IT contractors raise alarm over HMRC mulling 'one-month' nudge onto payrolls Freelance IT workers in the UK have expressed concern about claims that the government plans to force contractors onto the payroll of their clients after just one month of service. It was reported over the weekend that Chancellor of the Exchequer George Osborne would crack down on personal service firms during his spending …
Are HMRC saying that no job should take longer than a month and if it does, regardless of business sector and public/private sector, then the person doing that work must become an employee of the entity requiring the work???
I must have misunderstood because that does not compute in any market and it's obvious that it doesn't, even to someone as stupid as a bureaucrat.
It seems to me that you wouldn't have to join the payroll of the company which engages you, but your own PSC would have to pay you as an employee, rather than allowing you to take a nominal salary plus dividends. This is the same as what happens if you "fail IR35" today.
From the contractor's point of view, this is the worst of all worlds: the contractor pays the same taxes as an employee, but has none of the benefits (employment rights, holiday pay etc)
It will become complex if you have multiple contracts, some of which pass the new rules and some don't; you will have to apportion your income and expenses against each contract.
This post has been deleted by its author
No. That's not the case. You could be on the payroll after one month.
Believe it not, this is actually a concession by the taxman/George Osborne.
In the previous recent statement on redefing the defintion of self-employment, freelance work and IR35 status, HMRC had proposed, from day one, to ignore contracts, ignore existing case law and ignore existing status tests (mutuality of obligation, substitution, direction and control (that's the how, rather than what and when)) [pass anyone and you are *not* an employee].
What HMRC proposed (and may still be proposing) was contacting the client and asking them whether or not they thought the contractor was under the employer's direction and control - knowing full well that somebody in the personnel department is not in a position to make this judgment - but would almost invariably reply "Yes" - and would instruct them to add the contractor to the payroll and begin deducting tax and NI as though they were an employee - unless the contractor agreed to have their own PSC payroll supervised by the engaging client - and make tax and NI deductions as though they were an employee of the client.
The contractor would be free to appeal the decision and if HMRC agree that he/she should be treated as self-employed, then they will refund what's due once he/she has done their annual tax return.
I know where you're coming from.
My company generates around 30K of Corporation tax a year - several times what FaceBook currently pays. I also collect roughly the same amount of VAT for them as well.
On average I pay about 70-75K in tax to the government. if I was a permie I'd pay around 30-35K a year.
I'm not sure how making me seek a permie role will help with the balance sheet.
The "if I was a permie" implies you're a contractor, and generating revenue by selling your services. If you are billing VAT registered companies, the VAT you "collect" is simply claimed back by the company paying your invoice, so the net gain to HMG is nothing.
So, using your figures, currently HMG gets 30K from you, and if you were permanent, HMG would get 30 - 35K. By my reckoning (in your specific case) they will either get the same or more money from you.
"If you are billing VAT registered companies, the VAT you "collect" is simply claimed back by the company paying your invoice, so the net gain to HMG is nothing."
WRONG - it depends on the business sector and the VAT rules relating to the products sold. Financial Services are VAT exempt, so businesses engaged in selling Financial Services cannot reclaim the VAT they are charged on goods and services supplied to them, so that is a massive gain by HMRC
Velv is spot on. Irrecoverable VAT is the biggest tax that FS businesses suffer - way more than CT, NI etc. And it's thanks to the UK's contractor population that we have such an enormous FS sector - London is not just the biggest capital market in Europe, it's actually bigger than the whole of the rest of Europe put together.
1: that VAT was never your income and as already pointed out, gets claimed back for net zero good to HMRC.
2: the IR35 affair is about closing a loophole meant to reduce your taxes. If you'd really be paying less to HMRC as an employee you need to go seek professional advice on what you did wrong setting the company up!
It's hard to be sympathetic to those hurt by loopholes closing around their necks. You had it good, banked the money, now get over it.
>>I pay the government a lot more tax ( NI, Tax, Corporation Tax and VAT) as a contractor than I would as a permanent employee on a lower salary.
The proposal isn't that you'd become " a permanent employee on a lower salary." Just that a lot more of what you earn would be taken as tax, and that it would all be very much more complicated.
Not IT specific but I think that HMRC thinks freelancers might not be so forcoming with salaries, taxes to be paid etc. I'm looking at the building trade, employing lots of 'consultants', probably from abroad, who don't realise tax has to be paid to No. 11. Just my thoughts, not those of any gov't department.
