Month: August 2021

IR35 – Or How to Single Handedly Dismantle an Economy – Part 2.1

Yawnsome as this is getting, I have to drop this… the third government department to be fined by HMRC for IR35 non-compliance…

Third government body handed multi-million pound IR35 bill

By my tally, that’s now somewhere around £140m ‘non-compliance’ tax ‘recovered’ by HMRC.

At least the tax payer, who are paying that fine above even though they are probably full-time workers who don’t care about IR35, can rest assured that the government aren’t guilty of hypocrisy…

IR35 – or – How to Single Handedly Dismantle an Economy – Part Two

Ok, so, this was supposed to be Part One of a one part series. But, that DWP thing just rankled too much to ignore.

This post is more personal(ish) and uses my own experience of the wonders of IR35 to illustrate just how entirely nuts this failed scheme is.

First, some preamble to lay the foundations – I’ll try not to get boring, and please try not to get bored.

  1. IR35 is designed to recover tax from Contractors who are really Employees.
  2. Someone determined as IR35 pays tax as an Employee, but has no rights as an Employee.
  3. IR35 penalises both the Contractor, and the Client, as both are required to pay taxation on an Employee that doesn’t work for them as an Employee.
  4. Even the guy who came up with IR35 says it is untenable.
  5. HMRC have ignored an entire industry’s very compelling counter-arguments against it.

There, I think that’s enough to be getting on with.

Nb. by ‘Tax’ I lump ‘deductibles made by the state’ together, so National Insurance, NEST/Pension and so on. Basically, ‘Tax’ = ‘money you don’t get in your pocket’

So, what does this mean?

Well, I have been contracting for the past 12 years or so, quite happily. In that time, I have grown and developed a Software Engineering business and been able to charge more and more for my services.

My earning potential has far outreached any I would have been able to attain if I had been working full-time as an Employee of a company.

And no, I am not being ‘superior’ or gloating. I am setting up a point. I count myself incredibly lucky and fortunate to have had the opportunities I have had, and for how things have gone for me. Not many people have the good fortune to love the work they do, and fewer still to get paid well for doing it.

Most people (usually Employees) say Contractors should pay more tax, they are all on the fiddle, you earn it so you should pay it, and so on.

Yes, there are those who abuse the system (because it allows them to), and those who do off-shore and all the tricks. I don’t. I pay everything I should, and in 12 years I have paid more tax than I ever would have if I had stayed as an Employee. The abusers are in the minority. In 12 years I have met and worked with many contractors, and not once have I encountered a Contractor who I would consider an ‘abuser’.

So now to flip it on it’s head…

I have gone ‘Employee’, purely because of IR35.

I am fed up of having to prove I am not an Employee for every contract I undertake, of having the threat of an audit looming large, and the risk of being found non-compliant (even though I am) and having the past six years of work turned on it’s head and being fined, along with all the clients I’ve worked with.

Recent IR35 legislation has made it nigh on impossible, certainly very difficult, to do categorically prove you are outside IR35.

Most clients now are just going IR35 and requiring Contractors to be ‘within’ IR35 and therefore pay tax as an Employee but have no Employee rights.

But, it’s all ok!

Because you are a Contractor, not an Employee, to be within IR35 you have to be ‘Employed’ by an Umbrella Company.

This makes everything ok! (Hear the sarcasm…)

The Umbrella Company provides Contractors to the Client to do the Clients work. That’s all it does. It does nothing itself. So in other words, it is pointless, and only exists because of… IR35

In the past few years, 50,000+ Umbrella Companies have sprung up.

50,000+!

Why? Because they get to cream a little of the day rates of all the Contractors being forced into IR35. Which the Umbrella Company can only do because of… IR35.

The end result is that the Client is now having to pay more to get a Contractor via an Umbrella Company than if they hired the Contractor directly. Most Umbrella Companies claim this is a small amount. But, not if you consider ‘take home pay’… observe…

These figures are illustrative, but based on percentages taken from reality, and in fact led to my decision to go Employee.

Client – ‘ABC’ – a bank – offers Contractor ‘Tom’ £100 a day ‘within’ IR35, via Umbrella Company ‘Bob’. Bob states they charge (say £5 a day, I couldn’t find the exact fee % on the one I used as a reference, which in itself says a lot…)

After tax, deductions and so on, Tom takes home £53 a day

So, to reverse this and remove the Umbrella Company from the equation, if Tom worked directly for ABC (as he used to be able to), to get the same take home of £53, he would only need to charge ABC £80 a day.

