UK IT contractors slipping back into old ways of working now IR35 tax reforms delayed
- Reference: 1588585513
- News link: https://www.theregister.co.uk/2020/05/04/contractors_take_advantage_of_ir35_delay/
- Source link:
A survey of 1,000 limited company contractors by [2]contractor insurer Qdos shows 56 per cent who had been considered as inside the rules by their private sector clients have decided to revert back to working outside the scope of the legislation, taking advantage of the 12-month suspension to 6 April 2021.
The IR35 rules are designed to make contractors who work with directly employed staff pay similar income tax and national insurance contributions – but without the same holiday and sick pay benefits. This has led to considerable frustration in the community.
The reforms made medium and large-sized businesses responsible for determining the employment status of contractors, rather than the contractors themselves, and many put in place blanket-ban policies for techies employed via their own personal service companies (PSCs).
The Qdos study found 56 per cent of contractors had already been IR35 assessed by their private sector clients and just over half (52 per cent) had been determined to be inside scope. Forty per cent said they had been "blanket-placed" inside IR35, but 32 per cent of this group have had this decision reversed by their client.
Qdos CEO Seb Maley said: "Thousands of contractors have had no choice but to work inside IR35 and therefore don't trust the accuracy of their client's decision, which determines if they pay tax as a self-employed individual or as an employee.
"Those who feel they've been unfairly assessed or contractors who have had no choice but to work through an umbrella company or as an employee to keep their client, want to revert back outside IR35 – and I don't blame them."
Maley cautioned that contractors choosing to work outside IR35 should be sure to interpret the rules correctly.
In the run-up to the planned changes to the IR35 rules, companies chose to introduce an effective ban on using PSC contractors rather than risk being financially liable for a tax bill should their the HMRC decide these individuals are within the scope of the rules.
However, many organisations that were late to react to the tax reform, initially due on 6 April, are understood to have reverted back to their previous policy.
Fujitsu, for example, told contractors it is again up to them to determine if they are in or out of scope. A spokesman for the company sent us a statement: "In light of the government decision to delay the implementation of changes to IR35 in the private sector, contractors will be required to continue to make their own determination on their status."
Sources similarly told us Deutsche Bank had asked contractors to revert to back to old PSC contracts – Deutsche Bank refused to comment.
Other contractors claimed Capgemini, National Grid, Asda, Bupa, Tesco and Jaguar Land Rover had also done an about-turn. Most of the banks including RBS, [3]Barclays , [4]Lloyds Banking Group and HSBC had not.
Last week, the House of Lords [5]published a damning report on the planned reforms to IR35, and called on the UK government to rethink the measures.
When Treasury sec Barclay recently announced the 12-month delay to Parliament, he assured businesses it was a "deferral, not a cancellation". It is not clear if the House of Lords' intervention will make a jot of difference.
The delay gives businesses effectively banning IR35 plenty of scope to ensure they can accommodate the new rules, Maley said.
"When reform is finally rolled out, as long as the contractor is engaged under the correct IR35 status, whether they work inside or outside the legislation shouldn't matter. With one more year until the changes arrive, businesses that banned outside IR35 working now have a chance to rethink their strategy. That said, this time must be used wisely, and preparations need to start now."
Given the challenges businesses currently face coping with the fallout from [6]COVID-19 , a rethink of their IR35 policy is unlikely to top their list of priorities, but for some contractors it will be all-consuming. ®
Sponsored: [7]Forrester Build a Digital Experience Portfolio
[1] https://www.theregister.co.uk/2020/03/17/uk_ir35_tax_reform_postponed/
[2] https://www.qdoscontractor.com/
[3] https://www.theregister.co.uk/2019/10/01/ir35_barclays_to_halt_offpayroll_contractors_goes_directly_to_paye/
[4] https://www.theregister.co.uk/2020/02/24/treasury_to_go_easy_on_ir35_contractors/
[5] https://www.theregister.co.uk/2020/04/27/lords_ir35_report/
[6] https://www.theregister.co.uk/Tag/coronavirus
[7] https://go.theregister.co.uk/tl/1936/-8554/forrester-build-a-digital-experience-portfolio?td=wptl1936
Re: "Inside IR35" jobs still being advertised
The penalty for getting the status determination wrong is disproportionate - the client will have to pay full PAYE tax plus fine and interest, even if the contractor has paid the tax already.