It may be exactly like in construction. I help few friends with their tax returns (they work in construction). Situation is that although they're self employed (with all the bonuses and drawbacks of it) employer needs to pay their "expected" NI & PAYE taxes. So when they do their tax assessments those usually come with large returns due to expenses they can claim.
I have a feeling same will happen here - they will ask employer to pay your contributions directly to HMRC and people can claim them back if you provide all the proofs. People are not directly employed (they are still contractors) but are on payroll. System is really simple and already implemented. For PSC, where you're not supposed to muck with dividends and so, it makes sense.
It will just increase number of Ltd companies, which are more headache to manage. That will also increase workload on HMRC to analyse tax returns from those Ltds thus will be very counter-productive and expensive, IMHO.
Ian
wtf are you smoking?
Some questions for you matey:
- Why is it 'long overdue'?
- How long have you been working for yourself?
- Are you envious of daily/hourly rates that contractors can get?
- Do you know WHY clients engage some folk as contractors rather than permies?
I look forward to your hopefully lucid replies...
Cheers,
Jay
-
@KeithR
"Maybe he just thinks it's about time you paid the right amount of tax on them?"
Funnily enough the right amount of tax is as little as can be paid within the current laws.
Which is exactly what contractors pay...
If you want to be the guy that steps up and says "you know what... I can afford more heres an extra £5k HMRC" then by all means, fill your boots.
But until you set the example Ill keep paying what I HAVE to and no more (Incidentally what I have to pay is likely significantly more than what you pay)
"bring a nice boost to the coffers"
Impossible to tell until anything official is announced. Rule changes could result in a substantial reduction in spend by businesses, thus reducing the market and subsequently increasing unemployment.
Freelance workers are used by business as it is economical from the business perspective, not because they're trying to reduce money flowing into the treasury. If the cost of doing business rises, money into the treasury will fall.
How will killing off several entire industry sectors and destroying companies ability to improve their IT systems boost the coffers?
(And lets get this out of the way first - before you think contractors pay no tax I'd like to point out that most pay plenty of VAT - and HMRC are already going to increase their dividend payment tax take due to dividend tax changes - https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet).
A quick look has shown that the IT outsourcing industry was worth 41 billion GBP in 2011 - probably even larger now. Let alone the support industries like the recruitment agents, accountants, insurance companies (for liability cover), hotels, train companies, car leasing, B&B's, restaurants, service stations, coffee shops etc etc whose staff are all employees.
The Recruitment Industry alone is worth over 28 billion of which the largest part will be placing contractors (which feels about right to me since the agencies I've seen have very shiny offices in very expensive areas of the city).
http://www.telegraph.co.uk/finance/jobs/11191471/Recruitment-industry-now-bigger-than-its-pre-crisis-peak.html
So all that would go to zero.
To put it simply - currently companies do not pay anywhere near enough wages in London or other big cities to properly cover transport and housing costs. Contractors can claim for costs when working away from home which makes working for London companies feasible.
So, thrusting companies will want to expand, more staff/turnover (more tax paid) etc and will need to expand their IT (because EVERYTHING runs on IT) - and they won't be able to because all the IT contractors have disappeared and are now claiming benefits due to there being not enough jobs in their home towns.
Blame the London bubble if you like - but that's the way it is.
The biggest loss is this - flexibility for industry.
It's weird that a Conservative chancellor is even thinking of severely damaging the British economy by trying to get us all on to a sort of Marxist, everybody on the payroll, inflexible Communist style industry control.
If he wants more tax revenue then maybe he should go after the private housing sector. All those landlords living off everybody else's backs while channeling their 'profits' through private companies. Get them into jobs and paying PAYE. Maybe ban people from being landlords if they don't maintain properties properly. Hike the tax landlords pay (and get them to pay the rates again) to discourage people making money from nothing - boost the fair rent systems like they've had to in some cities in the US of Capitalism. Even, say it quietly, rebuild all the council houses and flats which Labour governments built and which the Tories gave away for votes. People might then be able to live AND work in London.
@ bailey86
what are you smoking/drinking?
how will this kill of the IT industry? you can still be a contractor, you can still do work for multiple companies, just the loopholes currently used to minimise the tax paid will be reduced or closed. You won't get away with earning £10K per year and taking £X0(0)k in dividends paying just 20% (or what ever) tax. Maybe you'd have to pay the same rate of tax as permies.
