PMSL, I wonder if the UK Gov has worked out the cost to them if all their contractors did this?
UK.gov tells freelance techies to slap 20 per cent on fees as IR35 tax hike looms
UK government departments are advising IT contractors to hike their fees by a fifth in order to avert an exodus of self-employed techies that will be hit by a forthcoming tax clampdown, multiple sources have told The Register. Changes by HMRC in April will shift responsibility for compliance with the intermediaries legislation …
COMMENTS
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Wednesday 25th January 2017 09:53 GMT AMBxx
It's classic government thinking - they assume that changes to the tax system won't change any behaviour!
The new 7.5% dividend tax is another example. I'm just living on savings and paying directly into my pension instead. Tax bill has dropped by nearly £20k. I didn't mind paying CT before, just unhappy at the sudden hike. They should think more along the lines of boiling a frog.
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Wednesday 25th January 2017 13:53 GMT macjules
Classic HMRC would be like this:
1) We want an easy target to hit for more tax.
2) Let's hit IR35 contractors. Add say ... 10%? .. to their bill.
3) Oh wait, we know that 90% will tell us to eff off so lets make it 20%
4) And we'll need a new collections division to chase down the other 90%.
5) Trebles all round!
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Wednesday 25th January 2017 09:48 GMT J P
Both feet, and the ankles
It gets better - if there's a long chain of agencies, then the Gov't department is going to be paying everyone's margin on the increased cost of funding the contractor's additional tax. So, contractor's day-rate goes up by eg £20 to fund the £20 which the Treasury will get back. 1st agency goes up by £21, 2nd by £22, 3rd by £23 etc. Treasury has to fund the Dep't with an extra £23, paid for out of the £20 extra income + top up from wherever else in the public purse they can find it. (While some of that extra cash stays in the UK economy and hits the Exchequer sooner or later, as pointed out in the article a lot of the bigger players shift their profits offshore out of the UK tax net, so we lose that wedge completely.)
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Wednesday 25th January 2017 10:23 GMT J P
Re: Both feet, and the ankles
You're probably all right about the numbers - there will be extra due diligence required at every layer as well, just to confirm who should be operating RTI on which payments, which will help to justify the "margins".
More worryingly, I've heard that since the new rules apply to ALL contracts, not just IT, and IR35 can catch any service supply that could have been offered by an employee (ie gardening, cleaning, legal work etc) public sector bodies are thinking about cancelling all their contracts with small business, and routing everything via Capita etc, just to avoid the analysis burden and related risk exposure if they get it wrong. Sure, it'll cost more than paying people direct, but it'll cost less than the risk of getting it wrong and having HMRC on their back for years.
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Wednesday 25th January 2017 14:06 GMT d3vy
Re: Both feet, and the ankles
"And who has been lobbying for this? Crapita et al. It is a sicking corruption of the tax system that is supposed to serve the people. F**k it no-one cares anymore, think I'll go back to Ameri..oh wait."
There is a way around this, but it requires people you trust.
If a few contractors banded together and formed a company offering service X that company could bid for work in the same way that Capita, CSC, CGI, Cap all do. Lower overheads so they could probably undercut them by quite a bit.
The trust comes into it when you have 4-5 people all with an equal stake in the company on different rates you would realistically only be able to take as much as the lowest day rate and leave the rest in the company for "Expenses & Entertainment"
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Wednesday 25th January 2017 14:23 GMT Dave 15
Re: Both feet, and the ankles
Problem with that. First you still have the issue of checking the tax but more important you wont be as cheap as the guy from Bangalore and you won't get the juicy contracts Craptia et al gets because you don't have 20 years experience in f****g up (sorry doing) similar contracts.
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Wednesday 25th January 2017 15:18 GMT d3vy
Re: Both feet, and the ankles
After CSC put their markup on offshore work and add their "project management" costs undercutting them is fairly easy.
My next contract was meant to go to CSC but I'm 20k cheaper, based in the same time zone and can be available for face to face meetings. Genuine reasons long the cost benefit analysis that the client did to decide between me and csc.
