TopBanana

10 page PDF judgement

Brief summary on Contractor UK

This is a big deal. IR35 is looking more and more toothless. The Judge basically said there's nothing at all to suggest Lisa (the contractor) was employeed by her client

[Edited by jlanng - 10/18/2002 2:15:05 PM]

[Edited by jlanng - 10/18/2002 2:15:29 PM]

[Edited by jlanng - 10/18/2002 2:16:01 PM]

MarkO

Clickable.

Cool - is there any analysis of the decision to save us having to plough through it all?

chiark

Oh great, more tax relief for our hard working, under paid IT contractors!

MarkO

Or alternatively, Chiark, and with a tad more accuracy, you could say "oh great - those contractors won't get fleeced for nearly 20% National Insurance on top of the tax they already pay at exactly the same rate as permies".

[Edited by MarkO - 10/18/2002 2:17:24 PM]

chiark

I thought the argument was that you couldn't just set yourself up as a company and pay yourself a pittance of a salary, then take the rest in dividends which are rather less taxable?

Or have I, as usual, got the wrong end of the stick?

ChrisB

Yes.

It's well known Mark doesn't do any work at all

carl

If you're over the upper earnings limit, I don't call corporation tax on profits plus 32.5% on dividends 'rather less taxable'

ProperCharlie

although you can (and people do) set up their limited companies off shore and therefore avoid UK corporation tax.

MarkO

That's what IR35 was brought in to stop, and nobody's really complaining about that (although it was a nice scam whilst the loophole remained open). Bear in mind though that income tax is payable on income, not salary - so whether or not you take the money as pay or dividends, you still pay the same tax. It's a common myth that contractors somehow pay less income tax on their income than permanent staff.

The biggest problem with IR35 is that it tries to imply that a contractor is in fact an employee of the client company, and therefore should be liable for NI on at least 95% of the earnings paid to the consulting company. So, for example, if a contractor's limited company turnover was 100k, then NI would be liable on at least 95k of that money. The unfair bit is that it wouldn't just be employer's NI (c9%), but employee's NI (c10%) too (since the contractor is both the sole employee and the director/employer. So on a turnover of 100, the contractor is effectively paying about 19% NI, plus normal rate income tax.

By taking a smaller salary and the rest as dividends, the contractor only pays this excessive level of NI on some of his income, rather than all of it.

carl

Change to the IR rules, IIRC, means that the IR can ignore (or 'see through') any institution set up for the purposes of avoiding taxation. If your argument was correct, there wouldn't be any IT contractors with UK companies

MarkO

But you'd still have to pay income tax on the money when you bring it back into the company, unless you do it illegally. So you'd end up with loads of tax-free income, but no way to spend it.

ProperCharlie

Yes but there is still a tax advantage:

Higher Rate PAYE - 40% deducted at source plus NI Contribution.

Off Shore Share Dividend: Taxed at 32.5 % (treated as tho' 10% tax paid at source although in reality not) so 7.5% advantage plus no NI.

Also under this scheme (scam?) people are able to offset loads of personal expenses as tax deductable. Can't do this with PAYE.

carl

No, able to offset loads of company expenses as tax deductable.

ProperCharlie

So there's no significant advantage then? Hence the big queque of IT and other 'contractors' with their P45s in hand beging to be put on the pay roll...

anyone got a bewinged pig smilie?

carl

Depends on the circumstances. But include your lack of holiday/sickness/employment rights with the employers' NI, accountancy fees, etc. and you have to earn a lot more than a permie to make it worthwhile.

MarkO

Not as much as some would make out, particularly if you run your own company (like I do) with a 'sensible' salary, and no p*ss-taking expenses, etc.

However, as Carl says it depends on your circumstances; my current contract gross rate equates to approximately four times what an equivalent permanent staff member is be paid (gross) as salary. Okay, so I don't get a pension, paid holiday, etc, but even taking this into account, I'm still hugely better off as a contractor than a permanent member of staff.

ProperCharlie

Fair point Carl. Main thing is people are generally more concerned with how much money is in their pocket on Friday night then whether or not they will be able to pay thier tax bill next year, or what happens when they get ill or whatever. It causes a lot of grief as the perms think that they are getting under paid....

DrEvil

... and as they cut contractor rates and paid hours in some companies - you can effectively be worse off by being contract rather than permie+benefits+sick pay+holiday...

thats the situation I'm in!

dsmith

Of course one of the "tricks" that people used to have was to employ a non-working spouse as "company secretary" and pay them a fair wodge of salary - but stay within lower tax and hence save the diff between higher rate tax and lower rate.

As a permie who has been tempted by contracting and worked with many contractors, I felt something like IR35 was needed to curb the worst of the excesses but what we actually got was a massive and stupid over-reaction.

Deano

MarkO

Yeah, which is all very well except that most contractors who I know who've had their rates cut are now just earning twice what the permies earn, whereas before they were earning 3, 4 or even 5 times as much!

My wife is my company secretary. I don't pay her too much though, 'cos I'm a tight barsteward.

Having said that, I pay more than enough higher-rate tax.

Couldn't agree more. I've been contracting for 8 years now, and TBH after hearing some of the things people were getting up to, loopholes needed to be closed. What annoys me is that despite me being very reasonable in the way I structure my company and pay (there's an awful lot of stuff I could get away with but don't) I'm now having to worry about being stitched up by IR35. The idiots have ruined it for the rest of us.

dsmith

of course everything's relative

TopBanana

There's a brief analysis on Shout99.com

MarkO

Interesting. From that page: Well, that's my defence sorted then. My client has paid me anywhere between a week and 8 weeks late on about 10 occasions in the last 18 months!

Good one. I use my own laptop at work (although only 'cos it means I can surf the web without having the restrictions of the corporate websensed firewall .

GaryK

A victory for common sense at last!

Two things really galled me about IR35 (when i was contracting):
Employment status: So your classed as an employee and as such have to pay yourself 90% of your income or whatever it is. Ok so Im an employee now, I'll have some holiday, sick pay and training thanks very much, o no you cant have that...but you said Im.... (yawn!)

Trageting the wrong people: It seems crazy that the government is targeting the one man band sector, the very key to economic growth and innovation while the fat cat PLC directors with their £200 an hour tax advisors remain unaffected!

But at the end of it all like I said working alongside permies, if you dont like the situation change it! simple as that

Gary

MarkO

My strategy is that if I get done by the IR, and classed as an employee, my next step will be to use that judgement to sue my client for unpaid holiday pay, and other such benefits.

GaryK

It didnt say or not wether she was a PCG member. Shot up the ar$e for them if she wasn't. Just shows you dont need to be a member to be in with a chance of taking on and beating the revenue.

Jodster

She was helped a great deal by the PCG and I for one am gutted that I've bent over for IR35 over the past two years and not battled against it. I'm going to fight it with this years accounts.

Lime website

[Edited by Jodster - 10/18/2002 4:59:58 PM]

MarkO

I always took the view that since there was no point just beding over and taking it. After all, since there are (well, were) no legal precedents, the worst that could happen was that you'd end up paying what you would have if you'd submitted to IR35 right from the start.

The law says that you can't be penalised for violating a ruling if no precedent has been set - so the worst they'd have done is to ask for the NI/tax/etc that would have been paid anyway. So it was a kindof risk-free gamble that's starting to look like it was worth taking.

Having said that, I'm lucky enough to be direct with my client (no agent) and have a tightly worded contract - as well as alternative business interests for my company (software I sell on the web).