"All those landlords living off everybody else's backs while channeling their 'profits' through private companies. Get them into jobs and paying PAYE"
how is what you are doing different to what the landlords are doing? your both earning money and paying the minimum (I'd say correct amount) of tax possible.
You know your onto a good thing and would be worse off paying the same rates of TAX as a permie and this is why you are a contractor instead of permie, because the money is better as you pay less tax.
'You know your onto a good thing and would be worse off paying the same rates of TAX as a permie and this is why you are a contractor instead of permie, because the money is better as you pay less tax.'
I think I need to restate what I said.
If IT professionals had to be short term permies then working in London would be pretty much unfeasible - earnings can be less than a decent living. I've worked with permies in London and they are so badly paid they have to commute for hours and live in cheap areas - not sustainable long term. Most of them eventually make the jump to contracting (or certainly want to). And these guys are very often experienced guys who are very good at what they do.
Contracting isn't just about how much tax you pay - it's what you can claim for as expenses.
There is a London bubble problem.
Also, companies need flexibility when employing IT staff. Might need someone for only one/two months - part time - for a few days etc. Contractors have to still pay the bills in between contracts - so need to be paid more to build up a buffer.
Permies often think contractors are raking it in - but how would you cope with effectively losing your job every few months and having to interview/negotiate for a new position whilst still getting bills in. The grass is really just the same shade of green - we're workers too just trying to make ends meet (in our case by providing a flexible service).
And as mentioned - it's not that contractors pay no tax - don't forget VAT. And before anyone says VAT is zero gain - then why is it implemented? You add value - a company expands - makes more money - pays more VAT. ATW the government received 97.7 billion in VAT in 2014. I'm happy to pay no VAT if people think it is a zero gain tax - but 97.7 billion doesn't sound like zero gain to me.
(And BTW - closing down VAT carousel fraud by sorting out the rules properly might be another area GO could look into).
Finally, Landlords. I bet not one landlord works as hard as the average contractor. They contribute nothing to society - just making money from money. As mentioned - getting rid of the bad ones would at least be a step forward. It would release more housing stock which may help the housing situation - and get away from the ridiculous situation we've got now where paying rent can be more expensive than what the 'landlord' is paying for the mortgage.
"Finally, Landlords. I bet not one landlord works as hard as the average contractor. They contribute nothing to society - just making money from money. As mentioned - getting rid of the bad ones would at least be a step forward. It would release more housing stock which may help the housing situation - and get away from the ridiculous situation we've got now where paying rent can be more expensive than what the 'landlord' is paying for the mortgage."
Yet another brain dead rant against landlords, and less factual than most. Have you ever considered that contractors may also be landlords? Property is a good alternative investment to the stock market and/or a pension fund.
As for making money from money, surely this is what savings accounts, ISAS, pensions and many other things do.
Finally, releasing more housing stock? From where? If you sell off the rental housing you still have the same number of houses and the same number of people wanting to live in them. Just nowhere for people with short term job security to live, as they can't afford a deposit to buy and they can't qualify for a mortgage. This is one of the key benefits of having a rental market; provision of housing to those who are unable (or don't want) to buy.
Two points I agree with; police rental properties more vigorously to prevent the vulnerable being exploited and build a new stock of rental properties to replace the Council Houses sold off. The rest is total bollocks.
OK.
Landlords or companies found guilty of not maintaining properties within the regulations are get banned from renting out properties. Sounds fair so far.
Those houses are then available for purchase - so - due to the law of supply and demand - more houses are available - prices go down - and first time buyers will find it easier to get on the housing ladder.
What's not to like.
BTW - This is what they used to have in Sweden - no ownership of private property unless you lived in it. The result - plenty of high quality housing available at half the cost of what it was in the UK at the time. When I was there it was quite surprising to see beer at fives times the UK prices - houses at half the UK prices.
Sorry to state the well known obvious - but the more private landlords you have the higher the property prices. All I'm suggesting is to enforce the rules more strongly to get rid of the bad ones - and make all of them pay more tax.
Remember, it was the landlords who used to pay the council tax (called housing rates) until the landlord's friend Thatcher transferred that bill on to the tenants as the poll tax which is now the council tax. And Thatcher brought in the tenancy agreements which allow landlords to kick people when it suits them (every six months I know but if you've got kids in school six months is nothing). So they've had a good deal over the last 30 years. Time we redressed the balance - and as mentioned - no private landlords - just regulated housing associations and council houses like they had in Sweden would be the best way to provide good quality, affordable housing stock.