Since HMRC is unable to get status determination correctly, they expect the businesses will get it.
Nobody is going to risk taking on independent contractors when IR35 change gets implemented.
The whole thing has been created to increase profits of large consultancies that some of them happen to be party donors. HMRC uses lies and deception to push this through.
We should have national inquiry about this.
FFS El Reg... AGAIN with this incorrect crap in your articles:
"The IR35 rules are designed to make contractors who work with directly employed staff pay similar income tax and national insurance contributions"
No, the IR35 rules are designed to ensure "Disguised employees" pay roughly the same.
It is IRRELIVANT WHO the contractor works with, where-as it is ENTIRLY relevant HOW they work.
Come on, its not like us PSCs haven't been reminding you of this for years!
Anon PSC.
PS - yes, the lack of "rights" when deemed "inside" is a bone of contention.
Under inside IR35 you cannot operate like a business and in fact you pay more tax than employee, because your company cannot for example offset the cost equipment against tax, but employer can do that.
This change is constructed so that heavy penalty is applied only if company assess the contractor "outside" when in fact he or she is working "inside". There is no penalty other way around. That means when this "reform" gets implemented, there will be no market for small independent contractors that offer better rates and quality than consultancies that happen to be party donors.
HMRC falsely claims the IR35 is about tax - since 2017 there is no tax advantage to operate via PSC.
Given how Treasury ignored perfectly valid Lords report about plethora of issues with this ill legislation, I am convinced that there is under the table deal going on. We need national inquiry about what's going on with people behind that and why they push it so hard and don't listen.
If this was a tax issue, they could just raise tax on dividends or make other small changes, without killing the whole market.
Government has no problem when agency worker gets paid small salary + commission, but there is perceived problem when contractor pays small salary + dividend (that is double taxed). The difference in tax is nulled by the fact contractor has to do full accounting, pay for insurance and do other things employer should be providing. HMRC could just make dividends to be subject to NI and deductible from CT, so it is treated the same as commission.
They won't do that, because the tax will be simplified, inspectors will have nothing to do, and party donor will have to compete with independent contractors and won't make their extra billions.
"HMRC falsely claims the IR35 is about tax - since 2017 there is no tax advantage to operate via PSC."
There is - you can still pay yourself a basic salary and take the bulk of your income as a lower taxed dividend. You can also "employ" your spouse tax free up to the limit of the free pay allowance. You can also claim for the likes of having an office at home* (even when you don't work from home) and get the VAT back on any purchase that you can vaguely claim to be business related.
* One of my fellow contractors claimed a tax deduction for the cost of a new carpet in his spare bedroom, since he pretended it was his home office and that the wear and tear on the old carpet was down to business use. And yes, he got that one past HMRC.
You are missing the fact that you also pay Corporation Tax on dividends. There is marginal difference between this way or PAYE since 2017.
If he is indeed using his spare bedroom as an office and the carpet was worn, then I see no reason why this wouldn't be a valid expense. The same as employer would deduct that cost if the office he or she works in needs repair.
Business owner can hire whoever he or she wants if it is needed for business. I am sure every business owner has a spouse and take her on the books to save few quid of tax. You can't be serious.
If you are not aware, everyone has personal tax allowance. If the spouse is not working and can help with the business, I see no reason why he or she couldn't be hired.
I think you are looking at this from a perspective of a hurt employee. Start a business one day, it's so simple, you pay virtually no tax and you'll get a spouse and new carpet!
