Wednesday 16 October 2019

Can you make me care about IR35 and the Loan Charge?

We get a lot of comments from readers and emails from people concernced about how the Government is changing the rules on contractors.

Contracting is a key part of the UK employment market with nearly 15% of the UK population registering at self-empoyed. Of course in reality, a whole range of people don't register as their incomes are too low to really matter from a tax perspective or perhaps their job descriptions are not really appropriate.

However, HMRC and the Government have long seen that contracting can be bad on two counts. One is that Public and Private sector companies use contractors as an accounting trick to reduce headcount and employers NI (see all BBC presenters as a great case of this) and secondly that it allows contractors to create synthetic situations where they are really employed but are paying taxes at a much lower rate.

The loan charge was an attempt to claw back taxes owed by people who had used offshore vehicles to lower their taxes. On balance, I think they Government were wrong to backdate such a change, as a backdated law is never a good one and people were not breaking the law when they entered into these agreements. It would have been better to outlaw the schemes and start afresh, but on the other hand everyone entering these schemes new full well it was a tax avoidance ruse and for no other purpose - nonetheless, it is not a terrible aspect of HMRC that they can at a whim choose to retrospectively change tax laws (what would w say if they decide to increase income tax by 5% retrospectively...)

Now the IR35 rules are changing and it is having a big impact, major companies such as Lloyds and Barclays are firing contractors on mass and instead hiring fewer full-time people to replace them. It need not be like this, they coudl take on all the same people on a zero hours basis for example. the balance in the past has been Contractors (and it is minaly construction and IT on a large scale in terms of sectors) taking the risk of patches of unemployment  and no benefits for the much lower tax cost of the terms of contracts. For contractors doing up to 6 months nothing really changes, the big change is in trying to do a year or more of contracting on a single job. As the real world shows it, it is forcing employers to think more carefully about how they resource their large, long-term projects.

At the time of Brexit, this is an odd thing to pursue as it does seemingly reduce labour market flexibility in order to improve the HMRC tax take. In terms of an election, it loses votes from contractors whilst likely making little difference to those employed, although there are a few vote sin making celebs squirm in public.....still, I don't see it as sch a big deal and overall am in favour or employee taxes being fair across the board. The comments on this will no doubt be interesting...


dearieme said...

As far as I know I always pay tax as required by law because, inter alia, I don't view tax as theft. Of course I also avoid tax like billy-oh, as long as it's compatible with the law.

With one exception: retrospective taxation is theft. I'd break the law to avoid retrospective taxation if I knew a safe way to do it.

There was another exception: when I was young I had little idea what the tax laws were. I may therefore have illegally dodged taxes out of sheer ignorance. Then again, I may have missed various legal tax avoidance dodges also out of ignorance.

Contractors: we had one in the family. All his tax avoidance was entirely pukka/kosher/legit. It was great fun planning it too. Adroit use of different tax years proved effective.

Anonymous said...

The loan charge could be an utter disaster for people who've been using it for years, maybe decades. I could easily see suicides, people losing their homes etc.

I never used it because it seemed obviously and de facto a wheeze, because the loans were never paid back, whereas its predecessor (where you borrowed in a high-inflation currency, changed to sterling at the current rate, repaid the loan a year later by which time it cost very little) was kosher in that anyone could do it and there was a risk involved.

One guy had a complex arrangement where ultimate control (and the cash) ended well outside the EU.

On IR35, I always had right of substitution, could plan my own work etc. But when you get your bathroom done you specify where everything will be, choose the taps and tiles etc - does that mean my plumber was my employee?

Anonymous said...

"whilst likely making little difference to those employed", hmm...we shall see.
Projects and indeed BAU (business as usual) functions still need doing. Accounting trick or not companies hire both contractors and permies to get the work done.
My guess is a lot more corporates will be offering fixed term contracts of 1 year.
In two or three years time the notion of a 'permanent' role may be a distant memory for many. Fixed term and zero hours may be the norm in many corporates.
As for loss of corporation tax receipts from the contractor UK limited companies closing, we shall see in 12-24 months.
With so many 'caught' in IR35 it shouldn't surprise anyone the laws of unintended consequences will apply.

