to prison again?). Piss money away on vanity projects like HS2 and Hinkley Point (way overpriced and selling off key infrastructure to French and Chinese).

Why do the Tories have such disdain for working people? The new rules will "Increase fairness" is the biggest kick in the teeth.

By the way, my definition of working class is anybody who needs to work for a living. Middle, upper, lower is irrelevant! I'm not a contractor at present. This is just simple money grabbing.

[Guvernator]

I'd like to give private sector clients won't be as stupid but big companies are big companies and they mostly won't want the hassle of dealing with this ststorm, don't forget any tax liability will be on them if they get it wrong. I don't see many private sector HR or Finance departments taking on that risk which means they'll probably do what a lot of public sector companies are doing which is make everyone work through an umbrella agency i.e. PAYE by any other name as it's no skin of their nose.

I'm all for paying my fair share and I pay more tax now then I ever did as a permie. I wouldn't mind so much if it was a slow balancing to bring it more in line with PAYE but this is basically an overnight wage cut, imagine if your boss turned round to you tomorrow and said next month we are going to cut your salary by 25%, live with it, how many people could cope with that sort of reduction in their earnings so suddenly?

Yes it is a money grab, for some reason contractors have now been demonised as overpaid tax dodgers. Meanwhile large consultancies and other large corporations get away with paying a lot less of the "fair share" than we do, makes me sick that we have to take on more and more of the burden while the real big earners get away with it.

[MickC]

Guvernator said:

I wouldn't mind so much if it was a slow balancing to bring it more in line with PAYE but this is basically an overnight wage cut

It certainly isn't a wage cut. A tax increase, and a big one, yes. But it's not a wage cut. You can always ask your client for a rate rise to compensate.

Guvernator said:

, imagine if your boss turned round to you tomorrow and said next month we are going to cut your salary by 25%, live with it, how many people could cope with that sort of reduction in their earnings so suddenly?

As a contractor? Seriously, if you have not budgeted for your 'boss' to turn round to you tomorrow and say he is going to terminate your contract tomorrow (since of course you have no notice period since you don't want any mutuality of obligation....) then that's part of the risk/reward balance of contracting. Similarly, if he said 25% rate cut please or you can leave, suck it up or find someplace else. Market forces.

My main problem with this is the removal of flexibility that taking full personal tax/NI off a business transaction means. No more business expenses as you travel around wherever the work is, no advantage in leaving a pot of emergency money in the company, no money in the company for training or equipment. No reward for the risk of 'no benefits included' short term work.

Edited by MickC on Tuesday 7th November 10:39

[Guvernator]

I've asked clients for a rate rise if they've wanted to increase the scope of my work etc but asking them to pay for my extra tax, not sure that will wash. Sure some companies in the public sector are offering slightly higher rates to try to incentivise people to apply but this certainly isn't across the board and again not sure how likely this will be to happen in the private sector. I've never been asked to cut my rate, I know it does sometimes happen but it's few and far between and would be the point where I'd be looking to go elsewhere tbh.

I do keep a rainy day fund for when I'm out of work, a fund that will be rapidly eroded if I have to go PAYE (which it will be in all but name). As you've already stated there is also no incentive to keep a rainy day fund or money in the company for training, equipment, holidays etc even though you will still have to pay for these out of your own pocket, basically you'd be paying the same tax as a permanent staff member with non of the perks of being a full time employee.

Every company I've worked in has had anything from 25-75% contracting staff, it's become a very popular method to hire temporary staff, it works for companies as they can flex the staff count according to project workload plus contract staff are paid for out of a different budget which is often more tax efficient for large companies. They also don't have to deal with the cost and HR overhead of permanent staff. I just don't see how reducing the ability to have a flexible workforce will in any way benefit UK plc.

[Countdown]

Why is it a "tax hike"? Surely you're paying the same tax rates as people who are PAYE?

I understand that you now have less flexibility to offset expenses but then again this is not something that is available to people who are PAYE.

With regards to job security, most PAYE employees have 1 month notice periods and statutory redundancy so it's not exactly a massive difference.

[Guvernator]

Countdown said:

Why is it a "tax hike"? Surely you're paying the same tax rates as people who are PAYE?