Everyone pays VAT on goods that attract VAT, if your a business that is obliged to charge VAT on your services, your customer pays the VAT & you pass it on to HMRC minus a small percentage.
How are you paying extra when its your customers paying and your earning from it at the same time?
If London is too expensive to work in as a permie how come so many permies work & live successfully in London without being contractors. The trains and tubes are not full of contractors commuting to work, they are full of permanent staff commuting from within or London or her suburbs or further afield. many choose not to live in London for many reasons other than they can't afford the rent. So called cheaper areas are not cheap compared to the North but they have other desirable qualities compared to living in London. I know many people who moved to the coast just because they like to be by the sea. Brighton to Central London is not that long to commute by train.
Lastly i know many contractors that are also landlords as its a good investment on the oodles of cash they've earned and paid less tax on than a permie. Not all landlords are bad, if they where no one would rent. Rent has been higher than a mortgage since at least the late 1990's. Some may not have a deposit big enough to buy or have been put off buying by stories in the press or the ever present danger of a recession and the fear of negative equity. In my opinion its misguided. Buy as soon as possible and lock in the value, after all renting is just paying some contractors mortgage and feeding their retirement plan.
If your contract pay is so low that you would struggle to live around & work in London maybe look to re-skill in something more lucrative?
Chris, with this "dividends paying just 20% (or what ever) tax."
You have shown how much thought you have put into this.
Corporation tax is indeed 20%... But I suspect that was a lucky guess...
Then of course there's :
Insurance
Accountants fees.
And the lack of:
Sick pay,
Holiday pay,
Job security,
Redundancy pay.
Plus we have to pay employees and employers PAYE...
I think you'll find the % isn't that dissimilar... Even more so next year with the new 7.5% divi tax.
"Rather asinine, isn't it, for a contractor to complain about lack of job security?"
It's not a case of complaining. Job security has a value. Permie get paid less but are in full employment. Depending on the contracting area a contractor may have long or short periods of no work. That has a negative monetary value.
If the proposals take away some benefits of contracting but don't compensate with the benefits of a permanent job then the complain is it's making you worse off.
"how will this kill of the IT industry? you can still be a contractor, you can still do work for multiple companies, just the loopholes currently used to minimise the tax paid will be reduced or closed. You won't get away with earning £10K per year and taking £X0(0)k in dividends paying just 20% (or what ever) tax. Maybe you'd have to pay the same rate of tax as permies."
First off, the income tax position is relatively neutral regardless of whether you pay by salary or by dividend - what is now being proposed (among other things) is in effect an *additional* tax on people *who work* and earn and pay through dividends - noting that those who do not work but collect dividends will only pay at the normal prevailing rate(s).
Additionaly, expenses such as travel, B&B, other accommodation etc which are incurred as part of the job, will no longer be tax deductible. This rule will not be applied to large companies - only freelance workers.
It is certianly going to make it very difficult for anybody to take a contract anywhere other than local.
I'm lobbying my local MP to see if he can get a new law passed allowing Permie staff to become contractors. I think it's unfair that us contractors can contract but Permie staff are banned from doing so. Disgraceful, utterly disgraceful that these people have to whine about contractors and they don't get the legal opportunity to take the leap and become contractors.
I've had my time as a contractor, and I don't ever want to go back to it. The endless hassle of book-keeping, saving receipts/invoices, expenses claims for the tax returns every year - no thank you! It felt as if I was doing the same amount of work for the the Inland Revenue (as it was then) as I was for the work I was actually doing (and enjoying).
Contractors are barmy* to my mind - I'll stick with being an employee and have PAYG for an easier and more enjoyable life!
*In a good way - you are braver folk than I am, obviously :-)
From an article about this on The Guardian the other day, I noticed the following mentioned:
"Some IT workers might work for a company for a short period or they might work for multiple companies at the same time. In that case they would not be seen as an employee."
So I take a 6 month contract with Company A and every 28 days (preferably on a weekend) I do a short-term contract for my Agent's company lasting 1 day (billing a nominal £1 for "consulting" and not requiring any on-site presence). Because I am working multiple concurrent contracts, my understanding is that it will not be a requirement to go on to the payroll for Company A.
I think we can all agree that there will always be loopholes.
Maybe it is to try and deal with all the zero hour contracts that the likes of Sport Direct use?
If so then some differentiation needs to be made but at the moment many people at the bottom don't get benefits because they have a job and are treated as spare parts by these so called 'employers', called on at any time IF they are wanted and can't take another job.