Anonymous said...

As one of the frequent whingers, let's go through a few things:

1) The Loan Charge backdating shows HMRC cannot be trusted - if anyone using a limited moved to umbrella in the same, or similar, role, what's to stop HMRC then using that as evidence they were a hidden employee all along and demand money from the entirety of the contract?

2) There are a number of hospitals currently understaffed due to the NHS' blanket decision to move everyone under PAYE. This is a political embarrassment - and meat for Labour - in the making.

3) It's a halfway house - if we are employees, where's our equivalent rights? There will be cases and this will increase company overheads significantly when the dust settles. The expectation is we shut up, pay PAYE, don't expect pensions or proper sick pay and pay our own training. As now, but worse working conditions. That won't last. Courts will have lots of to decide on.

4) You end up with the worst contractors. Remind me, what happens with banks when they're riddled with incompetents? Expect financial risk to head northwards as issues increase. The better ones will find ways around this, I'm already engaged in a few possibilities, so the lazy and stupid will end up in the risk averse, reducing risk against HMRC, but increasing it against their actual core business. Yay. That will not end well.

5) Around 5 million pissed off voters with less to spend in the economy, not smart from either a political or economical position.

6) Clients are not ready. There is something of an issue where many client have treated us as employees - we're not, any more than the sparky who comes round to fix things is your employee - which has partially led to this (although the BBC, taking the piss, has plenty of blame to take.) A lot of companies are going to find themselves in trouble between April and December next year. Thank fuck no major economic event is planned any time soon eh?

7) Cockroaches - I mean, recruiters - aren't ready. Expect a lot of recruiter businesses to go bust. Should help with corp tax receipts. Not.

8) Workforce flexibility will be seriously harmed, along with projects. This is more likely to shift work offshore, out of the UK economy.

9) Clued up clients are either rushing projects (bodes well) or pausing them, the latter reducing economic activity in the service sector.

I'm part of an anti-IR35 group, and whilst I give out the odd bit of advice, there is some talk from an expanding hardcore of finding ways of doing real damage to Tory prospects in marginals come the election, on the basis if we're going to be the enemy, may as well be to someone who won't tell us their piss is rain, or claim to be our friends whilst stabbing us.

There has been a definite need to tackle abuse, and to enforce the fact we're not employees - in general, we actually prefer that, as we can do our best work done without micromanagement, office politics or wanky middle managers needing their egos massaging with control over the who, what and where, and just get things done - but this is a naked money grab, and one which is going to cost the Tories dearly over the next 15 months.

The Loan Charge also never affected me, I had the option, but smelt a rat from the get-go - I have no sympathy for those who got caught out, but do with the back charging. We have more costs and expenses than an employee, plus need to make nest eggs for fallow times, but equally don't take the piss.

Anonymous said...

I suspect that this will be the killing of the golden goose that has lead to the UK being an IT leader.

UK employers spend a fraction on employee training and the contract market has ensured that technical knowledge has spread rapidly and easily across industry.

Good contractors can command good salaries as permanent employees - there has to be a benefit to working away from home, a level of uncertainty, and often being treated as second class in the workplace.

Expect shares in DXC, Captia etc. to go up - along with the number of big ticket IT failures.


Sobers said...

I also have no sympathy with the Loan Charge brigade. Anyone who thought that a scheme whereby they lived and worked in the UK for a UK employer yet paid no or very little income tax was a) legit and b) something that HMRC would wear for very long needs their head examining. It was an obvious con - people being told things that they wanted to be true. I wonder how many of those selling the schemes actually used them themselves?

CityUnslicker said...

Loan Charges reminds of me of Film Schemes very much, where the supposedly clever bought into a stupid idea that was never going to stand up to any real scruitny in the public domain.

