As the title. Changes coming in the private sector in 2020. Already causing some disruption in the public sector. Any views/thoughts ?
About time this loop hole was fixed …
As long as there are rules there will be ways around them …
I am working with my other half to enable our company to produce contracts with a ‘substitution’ clause - one that appears credible when looking at the contract in isolation but one where the employer would see that there is no point in us activating it (we work in completely different specialities). No disadvantage to the employer, but clearly places the contract outside IR35.
@Camphuw. How is this a loophole? IR35 denies contractors the ability to invest in their company on the same terms allowed for other businesses. How are they then supposed to buy the tools of their trade? The loophole is in how some contractors pay themselves almost entirely through dividend rather than taking a salary; many other company directors / shareholders do the same thing, so maybe this is the practice that should be curtailed.
Good point @Xanthe
I see no problem in being paid in dividends if one is a shareholder. It is the rerouting of fees/salary that is the issue.
FWIW I run a small consultancy assisting overseas US companies to enter the European IT market. 3 years ago one of our clients wanted a dedicated resource, their “own man” if you like. I took the assignment on, contracting to this US company directly.
It was their CEO who picked up on the potential IR35 violation whereby his company would become liable for effectively operating in the UK without paying taxes, etc.
It is my understanding that IR35 is primarily in place to ensure that companies operating in the UK pay their dues to the Revenue. Whilst I was running with 2-3 contracts then I could prove I was not effectively employed by 1 alone, as soon as I moved to a sole contractor arrangement, that argument went away.
First off, let me declare I have an interest in this as I own a contractor accountancy company and umbrella company. I have worked in the industry for many years and have been involved in HMRC consultations and lobbying activity at the highest level since IR35 was introduced 19 years ago. I also advise the recruitment sector on legislative issues.
The IR35 changes coming in the private sector are already having an impact however the nuclear bomb which is about to go off in the contracting market is the implications of the Costelloe case which is the first time the MSC (Managed Service Company) legislation has been decided in court and applied. Essentially it makes pretty much ALL companies that facilitate the setting up of Limited Companies for contractors (even if they are firmly outside of the IR35 trap) Managed Service Providers.
The vast majority of contractor accountancy firms offer what is essentially a standardised accountancy package where certain decisions are made on behalf of the contractor. There are also many who shoehorn contractors down the PSC route even if they would actually be better off going umbrella which is a huge red flag.
HMRC now have the means to get their pound of flesh from contractors using IR35 and the MSC legislation in combination and it is their stated intention that they will treat ALL contractors as caught by SDC, IR35 or MSC even if they are truly in business on their own account.
Thankfully, we have always offered a bespoke service with reduced levels of standardisation however we are still looking back over our interactions with all of our clients to make sure we have little baggage. The big providers - think Clearsky, Brookson, SJD etc - are facing some far reaching implications which will massively impact their clients. Plenty of smaller providers are likely to be put out of business leaving their clients in the lurch.
Xanthe - having clauses like Right of Substitution in a contract mean absolutely nothing in an IR35 tribunal. The first thing that happens in the hearing is the contracts are disregarded and the actual working practices are examined. Please, please don’t rely on an “IR35 friendly” contract - it is worthless and does not place you outside IR35. Agencies love providing these contracts and we do all we can to educate them that they are not worth the paper they are printed on.
I’m happy to offer advice to anyone on the forum who is worried about things.
Hi Spiderlover, our working practice is already outside IR 35 in that we have another arrangement with a different business where we both provide services (on a specified item basis), each of us in the service company providing different specialised services as required for the client. This however is a minor stream of business for our company as this is on an item by item basis. The only way remaining for HMRC to get us would be on the basis of the terms of the contract(s) that provide the major revenue stream.
We are also currently developing a range of products (in a completely different area of work) for our company to sell, but these aren’t yet ready for market, so HMRC could argue that this work isn’t yet relevant.
In my opinion, if someone describes IR35 as a loophole that needs to be fixed then it shows a lack of understanding of the subject.
As spiderlover has alluded to, one of the reasons that IR35 was announced in 1999 was as a way to stop the abuse that HMRC saw when an employee left full time employment on a Friday only to return the following Monday to the same role as a contractor operating through their own Ltd company. The way to ‘fix’ this in HMRC’s view was to apply this IR35 rule and, in simple terms, subject almost all of the income that the contractor receives to the same taxes as an employee. Sounds fair - right?
Well actually no. The contractor is no longer eligible for holiday pay, sick pay, maternity pay, pension and has none of the other worker protections offered to permanent employees so it’s not comparing like with like. Added to this is the fact that the contractor then has to pay the Employers NI that was previously paid for by the Employer and yet when the contractor is struggling to find a contract they cannot claim Jobseeker’s Allowance that their NI paid for since technically they are still ‘employed’ by their Ltd company despite that Ltd company having no income.
The ill-thought-out IR35 legislation was a sledgehammer to crack a nut. I can’t understand how it can be fair to be classed as an employee under tax law whilst simultaneously being classed as self employed under employment law.
Don’t forget that even if HMRC decide that the IR35 rules apply they still expect the contractor to charge and pay VAT. Whoever heard of employees having to charge their employer VAT and pay it on to the Revenue?
Essentially it means that you pay all the tax and NI (including Employer’s NI) of an employee, get none of the benefits (holiday pay, sick pay etc), and get none of the benefits of a limited company - e.g. cannot invest in your company with pre-tax money - but have all the obligations such as having your accounts go through an accountant (not particularly cheap). It is a terrible thing.
Interestingly, when it was introduced by the Labour party, some specific occupations were excluded - mainly (entirely) ones that the MPs’ friends might have such as lawyer or architect, IIRC.