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Wednesday 25th January 2017 14:49 GMT Anonymous Coward
Re: Both feet, and the ankles
The problem is that Companies have to be on a preferred supplier list and meet various criteria before they get near to any sort of Government contract.
Many years ago I worked for a large Canadian consultancy in the UK that was excluded from bidding on government contracts as it had not become a preferred supplier. They had to use another consultancy and be sub-contracted to do work on a local government portal.
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Wednesday 25th January 2017 15:22 GMT d3vy
Re: Both feet, and the ankles
"The problem is that Companies have to be on a preferred supplier list and meet various criteria before they get near to any sort of Government contract."
Yes, but if a small barrier like that is going to stop you contracting probably isn't for you anyway.
I am a suppler to 3 NHS CCGs and am part of the MoD supply chain too (though the MoD one is through a proxy)
There are barriers to doing it, but they are not impossible (or even particularly hard) to overcome.
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Thursday 26th January 2017 05:28 GMT Twilight
Re: Both feet, and the ankles
If it's not that hard to get on preferred vendor lists in the UK, that's very different than the US (where it is usually very hard to get on private-sector preferred vendor lists and nearly impossible to get on government ones (though state-level is usually easier)).
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Thursday 26th January 2017 01:40 GMT d3vy
Re: Both feet, and the ankles
No, an umbrella is very different from what I proposed.
In an umbrella you are an employee of that company, they pay you a wage and your expenses, they take a cut to make their profits.
What I proposed was a situation where a small group of contractors all owned shares in the same company, allowing them to use the same tax structure (small salary and dividend) as they currently use.
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Thursday 26th January 2017 11:12 GMT Doctor Syntax
Re: Both feet, and the ankles
"allowing them to use the same tax structure (small salary and dividend) as they currently use."
Actually I suspect that this would get you looked at closely, especially if you were to then make payouts based in any way on relative contract earnings - and if such differentials existed over a long term then it would tend to instability.
The real advantage of this sort of business would be the ability to bid as a group for larger projects as a complete package. That would get you work that a solo contractor couldn't and if you're delivering a turnkey project for an overall fee there's no problem with one task being priced at a different rate to another.
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Thursday 26th January 2017 20:04 GMT d3vy
Re: Both feet, and the ankles
@dr s
"especially if you were to then make payouts based in any way on relative contract earnings"
Sorry again, that's not what I meant. I meant they would have to all agree to take the same dividend, even if that meant leaving some of "your" money in the company.
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Thursday 26th January 2017 10:57 GMT Doctor Syntax
Re: Both feet, and the ankles
"when you have 4-5 people all with an equal stake in the company on different rates you would realistically only be able to take as much as the lowest day rate"
If you're setting up a company with multiple people you're really going to have to run it on business-like lines. You don't immediately take all the income out as dividends like the cowboys who gave the IR the justification for IR35. You pay salaries to all including sick pay and holidays. You also build up a surplus to cover for one or more of your consultants being out of contract for a while. You then pay dividends based on what's left over. Pretty well what a singleton should be doing if they're running on business-like lines.
BTW, I think you'd need at least 5. IIRC the original IR35 legislation specified a shareholding of >20% although it may have changed since I retired.
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Thursday 26th January 2017 19:54 GMT d3vy
Re: Both feet, and the ankles
@dr s
You're quite right,
That's kind of what I proposed, I didn't mean it to read that they would take everything out.
Rather that when they did declare a dividend it would have to be based on an agreed amount which would have to be based on the income generated by each person.
That said, there's nothing to stop a contractor emptying their company account every month (as long as they leave enough to cover tax etc) doesn't matter if your a one man band or a company owner employing 20 people, you can take what you want as long as it's accounted for an all taxes paid.
It's a daft idea to do that... But there's nothing to stop you doing it if you want to.
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Thursday 26th January 2017 19:57 GMT d3vy
Re: Both feet, and the ankles
@dr s
I've just typed a big response and chrome crashed...