Personal Service Companies are a figment of HMRC's imagination. There is no legal definition.
There is no 'loophole' Contractors act as a limited company because of previous legislation that made it impossible for contractors to act as a self employed person and pay even less tax. The tax most contractors are avoiding is about 10-15%, they do however get no employment benefits so maybe that is a fair trade off?
This putting contractors into a one size fit all harness keeps failing.
The result of this will either be
1. All the contractors become highly paid permies swapping their daily rates for equivalent salaries. They & their employers then hand over oodles of tax to HMRC. Agencies disappear. Watch out for Airborne pigs.
2.Contractors end up working for agents at same rates or more likely lower rates maybe 10- 20% meaning less tax.
3. Contractors end up working for contractor agencies which incorporate abroad and or figure out how to avoid tax. Companies get to pay costs abroad so avoiding UK tax.
4. Companies import ICT workers and pay them minimum wage after deductions so they can claim tax credits = negative tax. IT workers retire or work abroad.
5. Companies can't find contractors to work for them in London etc because of lack of expenses so they offshore work. We loose skills and any lead we had in IT or similar.
6. Contractors find a way to work round the legislation and ignore it which was what happened with IR35. As they are fed up of being targeted more people do it.
every valid option above means lower tax take. This proposal is not the way to fix it. Lets have a point based system that can be applied fairly and identify those disguised employees and the real contractors.
Amusingly enough I now know 8 contractors who started "real businesses" funded originally by generous fees from contracting. They employ staff and pay lots of tax. They would probably not have launched their business as a permie with a none compete & employer owns IP clause in their contracts.
@Why Not?
You missed an obvious option. Offshore yourself.
Mega Corp pays Lout Inc (Bahamas) to provide services. Lout Inc (Bahamas) subcontracts Lout UK Ltd for a lower rate to provide those services, and Lout UK Ltd employs me, as a permie, to do the provision as well as my wife to run the company. If the tax man quibbles about the spouse, then Mrs Lout IT Talent Search UK Ltd gets the gig with Meg Corp and pays Lout Inc (Bahamas) with the rest of the geographical shenanigans remaining the same.
The excess earnings that I was going to save & invest remain offshore and tax free, and I still split my income over two tax bands thus reducing my effective tax rate considerably.
I am not an accountant and I'm certainly not a lawyer, but a former employer was the trade name in tax arbitrage, so while the implementation details of the above may vary, the principle of how it is operated does not. Stop thinking about one company and one legal jurisdiction and the world is literally yours.
I predict much sound and fury, signifying nothing, and affecting revenue collection only marginally either side of zero. I'm a permie going contracting for my next gig, so will be more than happy to put my money where my mouth is.
Yes, this is more my take on it as well. Employing people as contractors has become an easy way for companies to easily avoid any of the responsibilities of an employer and to be able to get rid of people without having to give any notice or pay redundancy.
I'm currently working as a contractor for a company who have a hiring freeze on, I would prefer to be an employee but there's just no chance of that.
As a contractor you are far more in control of your working life than as a permie. You're more like a Pirate than a Royal Marine. Companies need both types of people. I expect you were hired by a department within a company who are able to pay other companies to get stuff done. I expect it was corporate HQ who issued the hiring freeze so technically you are not a person but a supplier.
A company (customer) expect another company (supplier) to look after their own staff and taxes. The customer tells the supplier what they are looking for and the supplier figures out how best to deliver that. As long as the customer is pleased with product or service and the supplier is pleased with the payment then business has been done. As long as no one gets run over by a forklift then the human aspect is OK too.
Zero hour contracts are here to stay, there's no other way to fudge the employment figures and allow your rich chums to flog the peasants.
Also zero hour contracts require you to be on the payroll but not get paid, this is about trying to get back tax breaks contractors (in my opinion) rightly deserve. I've had jobs in London & Birmingham and if it wasn't for the tax back on travel and accommodation I wouldn't have been able to do those jobs due to the cost outlay.
Not a chance! This is a Conservative government you're talking about. The idea that they'd do this to help the working poor is completely unbelievable. Besides, the article remarks that IR35 isn't working and the number of PSCs is increasing, so we know perfectly well that "helping" people is the very last thing on their mind. And by the way - since it's a CONSERVATIVE government doing it, it's pretty clear that the wealth floor has increased to the point that they now consider IT contractors to be the working poor.
The Register 
Biting the hand that feeds IT
Copyright. All rights reserved © 1998–2024