So, given deductions and so on are all the same (ignoring Tom’s ‘fees’), that means ABC are paying an extra £20 a day to ‘someone’…

Ok, some of that £20 is indeed tax from the higher day rate.. but… not all of it, tax is a percentage of that £20 after all… which means Bob is getting a bit more than they should be… at least an extra £12 a day for doing nothing. So effectively (with their made-up-£5-a-day from above) they are taking £17 a day, or 17% of the daily rate ABC are offering. For sod all. For doing Tom’s PAYE for HMRC so it doesn’t confuse them.

These Umbrella entities only exist in the numbers they do because of IR35, and they are massive profit generating loopholes created solely (IMH-and-probably-incorrect-O) by a failed taxation policy ran by HMRC. (One wonders how many HMRC staff/MP’s own shares in some of these Umbrella companies… that would be an interesting piece of journalistic investigation…)

Without IR35, some of them may still exist, as yes, they do provide a convenience to Contractors who don’t want to do their own accounts and so forth, and just want to be able to work freely. But, that’s fine when it’s their choice… not when it’s a blanket requirement forced on all Contractors.

They all do the same work, the same way, but get less money, can’t claim expenses and cost the client more.

And because they can’t claim expenses (which by the way, generate secondary taxes which people seem to forget) they spend less, travel less. So all those food shops and so on in Central London now get less turnover, so pay less tax…

Do the math.

Because of this, Clients are unsure of their hiring position, are hiring less or more discriminately, are paying more per Contractor than before (or not, and getting less experienced Contractors because the Umbrella pays them less, so attract less experienced people and so on, which ultimately costs the client more due bug fixing time, lower quality work and so forth).

Having talked to numerous Recruiters on my quest for gainful work earlier this year, it is evident that Contractors from all sectors are bailing Contracting entirely. Either working abroad, or going Employee. This means Clients are losing access to a highly skilled, flexible resource that they rely on to ramp projects up/down, or do R&D, prototype projects, throwaway work, and so on. You can’t do these without the burden of a massive ‘permanent’ Employee cost, so what will the Client do? Stop growing, stop innovating, make less, turnover less, generate less tax £’s…

With Brexit (& Covid) the UK really needs to bring home some form of economical boost (not a football trophy), and Software Engineering is a great, low cost, high turnover industry requiring skilled people. We could boom with this; computers and software are everywhere, and reaching further into our lives every day (in both good and bad ways yes, but hence the need for better/more highly experienced people).

And yet, HMRC doggedly pursues an unworkable policy which is crippling any chance of that happening. End result, less people paying their higher taxes, less industry turnover, less corporation tax, less VAT churn, less economic growth.

Even their own IR35 determination tool (CEST) hasn’t got a clue on how to apply IR35 to a Contractor.

I now work full time, and get less income than when I did… therefore I am generating less tax £’s now as an Employee, than I was as a Contractor.

Employees generate direct tax £’s at two points; that paid by their Employer, and that paid by the Employee under PAYE.

Contractors (at least, those with their own Ltd Co and a high enough turnover) generate direct tax £’s at four points. VAT, Corporation Tax (on profit), Dividends Paid & Self-assessment Income Tax.

Then there are the secondary ‘losses’ IR35 incur on the economy. I on longer need an accountant (sorry!) so they lose turnover, and therefore pay less tax. I also spend less as I have no expenses. I no longer travel to London, I no longer spend money buying food and shiny tech. This is all ‘lost’ revenue to those sectors. Though more money in my back pocket it has to be said 🙂

IR35 is generating a huge ongoing, rolling snowball of economic harm to the UK, and the snowball grows every day as it rolls inexorably onward, crushing PSC’s at the moment, and soon SME’s who can no longer weather the loss of revenue preventing them growing, and then Enterprise stagnation as they fail to innovate… (doom and gloom, I know, I know…)

More math: multiply my own reduced contributions of tax £’s by the countless Contractors going Employee.

Well done IR35, because ‘taxing contractors fairly’ to generate more tax, clearly worked.

Damn, I forgot the ‘Not!’…

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