Making someone redundant and asking them to go self employed

[Purple845]

The initial message was deleted from this topic on 27 April 2018 at 23:27

[Purple845]

The initial message was deleted from this topic on 27 April 2018 at 23:27

[Eric Mc]

Possibly, especially if the work carried out by the individual in a self employed capacity is essentially what they were doing when employed. As is often stated, it's the role the becomes redundant, not the person.


HMRC would also be very curious as to why the employer felt the need to rehire the same individual to do the same job they had previously only this time under a different set of terms and conditions.

Employers do try this on - but it's not usually right.

[Moonhawk]

No idea if it's legal - but you'd almost certainly fall inside IR35.

Inside IR35, the company would get you to work exactly as they did before - but YOU have to pay the employers NI (in addition to all your other taxes) and you get no employment benefits (holiday pay, sick pay, pension, maternity etc) and no employment protection (redundancy, consultation etc).

Whatever rate they payed you as a contractor/consultant would have to take all of this into account.

[Eric Mc]

Moonhawk said:

No idea if it's legal - but you'd almost certainly fall inside IR35.

Inside IR35, the company would get you to work exactly as they did before - but YOU have to pay the employers NI (in addition to all your other taxes) and you get no employment benefits (holiday pay, sick pay, pension, maternity etc) and no employment protection (redundancy, consultation etc).

Whatever rate they payed you as a contractor/consultant would have to take all of this into account.

IR35 does NOT apply to self employed individuals. It WOULD be an issue if the newly redundant ex-employee was re-hired through a limited company or some other intermediary.

[popegregory]

It happened to my old housemate. His wages went up very slightly and he went down to four days per week. He couldn’t believe it.

[MitchT]

Eric Mc said:

IR35 does NOT apply to self employed individuals. It WOULD be an issue if the newly redundant ex-employee was re-hired through a limited company or some other intermediary.

So, for the benefit of the uneducated, if you're self-employed as a sole trader for one employer/client then you're okay, but if you set up a limited company and serve your employer/client via that entity then you're on the hook?

[Eric Mc]

MitchT said:

So, for the benefit of the uneducated, if you're self-employed as a sole trader for one employer/client then you're okay, but if you set up a limited company and serve your employer/client via that entity then you're on the hook?

Yes and no.

HMRC is always concerned about people who are engaged by an organisation in a manner which keeps them off the payroll, especially if it looks like they really SHOULD be on the payroll.

This concern applies whether the individual concerned is operating as a sole trader i.e. self employed, or is operating through an intermediary (usually a limited company - but it could be something else, such as an LLP or a trust etc).

If the individual is operating as a sole trader, IR35 would not be invoked. However, HMRC can still query that person's employment/self employment status. If they do and decide that the person should really be an employee, they will instruct the "employer" to put the individual on to the payroll and start deducting and calculating the correct PAYE and NI relevant to their "wages" The "kicker" is that they can also instruct the EMPLOYER to calculate all the underpaid PAYE and NI that they SHOULD have paid over in the period that the individual was being treated as self employed. This is obviously a massive risk for businesses and many years ago they come up with a wheez to get them off the hook and effectively kill that risk. The "wheez" was "the personal service company". This is where IR35 comes in.


The trick was, if the individual instead of being a simple "sole trader" set themselves up as a limited company, any payments made by the employer to that individual would instead be paid to the limited company. And for many years, there was never any suggestion that "limited companies" would be paid as some sort of employee. Therefore, the "employer" would never be at risk of having to find large amounts of PAYE/NI back payments.

IR35 came in around 2000 and effectively said, if an employment relationship exist, it is the limited company that has to find the backlog of underpaid PAYE/NIC. In other words, the risk of having to pay tax and NI backlogs is on the small limited company, not the employer.

IR35 was introduced in an attempt to discourage these "Personal Service Companies" from being set up.

Changes to IR35 in the last year has changed this scenario somewhat and now public sector employers DO have to calculate and deduct PAYE/NI when paying Personal Service Companies - if appropriate.

This new method is likely to be applied to the private sector, possible from next April.

[MitchT]

Thanks Eric.

I know a lot of people in the tech community who work on six month contracts via their own limited company. They love it 'cause it's tax efficient, the day rate is fantastic and they don't have the job security concerns that most freelancers do 'cause they're in massive demand. I guess when IR35 hits the private sector they're going to get caught up in it. Would dodging the bullet be as simple as working fewer days per week for one client so they can take on another?

[Chozza]

MitchT said:

Thanks Eric.

I know a lot of people in the tech community who work on six month contracts via their own limited company. They love it 'cause it's tax efficient, the day rate is fantastic and they don't have the job security concerns that most freelancers do 'cause they're in massive demand. I guess when IR35 hits the private sector they're going to get caught up in it. Would dodging the bullet be as simple as working fewer days per week for one client so they can take on another?

Why bother dodging the bullet.. Just increase the day rate

[Eric Mc]

MitchT said:

Thanks Eric.

I know a lot of people in the tech community who work on six month contracts via their own limited company. They love it 'cause it's tax efficient, the day rate is fantastic and they don't have the job security concerns that most freelancers do 'cause they're in massive demand. I guess when IR35 hits the private sector they're going to get caught up in it. Would dodging the bullet be as simple as working fewer days per week for one client so they can take on another?