The jist was : you're quite right that's what I was getting at doing, not emptying the account every month, but rather having a clear agreement in place for how dividends would be doled out based on the profits generated by each member.
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Wednesday 25th January 2017 16:23 GMT Lotaresco
Re: Both feet, and the ankles
"And who has been lobbying for this? Crapita et al. "
I have been through and lost the arguments about this when I did contract work for a government department. At that time I had access to Mad Frankie Maude and attempted to persuade him that clamping down on small businesses was a really, really bad idea. The source of the lobbying was obvious (the usual suspects) and the reason transparent.
The big integrators want to stay the only game in town. They were hurt when Cabinet Office decided that their gravy train should end. CO promoted the use of individual contractors and maintaining details of "talent" so that departments could find trusted contractors. The big ones screamed "not fair" and put a lot of money into
greasing the wheelsensuring that their concerns were listened to.I know several of them have been busy signing up lots of independents using FUD and IR35 to persuade people to join them as permies. I've seen the offers. It's usually an offer of a pay cut between 25-50% with an attempt to sell the "benefits" of company car, pension and health insurance. Of course the rate to government rises by about 50% to pay off "overheads" and the integrator makes a neat 100% (or as they say 50%) profit on each body that they rent out.
They can do one as far as I'm concerned. My order book is bursting at the seams and I've enough private work to see me through to retirement. I don't need to work for politicians who think that someone who actually does something is beneath contempt.
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Wednesday 25th January 2017 09:56 GMT djstardust
Same thing is gonna happen
In the oil industry.
Before the arse fell out of it probably 50% plus workers were contractors. The companies liked it this way because they could hire and fire at will dependent on workload or whether they actually liked the contractor or not.
When things pick up the oil companies will be wanting contractors back again on 6 to 12 month stints, but of course the goalposts have moved greatly in the past two years.
There's gonna be a crisis because a lot of the contractors were not from Aberdeen originally and have gone home, and the ones that are left will realise the tax system has changed and they can only draw 5k without penalty.
This has been a total screw up and to save a penny the government will lose a hell of a lot more.
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Wednesday 25th January 2017 10:15 GMT P. Lee
Re: Same thing is gonna happen
>This has been a total screw up and to save a penny the government will lose a hell of a lot more.
A. You assume the government cares
B. You assume this is for the benefit of the government rather than some business buddies who have large companies with costs which *they* can offset against tax and who now find themselves with a little less competition.
/tin foil hat=off
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Wednesday 25th January 2017 11:25 GMT Blotto
Re: Same thing is gonna happen
its more like a bunch of numpty labour backing civil servants horrified at the rates contractors earn will now be happy that the contractors pay the same or similar rates of tax as permies, whilst being blissfully unaware the contractors rates have shot up to cover the extra in taxes.
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Wednesday 25th January 2017 14:23 GMT d3vy
Re: Same thing is gonna happen
"its more like a bunch of numpty labour backing civil servants horrified at the rates contractors earn will now be happy that the contractors pay the same or similar rates of tax as permies, whilst being blissfully unaware the contractors rates have shot up to cover the extra in taxes."
I always like to point out to people like that that my *PERSONAL* tax rate might be way lower than theirs, but I also have alot of other things to pay that they dont.
From my day rate I have to cover Professional Indemnity, Public Liability, Employees Insurance policies. I also have to provide my own hardware and software licences, I then have to pay an accountant (to make sure that HMRC get what they are owed).
Then my entire pension contribution comes out of it, no employer contribution or % matching, its all my money…
Then I pay the 20% Corp tax on whats left before I can take it out – Which incurs a national insurance payment on the salary component and an additional 7.5% on the dividend component
Yes, this STILL leaves me with more available to take home than when I was a permie… but when I was a permie I never worked 50+ hour weeks, I had paid holidays and had the security of being able to take 6 months sick leave at full pay. I also had a matched pension contribution. Contractors get none of that. *
* For reference I left that position because we were being TUPE’d to CSC and CSC wanted to send me out to different clients (Billed at 4-5x my salary) and wouldn’t give me a pay rise, all the fun of contracting with none of the benefits, Its been almost 3 years now and despite the current changes I don’t regret it one bit.
