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IR35 reform to be repealed; workers will determine employment status

82 points by saos 4y ago

d4rti 4y ago
Note that the liability is shifting back to contractors. I don’t consider this a win for the contractor. The end client should be the one to determine status and shoulder the responsibility if it turns out to be incorrect.
- 988747 4y ago
  If you are contractor then you are a business owner, and you should bear responsibility for your own taxes. The upside of this liability shift is that your customers will be more willing to negotiate with you. Right now some of them are assuming very defensive positions, like treating all contractors as being inside IRS35, because claiming that you're outside is a risk for them.
- danparsonson 4y ago
  That was ever the case in the past though, and previously dealt with by means of a well written contract and appropriate working arrangements. The alternative (status determination by client/'employer') meant an instant ~15% pay cut for anyone unable to negotiate a rate increase to cover the additonal tax burden.
- jsty 4y ago
  > The end client should be the one to determine status and shoulder the responsibility if it turns out to be incorrect. I'd say the opposite, the incentives / risk structure are otherwise completely misaligned. If the end client says you're outside IR35 and you should be in, they get whacked for income tax + 2x national insurance (employer and employee contributions). If they say you're inside and you should be outside they only have to pay the employer NI contributions. That's a recipe for blanket "inside IR35" decisions, which is exactly what happened to the detriment of many genuinely independent contractors.
  - gpderetta 4y ago
    It would have made sense that if 'employee for tax purpose' also meant 'employee for employment law purpose', so that the declaring someone inside IR35 would have significant consequences for the employer as well.
    - Silhouette 4y ago
      Double standards are a big part of the problems in this area for sure. Another obvious example from recent times was the COVID support schemes. If you were an owner-operated business that paid out through the usual salary+dividend combination then you would have got far less if you needed to use something like the furlough scheme than if you'd been paying everything out as salary or registered as self-employed. IMHO that's fair enough in itself - if you claim to be operating like a business and treating your income as business profits rather than salary normally then you don't magically get to change your mind to claim a different support scheme. But it's pretty hypocritical for the government/HMRC to then come along the next day and try to interpret the income of that business as if it were all salary and tax it as such to their benefit.
- varispeed 4y ago
  There is a whole host of unintended consequences with that, that negatively affect the market. It gives the larger entity in b2b relationship an effective say how the smaller partner is being taxed. This gives them literally an instrument to wipe their competition. For instance, a big haulage company can't find drivers to do a certain route, but there is a small company in the area happy to subcontract. Big company can now say, alright guys, I can only give you the contract in-scope of IR35. If every big company in the area does that (and they do), then suddenly that small business can no longer operate. Company folds and its workers can either seek employment in the big company or do something else.
- Silhouette 4y ago
  This shouldn't be a win for genuine contractors but it very obviously is. Since the reforms that are being wound back were introduced there has been a huge chilling effect on the flexible labour market here because a huge proportion of larger clients are highly risk-averse and push all contractors into IR35/umbrella arrangements as a blanket policy. Of course they aren't supposed to do that and they are supposed to assess each contract individually and there are supposed to be appeals processes if the IR35 status is then determined incorrectly. However we live in the real world and what is "supposed to" happen means very little. The market for contractors today is a fraction of the size it used to be before the new rules came in. Typical rates in many parts of the market actually fell since the changes when logically several factors should have been pushing them up if the market was functioning properly. No doubt some part of that was getting rid of disguised employees because those people do exist. However the effect has been far too widespread and affected far too many genuinely independent workers and their clients as well.
  - varispeed 4y ago
    > Of course they aren't supposed to do that and they are supposed to assess each contract individually and there are supposed to be appeals processes if the IR35 status is then determined incorrectly. That part was completely botched. The HMRC themselves admitted that role based assessments are permitted. Also they have deceived the public what assessment actually means. If the client writes the contract in a way that puts service provider in-scope (to minimise the risk), then there is not much that can be done. The appeal is basically requesting the client to change the contract, which for obvious reasons they won't do, because that would put them at risk. So the client can always walk away when you appeal. From the IR35 perspective, the individual situation of the contractor does not matter.