IR35 can be complex as judging a person's status depends on multiple factors. Number of clients is just one.

[Gargamel]

Redundancy is triggered when work of a particular kind cease or diminishes at that location.

In my view that wouldn’t meet the test.

However in reality the company will offer a ‘mutual separation agreement’. Which has the same effect as redundancy, ie terminating the employment contract.

So yes of course it can be done, but the label is wrong

Edited by Gargamel on Monday 23 April 17:13

[Moonhawk]

MitchT said:

Would dodging the bullet be as simple as working fewer days per week for one client so they can take on another?

Nope - each contract is looked at separately. Even if you only do 1 day per week for 5 different companies - each contract could be deemed to be inside IR35.

[Moonhawk]

Eric Mc said:

IR35 does NOT apply to self employed individuals. It WOULD be an issue if the newly redundant ex-employee was re-hired through a limited company or some other intermediary.

Whilst that is true - very few contractors are taken on as sole traders as explained in this article. People often use "self employed" and "working via their own limited company" synonymously.

https://www.contracteye.co.uk/ir35-sole-trader.sht...

I suspect the company would insist that the contractor is limited (or via an umbrella) - and I made my comment based on that assumption.

Edited by Moonhawk on Monday 23 April 16:31

[Eric Mc]

Moonhawk said:

Whilst that is true - very few contractors are taken on as sole traders as explained in this article. People often use "self employed" and "working via their own limited company" synonymously.

https://www.contracteye.co.uk/ir35-sole-trader.sht...

I suspect the company would insist that the contractor is limited (or via an umbrella) - and I made my comment based on that assumption.

Edited by Moonhawk on Monday 23 April 16:31

For accountants like me, the distinction between "self employment" and operating through a limited company is absolutely vital - and makes a world of difference in the type of advice I can give. Therefore, when people bandy about the term "self employment" without being 100% clear about what they are REALLY referring to, it is only right and proper that a person likes me, who is trying to help, establishes what the person really means.

Companies insist on individuals setting up limited companies to protect their own asses - no other reason. I would argue that if an "employer" orders a potential employee to operate through a limited company, IR35 would INSTANTLY be applicable - because the whole ethos of independence and control has gone out the window at the first moment of the engagement. In other words, the limited company is, in effect, a sham and there is no separate business in operation.

[Chris Type R]

Chozza said:

Why bother dodging the bullet.. Just increase the day rate

Interesting article here - https://www.contractoruk.com/news/0013564public_se...

[Antony Moxey]

Its what happened to me. I worked for a big firm that at implemented a whole raft of redundancies. When it came round to my department’s turn it was very strongly suggested that if we set up our own firm me and my boss would get the contract to carry out the work that they would no longer have any employees to do.

Anyways, that was in 1995, we did indeed set up our own firm and grew beyond the original contract such that years later when the same firm decided to employ people in our old positions and thus not renew our contract we had enough clients elsewhere that we were able to pick up enough new work to more than cover the loss of that contract.

Sold my half to my business partner a couple of years ago and as far as I’m aware the business is still operating today.

[Eric Mc]

Antony Moxey said:

Its what happened to me. I worked for a big firm that at implemented a whole raft of redundancies. When it came round to my department’s turn it was very strongly suggested that if we set up our own firm me and my boss would get the contract to carry out the work that they would no longer have any employees to do.

Anyways, that was in 1995, we did indeed set up our own firm and grew beyond the original contract such that years later when the same firm decided to employ people in our old positions and thus not renew our contract we had enough clients elsewhere that we were able to pick up enough new work to more than cover the loss of that contract.

Sold my half to my business partner a couple of years ago and as far as I’m aware the business is still operating today.

The good old pre IR35 days.

[The Selfish Gene]

hi Eric - in the IT business (as I know you know) many people operate outside of IR35, and it's generally considered that as long as you are genuinely providing a service then you're ok.

Clearly that could be terrible advice, but to my knowledge of my contacts, clients and associates nobody has ever been even investigated for IR35 in all the years it's been around.

In general it succeeded in catching the husband/wife loophole (wife claiming salary and not actually doing anything) etc

Do you think it could land like EBTs.........clarifying a law and backdating? Or is it not really enforceable unless it's a totally clear cut case?

[Eric Mc]

The Selfish Gene said:

hi Eric - in the IT business (as I know you know) many people operate outside of IR35, and it's generally considered that as long as you are genuinely providing a service then you're ok.

Clearly that could be terrible advice, but to my knowledge of my contacts, clients and associates nobody has ever been even investigated for IR35 in all the years it's been around.

In general it succeeded in catching the husband/wife loophole (wife claiming salary and not actually doing anything) etc

Do you think it could land like EBTs.........clarifying a law and backdating? Or is it not really enforceable unless it's a totally clear cut case?

IR35 has caught a few - but it has not been as successful as HMRC hoped. This is mainly down to lack of resources at HMRC,. not due to any significant failing in the concept. When HMRC DOES tackle someone on IR35, they tend to have a reasonable success rate.

The "husband/wife" situation has never really been an IR35 issue - more a general issue surrounding "income splitting" and "anti-settlements" legislation., The most famous case taken by HMRC in this area (The Arctic Systems case), HMRC lost.