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Wednesday 25th January 2017 10:40 GMT J P
There's an interesting conundrum around that. A few years back, there was a school of thought that you could have an "IR35 proof contract" - just stick in the right clauses round control, substitution etc and off you go. HMRC and the Tribunals disagreed, and the case law is very firm and clear that you have to look at what happens on the ground, not just what was signed 18 months ago. (There's one case where the paperwork stayed the same for several years, but part way through the actual day-to-day practices changed, and so did the IR35 status).
Now square that with the idea that HMRC's new tool will be able to accurately predict *before the contract starts* what your status will be. Hint: you can't. And since payments have to be processed on the RTI system, it's not something you can revisit after starting; you have to get it right up front. It's just another reason why implementation is likely to be 'extremely challenging'.
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Wednesday 25th January 2017 10:49 GMT Dr. Mouse
The tool will present HMRC's interpretation of the rules, which has been shown time and again in tribunals to be wrong. The difference is that the contractor will have to pay the tax from day one, and will have to fight to claim it back, instead of HMRC having to investigate and prove they should have been paying.
It will gain the government no extra income. Contractors will leave or jack up their rates to cover the extra tax. It will actually cost the govt more.
However, it is obvious to all that this is just the first stage. Soon enough, they will force these rules on the private sector. Then all companies and contractors will suffer, and the government might make a bit more tax. The people will be happy, because it'll be presented as "clamping down on tax dodgers", but the whole country will suffer for it (less people contracting, a less flexible workforce, lower productivity, higher prices, etc).
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Thursday 26th January 2017 11:52 GMT Doctor Syntax
Re: > Just the first stage
"it's a tax dodge."
I'm not too sure to whom you were replying as you didn't quote. But if it was to d3vy pointing out that Ltd Co vs self-employment was a tax dodge then you're wrong. The Ltd Co approach was forced because of IR* rules about tax defaults by self employed settling on the next link in the chain: the agency** or, in the case of direct contracts, the client. Having the contractor work via their own Ltd Co removed that liability. There seem to be areas where self employment still seems to be the norm but in general most clients are liability-averse.
There's also the point that the contractor is taking on risk. Imagine you're a manager in a large IT dept (or oil or any other area). You have a certain amount of more or less fixed workload for BAU plus a variable workload for projects or even seasonal fluctuations for BAU. How do you staff it? Even trying to budget for the fixed workload is problematic, people take sick leave, parental leave, holidays or sometimes just quit or retire. Add to that the project work & you are really exposed to risk. If you have a staff level set on the basis of hoping for the best you take the risk of being understaffed immediately someone is off or a new project arrives. If you set some higher staff level you take the risk of sometimes paying salaries to people for whom you've currently no work.
Your best solution is to add some freelancers into the mix. That means that if you have a surplus you can get rid of them quickly without redundancy payments and if you need more the recruitment process is usually much faster than recruiting permies, especially if you can keep HR out of the loop. The crux of this is you have transferred the employment risk to the freelancers.
Now the freelancer is carrying some of their clients' employment risk. This is a very different situation to the employees alongside whom they will be working whilst on contract. They are not employees, they are businesses, taking business risks like any other business and this is why, irrespective of whether they're a one-man band or a Crapita-scale giant they should be treated as such.
None of this, it seems, stops permies complaining about tax dodges. But, I ask, why do they say this whilst not jumping on the bandwagon themselves? Are they too high-principled to embark on similar "dodges" or is it possibly that they don't want to take on the risks?
* As it was then, this pre-dates HMRC
** This prompts a thought. If Uber etc are presenting themselves as an agency then maybe this puts them on the hook for defaults by their
employeesindependently contracting drivers.
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