I understand that you now have less flexibility to offset expenses but then again this is not something that is available to people who are PAYE.

With regards to job security, most PAYE employees have 1 month notice periods and statutory redundancy so it's not exactly a massive difference.

Don't really want to turn this into a Permie Vs Contractor thread, I do agree some balancing needs to be done in terms of taxation but they are different methods of working so a blanket one size fits all doesn't really work as each method of employment has it's pro's and con's.

For instance I could argue that the perks and benefits you get for free as a permanent employee far outweigh any expenses you can claim as a contractor unless you are willing to fiddle the system which I'm not.

Yes security isn't what it used to be but still better as PAYE, as a contractor you can literally be asked to leave on the same day, something you rarely see as PAYE

Also it wouldn't be so bitter a pill to swallow if it was done gradually but a 25% tax hike is massive, no it's not a wage cut but it might as well be, the effect on your take home is much the same. Let me rephrase the question, as a permie would you be happy if your boss told you as of next month you'd be getting taxed an extra 25%? How many people would still be able to make ends meet, pay the mortage\bills etc with such a massive hike in tax, all in one go?

[Countdown]

How are you paying 25% less tax as a Contractor compared to a permie?

FWIW I'm a Contractor but it's long term interim Finance roles so it's hard to argue that I don't fall within IR35.

[ralphrj]

The problem is not genuine contractors but the explosion in "pretend" contractors where people leave their permanent job only to return to do the same work as previously, at the same cost to their employer but are able to exploit the tax rules to take more of their pay home.

The same work is being done by the same people but the Government is getting a smaller payment of tax.

This is now so widespread that one of the economic watchdogs (IFS, OECD or similar) said recently that it poses a serious threat to UK finances.

No surprise that the Government is trying to prevent people from exploiting these loopholes.


I'm sure there will be responses along the lines of "contractors don't enjoy the same rights as employees" and I fully understand that (I have spent several years as a contractor). However, the cost of having the flexibility to hire and fire at will needs to be paid by the person enjoying the benefit of that flexibility (the client) and not by the taxman.

[Countdown]

Guvernator said:

Let me rephrase the question, as a permie would you be happy if your boss told you as of next month you'd be getting taxed an extra 25%? How many people would still be able to make ends meet, pay the mortage\bills etc with such a massive hike in tax, all in one go?

I do understand your frustration. However, to put it another way, it means for example that 2 Infrastructure architects in our IT Dept are going to be paying the same rate of tax as 4 of the others (for doing exactly the same job). It's basically a perk that's been removed.

As with lots of things in life you have to decide am I still better off as a Contractor or, all things taken into consideration, am I now better off as a permie?

[Guvernator]

Countdown said:

How are you paying 25% less tax as a Contractor compared to a permie?

FWIW I'm a Contractor but it's long term interim Finance roles so it's hard to argue that I don't fall within IR35.

Usual method for Ltd company, corporation tax, NI, salary, dividend tax offset by some some expenses Vs PAYE at 25-40%.

Agreed it's not an exact science as you aren't really comparing apples with apples but I know how much I take home now and an online IR35 calculator tells me how much I'd take home on the same day rate but inside IR35 and the difference is about 25% less.

[Eric Mc]

The big difference is that IR35 requires the individual to have to account for the Employer's NIC through their own company. Er's NI is, of course, normally paid by the employer. In order to maintain their net income, the individual operating through their personal service company will either have to take the Er's NI on the chin and accept a reduced net take home amount or try to up their charge out rates to compensate,

It's doubtful how many "employers" will be willing to agree to higher charging rates from contractors.

Er's NI is the single biggest reason why these contractor personal service companies exist - coupled with other employer obligations such as sick/maternity pay and auto enrolment.

[paul789]

Countdown said:

Guvernator said:

Let me rephrase the question, as a permie would you be happy if your boss told you as of next month you'd be getting taxed an extra 25%? How many people would still be able to make ends meet, pay the mortage\bills etc with such a massive hike in tax, all in one go?

I do understand your frustration. However, to put it another way, it means for example that 2 Infrastructure architects in our IT Dept are going to be paying the same rate of tax as 4 of the others (for doing exactly the same job). It's basically a perk that's been removed.