Anon - I like many of the points you make and some are enough on their own to stop the change in the way. However, it maybe the Tories doing this but your point about the NHS makes no sense, LABOUR hate zero hours and contracting. They want everyone in a nice full time Union job if possible. So killing the Tories won't help you either.Show the political party that shows love to contractors...

Anonymous said...

@CU, maybe I wasn't clear with the NHS point - some hospitals are operating under dangerous staffing levels partially due to IR35 changes in the public sector.

This is clear grist for Labour's "you can't trust the Tories with the NHS" mill, especially if it led to an uptick in deaths - I've no doubt a statistician could already crunch some numbers on deaths based on it.

More to the point, it's dangerous to the public. I'm wondering what will happen in the private healthcare sector too come April. Plus, should we have a bad winter, the tabloids will have a field day.

As for killing the Tories not helping, it's not the point. It's turkeys voting for a different type of Christmas.

The Tories are unlikely to change tack if they're rewarded with election victories, a bit of pain on the other hand will give them cause for concern, and maybe reconsider the direction they're going in.

You don't give a puppy treats for shitting on the sofa.

Anonymous said...

IR35/Loan Charge goes against most employment and tax law. It is not the construct that is the issue, it is the intent.

Backdating is just backdating to the time when the intent can be shown.

These bloody judges and their wish to implement the law. Whatever next.

Anonymous said...

Anon 6.28 - I don't see why taking the risks of self employment shouldnt be rewarded with more cash. HMRC are taking the mick with the current approach - why should I be taxed as an employee but not get sick pay, training or a pension?

Anonymous said...

I see HMG have dropped the plan to make UK porn viewers register, with proof of age like passport or credit card - mind, it would have been a fun contract to work on.

Just imagine when someone hacked the database and stuck the info on the web...

(No interest to declare, I think visiting porn sites is something most grow out of, like video games)

Wildgoose said...

The original IR35 legislation came about because big companies like Anderson Consulting didn't want their own IT contracting divisions being undercut by individual IT Contractors. And so they tried to legislate Contractors out of existence.

The argument at the time was that Contractors were taking their wages as lower-taxed dividends rather than as PAYE & (Employer's + Employees) NI.

A proper (and fair) answer would have been simply to say that NO limited company could take more than a set percentage of their turnover as dividends and apply that across the board.

Simple and easy. Addresses the supposed problem that IR35 was marketed as being about. But it wouldn't have damaged the IT Contractor industry in favour of the big boys and so that is why it didn't happen.

The current IR35 proposals are a disaster that will cause enormous damage. I can only presume somebody must have been bribed to provide support for the Indian outsourcing industry because nothing else that I can come up with makes any sense at all.

Charlie said...

As with all these things, unintended consequences will see the overall tax take lowered.

I'm an IT contractor with reasonably good day rate for my sector. Like all other contractors, I pay myself a small salary and a large dividend. At the moment, HMRC get about £40k a year in corp tax from my ltd co, roughly the same amount in VAT, and, depending on the year, anywhere from £10k to £30k in dividend tax. Let's call it a round £100k annually.

The amount I've been offered to stay in-post as a permanent employee would mean annual deducations totalling less than £50k. I'll see a real-terms 50% take home pay cut (but I'll get paid holidays and a badly-invested pension, yay!) which means a lot less money spent into the economy (although of course I'm much more concerned about the personal impact rather than the wider economic impact!)

So, they way I see it, and I've heard similar numbers from colleagues in the same industry, is an effective 50% pay cut and pretty much the same reduction in tax.

Anonymous said...

That is a good day rate, Charlie. I chose the dev route over business analysis at the start of my career, a lot less cash but I loved the work.

Met up one day at a new site with an old colleague who I trained with 20 years before, he'd become an expert on MFID and was on four times my day rate!

Anomalous Cowshed said...

I wonder sometimes about the timings of the cashflows to government, from the self-employed.

That is, is it possible that IR35 policy is to trade off a potentially higher tax take, and labour mobility, for a lower take that has lower potential volatility and more regular timings?

If this is true, then it suggests that the Treasury encounters problems with cash flow as the number of self-employed people increases, and probably has for quite some time.