IR35 is an absolute clusterfuck and I'm glad I left the UK and contract in Australia now.
It's a huge financial risk being held over your head at every turn. If HMRC decide to investigate that can cost you and you're likely to be on the hook for all sorts of legal fees to fight them.
If the courts side with them and decide that you are, in fact, caught by the legislation, they don't seem to work out liabilities based on what you paid in corporation tax, dividend tax etc, and what would have been owed under PAYE and NI, no, you get sicced with the whole lot again AFAICT. Neither does your determination as an employee entitle you to the employment benefits you would have had - pension contributions, paid time off etc - under that status. The whole thing is a big "fuck you" to the contractor.
IMHO it only exists because of the imbalance in taxes in the UK between earned and invested income. The system is broken and in response, instead of fixing it, they decided to fuck over small players by putting them in jeopardy.
IR35 was full of good intentions. Businesses were abusing the system by forcing low paid workers into self employment and contracting. This allowed them avoid paying national insurance or any normal employment benefits.
Unfortunately highly paid consultants have been swept up into very badly implemented legislation.
You are assuming there were good intentions. The real reason for this legislation was the fact that big consultancies were losing talent. Why should someone work through a big consultancy if they could work with the client directly.
Like, why earn £50k at consultancy if you can make £500 a day without them. It's a no brainer.
So these big firms lobbied Treasury and government and they used tax avoidance as a vehicle for the "reform". It's funny though how the fact that big consultancies are actually avoiding paying tax is never brought in.
Like tax yield from a big consultancy employee on £50k is substantially lower than from a contractor on £500 a day, even if they pay themselves the mythical low salary + dividend (which is a result of PAYE being not fit for purpose, but I digress).
Currently IR35 actually _enables_ abuse of low paid workers, because they can get hired on inside IR35 and can't get any employment protections.
Yeah I don't disagree entirely with the intent - stop tax dodging by dodgy companies and by dodgy contractors.
But the implementation, my god, it's a mess, and it seems to put the liability all in the wrong place, on the weakest party in the relationship.
And as I said elsewhere, the root cause of the difference in taxation for the contractor is that investment income is taxed less than earned income, something I find pretty hard to accept in principle.
The intention was to sweep up the consultants. They even bragged about getting an extra £1 billion out of these people.
It was mostly about enforcing a clearer class distinction between dirty workers and good clean capitalists (who are handed a lower tax bill).
The list of rules actually has an interesting historical parallel - the Soviet Union would deport peasants ruled "outside ir35" to siberia and confiscate their assets in a process known as dekulakization.
It really is a disaster for innovation. If a startup wants to launch or a company want to start a new product then they need a flexible workforce. They are going to end up with system integrators or nothing.
forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
personally I find that reasonable. the government should subsidize contractors.
so if a contractor just sets aside the same amount as they would have had to pay in a salaried job (including employers contribution) then all should be good?
obviously this should be factored into the cost of doing business, but if a person deems themselves fit for contracting, then they are also fit for this administrative overhead.
> forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
It's not that you're wrong, it's that what you're suggesting is naive.
There is no "equivalent" tax rate when working through a limited company and when IR35 applies per contract and not per worker.
That's just not how tax works here. Instead you pay an accountant to estimate your accounts, hand them to HMRC and they either accept them as correct or hold a tax investigation.
HMRC can't and won't tell you what you should pay, they just say yes or no to the estimate you provide them.
There is no way to know what a potential future fine might be because they could reopen all previous year's tax returns.
If they can't tell you then how can anyone else know what they should set aside?
I have also worked as a contractor (In Denmark, though). Working as a contractor in software development is rather forgiving, as there are only insignificant expenses. Therefore I can report most / all of my revenue as profits and pay full income tax. Knowing the basics of the Danish tax code, I can estimate my contribution and just pay it on a monthly basis to SKATs (Danish IRS) bank account. EOY I will report all my deductions, banks report all my capital gains, etc. and SKAT calculates the tax true rate and automatically pays me back within a week. If I forgot something, I can change merely change my reporting and everything is recalculated instantly.
However, hearing about the systems in other countries makes me appreciate the Danish system.
> forgive me if I am wrong. what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
Yes, it is meant to, and that's perfectly reasonable as a starting point. That's how things are here in Australia AFAICT, without the need for this sort of legislation. If you are found to be inside the equivalent legislation in Aus, it mostly just affects what sort of expenses you can claim.
In the UK though, there is a legitimate question about why tax should be different if (for example) I go into business selling my skills and sell them to a client company vs IBM selling my skills to a client company. Why should the big firm get to pay its people a salary with a part of their fees, then give profits to its shareholders as dividends, if a one-person operation cannot do the same?
Also, as a contractor I am not an employee. I do not get employment benefits. I do not get pension contributions. I do not get paid leave or cover for illness. Does this mean I should pay less tax? Perhaps not, but it does mean that the concerns are different.
That all said, in general, I agree with you, the same rough tax rate should apply. I didn't do contracting/consultancy as a tax dodge.
The root cause of the issue that the government is addressing here, very badly, is that the tax rates are badly coded and favour investment income over earned income, something which I think is deeply wrong in UK society anyway. Normalise these and the whole issue goes away.
> so if a contractor just sets aside the same amount as they would have had to pay in a salaried job (including employers contribution) then all should be good?
No, as I called out in my comment above, the outcomes of status investigations are not "make up the difference", it's "pay all the tax without taking into account anything that's already been paid". And that's before we get into legal and accountancy fees, the fact that expenses incurred in doing business will be re-evaluated and likely denied as ineligible, and you won't get any of the benefits you would have been owed by the business or by the government as an employee. You'd have to put a lot more aside than the difference, it ruins people. And it costs a lot more people money - there are a variety of forms of insurance people take out to cover the costs of investigations, court proceedings and even the eventual liabilities.
As written elsewhere, I can appreciate the differencen between the tax codes in different countries.
When I contribute to my tax-exempt pension in Denmark, I can deduct that in whatever income I have, whether that is from an employment or profits of my own company.
> forgive me if I am wrong.
I think I need to defer to this one. I am completely ignorant on these things.
> what I can see from rudimentary search on IR35 is that it is meant to make people pay the same tax whether. employed or working as a contractor.
Yes, this is used as a vehicle to make this legislation palatable to the voter. The truth is, big consultancies who operate the same business model as a contractor are exempt from the legislation. So if big consultancy charges £500 a day for a worker, they don't have to pay PAYE on that £500, even though their worker work as de facto employees at the client's, but contractor would have to.
Being able to substitute staff. If you can accept a contract and then send your next door neighbour to do the work then that is a strong signal that you are outside IR35.
This is entirely irrelevant unfortunately. You could be able to send substitute and still be in-scope of IR35. It's ultimately down to the client's risk appetite.
It's a huge financial risk being held over your head at every turn. If HMRC decide to investigate that can cost you and you're likely to be on the hook for all sorts of legal fees to fight them.
If the courts side with them and decide that you are, in fact, caught by the legislation, they don't seem to work out liabilities based on what you paid in corporation tax, dividend tax etc, and what would have been owed under PAYE and NI, no, you get sicced with the whole lot again AFAICT. Neither does your determination as an employee entitle you to the employment benefits you would have had - pension contributions, paid time off etc - under that status. The whole thing is a big "fuck you" to the contractor.
IMHO it only exists because of the imbalance in taxes in the UK between earned and invested income. The system is broken and in response, instead of fixing it, they decided to fuck over small players by putting them in jeopardy.