As with lots of things in life you have to decide am I still better off as a Contractor or, all things taken into consideration, am I now better off as a permie?

Taken in the round, looking at the market as a whole, you need to consider the demand side of this. Companies often prefer to engage the services of micro businesses in this way. If the supply of willing contractors dries up due to these changes, it's not necessarily a given that permie roles will be created to get the work done.

They may just look to outsource more to the big IT outsourcers or the Big 4, for example. Because those organisations are really, really wonderful and their quality is simply amazing.

Edited by paul789 on Tuesday 7th November 12:45

[Guvernator]

Countdown said:

I do understand your frustration. However, to put it another way, it means for example that 2 Infrastructure architects in our IT Dept are going to be paying the same rate of tax as 4 of the others (for doing exactly the same job). It's basically a perk that's been removed.

As with lots of things in life you have to decide am I still better off as a Contractor or, all things taken into consideration, am I now better off as a permie?

The problem is permie wage inflation or more precisely the lack of. When I was a permie I basically hit a wage ceiling 7-8 years ago, looking at similar permie jobs even now, the pay-scales are basically the same as they were back then. That's 8 years of price inflation, house price rises etc without a similar reflection in increased wages.

I was literally going backwards for the last 2-3 years of permie employment with below inflation or sometimes even zero wage rises. I got fed up of struggling at the end of the month which was one of the main reasons I decided to take a risk and go contracting as it was the only way to get out of the hole I was digging myself into.

I literally couldn't afford to go back to being a permie now without it massively effecting my ability to keep the lights on, let alone continue my current lifestyle which isn't extravagant by any stretch of the imagination so I'd have to downsize massively and go back to living from paycheck to paycheck. Consequently I'd actually be paying a lot less direct and indirect tax into the system as I'd be spending a lot less.

It's almost as if the powers that be don't want you to better your lot in life.

[schmunk]

It has already been said above but, to reiterate, this will only affect contractors if they are adjudged to be within IR35.

IR35 rules aren't changing, but it's putting the risk of non-compliance onto the "client", meaning they will be somewhat more circumspect in choosing how they engage with staff.

The point being that if through this rule change you are suddenly found to be within IR35 and suffer a "wage cut", then you almost certainly should have been within IR35 already - i.e. you have been underpaying income tax and NI compared to the permanent staff member next to you, but to date getting away with it.

[bigandclever]

paul789 said:

They may just look to outsource more to the big IT outsourcers or the Big 4, for example. Because those organisations are really, really wonderful and their quality is simply amazing.

And they definitely, definitely don't play fast and loose with tax legislation to suit their own ends. No siree, Bob.

[deckster]

schmunk said:

It has already been said above but, to reiterate, this will only affect contractors if they are adjudged to be within IR35.

IR35 rules aren't changing, but it's putting the risk of non-compliance onto the "client", meaning they will be somewhat more circumspect in choosing how they engage with staff.

The point being that if through this rule change you are suddenly found to be within IR35 and suffer a "wage cut", then you almost certainly should have been within IR35 already - i.e. you have been underpaying income tax and NI compared to the permanent staff member next to you, but to date getting away with it.

That's not really relevant, though - even allowing for the fact that at least 95% of contractors should be declaring within IR35 anyway.

The point is that the risk is shifted from the contractor to the client, and what client is going to take that risk? As has been said: this will just lead to clients insisting that every contractor goes through a PAYE brolly regardless of their individual circumstances - in the same way that, 20 years ago, contractors had to start using Ltd companies rather than just being sole traders.

[bigandclever]

deckster said:

That's not really relevant, though - even allowing for the fact that at least 95% of contractors should be declaring within IR35 anyway.

Now ... that's just a made up 'fact', isn't it.

[plasticpig]

ralphrj said:

The problem is not genuine contractors but the explosion in "pretend" contractors where people leave their permanent job only to return to do the same work as previously, at the same cost to their employer but are able to exploit the tax rules to take more of their pay home.

Err no. That's not the problem. The problem is the employers who force their workers into self employment so they don't have to pay HMRC the Employer NIC for the worker (13.8%).