"One of my fellow contractors claimed a tax deduction for the cost of a new carpet in his spare bedroom, since he pretended it was his home office and that the wear and tear on the old carpet was down to business use. And yes, he got that one past HMRC."
I don't see how this is relevant. If he has falsely claimed something as a business expense, then this is fraud. It is not a tax advantage of being a contractor.
And any business owner can do similar things. For instance, the MD of a company I once worked for had some of his warehouse staff use the company van to pick up a load of his furniture from his house and store it at the warehouse for several years. He paid nothing for this (except in any reduction of profits), the company basically providing him the services of a mover and a storage unit for free. IMHO, this is no different to what your fellow contractor did.
"You can also employ your spouse"
I've removed your superfluous quotes. Although, AFAIK, it's not necessary for small companyies to have a Company Secretary these days it's still an option. SWMBO was my CoSec and it was she who signed contracts on behalf of the company. The CoSec has legal responsibility for the company and should be entitled to be paid for that responsibility. If accepting that legal responsibility isn't genuine employment I don't know what is.
"consultancies that happen to be party donors"
I always reckoned that when IR35 was introduced we should have had a whip-round and see if we could raise half a Bernie to contribute to Labour to get it rescinded. Then it could have been found out (with a few hints to the media) and they'd have had to give it back.
HMRC's CEST is deliberately flakey
and gives different answers at different times to IR35 rules that are vague/hard-to-understand. The inevitable result of that is that companies will take the path of least risk to them: push people into IR35, even if said risk is very small. So: the winners get what they want, the winners being the large consultancies who get to push their underqualified staff at inflated prices.
One way of (partly) fixing this would be to force a company (if asked) to take someone 'found' to be within IR35 fully onto their payroll complete with holiday, etc, benefits. This might also benefit the lower paid gig workers such as Deliveroo riders.
There are many things which bug me about IR35, but here's one few seem to have brought up in the past.
There are a fair number of digital agencies out there who supply development services to clients on a man-hour basis. They will bill out their staff to the client for an inflated rate: One I know of charged their client around £500 per developer day, with their staff devs being paid around £175/day (£45k/yr). They employed support staff, too, and paid for office space and the like, but made a hefty profit which was partially paid out in dividends.
Many of these arrangements I have seen would fall inside IR35. The client has significant control of the developers, they insisted on particular, named devs (no substitution), there is a contract in place with a retainer for a set number of dev-hours (MOO) etc.
If these were considered to be inside the reformed IR35 rules, the entire £500/day charged to the client would need to have income tax and national insurance deducted by the client, regardless of the other expenses incurred by the agency. The payments for those other expenses would have to come from already-taxed funds, including paying other employees (which would be taxed again).
A digital agency is allowed to operate this way without IR35 applying, yet a contractor is not. How is this right?
You hit the nail on the head. Some of these agencies are party donors.
Such agency would charge much more for a developer per day - area of £1000 per day is more realistic. This will provide a developer hired as an employee at about £50-70k, so there is no IR35 involved, as the worker is on PAYE.
Imagine how much money these agencies made when changes to IR35 were introduced in public sector. They can't wait for this to be introduced in private sector now so they can make a killing.
Company can take a contractor on £500 and risk heavy fines if they get contract and status wrong, or they can take on agency at slightly higher cost, but no risk of crossing HMRC.
The result is that small companies providing IT services can pack their bags, as no company is going to risk getting the IR35 status wrong.
"Brit contractors are opting out of the rules in droves – and many employers no longer care."
Employers of whom? The employers of the contractors are the contractors' own companies and they care very much.
"Inside IR35" jobs still being advertised
There are still people advertising roles as 'inside IR35', presumably as a way of telling you that they don't want you to apply for them.
Hopefully the 12 month deferral to the changes will allow them to rethink and find a way that properly prevents abuse of the tax system without removing basic employment rights.