  - Nextgrid 4y ago
    I wonder whether the net tax revenue even from "disguised employees" (both the taxes they pay directly such as Corp & Dividend tax, as well as indirect taxes such as those they pay when they actually spend their gains) was still more in volume thanks to a healthy, flexible contracting & IT market rather than the sad & deserted wasteland we have now. Tax avoidance is a problem but maybe it's better to skim off a little bit from many people than take a lot from a very few people while scaring the rest away?
- petesergeant 4y ago
  Many eons ago, when I was a contractor in the UK, insuring against IR35 risk was much, much less expensive than being inside IR35.
  - Nextgrid 4y ago
    At least one IR35 insurance policy I've reviewed essentially gave the insurer a way out from litigating the case "if they didn't believe they'd prevail". If the same party that stands to lose money if they get involved is the one deciding whether to get involved or not, surely that's a conflict of interest and makes the policy pointless? Sure, I guess you could litigate against the insurer (and still litigate against HMRC), but the whole point of this insurance is to protect against legal costs - if you're going to spend money anyway, what's the point of insurance?
    - petesergeant 4y ago
      The insurance I had wasn’t just litigation, it also covered paying the penalties and tax.
- gadders 4y ago
  But the end client won't do this and will just blanket put everyone inside IR35, as happens now. This is absolutely a win for the contractor.
- trhoad 4y ago
  There is no risk if you're genuinely running a small business. If you're a permalancer, coining a freelance rate whilst paying very little tax (no PAYE), then you _should_ be caught out. You _should_ have the liability.
  - darkr 4y ago
    You're still liable for corporation & dividend tax. Though the rates are favourable towards the independent contractor, there isn't a huge amount of difference between a perm. employee these days; when you factor in the additional risk taken on by the independent contractor, it's difficult to say either way which one has the better deal.
  - Nextgrid 4y ago
    The problem is that the rules are ambiguous and in some industries (such as software development) it is not possible to effectively separate employees from contractors which means that even legitimate contracting activity can look like disguised employment. If you operate a business that provides software development services and want to help a client with their existing software project (who already has full-time employees working on it) you will often need to become embedded within their team which includes participating in regular meetings (including daily standups) and do "employee-ish" things that look risky from an IR35 point of view. Just speccing out a clear scope of work in advance is very difficult as sometimes the scope will vary over time as edge-cases are discovered during development, so the SOW will end up very broad and may look employee-ish. Your best bet is to have mitigating factors such as working for multiple clients, using your own equipment, etc and possibly contract length (I am not sure if it counts, IMO it definitely should) but none of those are bulletproof either. Contributing to an existing codebase in parallel with a client's in-house development team is risky from an IR35 point of view even if you are doing so in good faith and want to operate a business rather than just be a "permalancer". That's also why with the new rules (that are now being repealed), a lot of companies did a blanket determination of putting everyone "Inside" IR35 because the rules are not only unclear to begin with, but even more difficult to correctly interpret and apply in certain industries.
    - 4y ago
- varispeed 4y ago
  Liability ultimately was always with contractors, just now when HMRC claims the assessment was wrong and the client gets fined, they pay, but they can claw the money back from the contractor. Usually it is in the contract terms. The PAYE that becomes due is contractor's personal tax and the client could likely use unjust enrichment - the contractor was paid in error if it wasn't defined in the contract. These IR35 changes were really poorly written with only the happy path in mind.
DoingIsLearning 4y ago
I have been outside the UK for more than 8 years but I still get approached by UK recruiters offering contracting gigs. 7 out of 10 of them always write "Outside IR35" and I never really grasped what it meant exactly, can any UK contractors ELI5?
- mutatio 4y ago
  "Inside IR35" would mean you're controlled like an employee, and taxed so. "Outside" could mean one of two things, the company you're contracting for doesn't qualify to determine your status (and the tax burden if investigated is on you, if you deem yourself "outside") or they have provided a statement outlining why the role is truly considered outside IR35 (https://www.gov.uk/guidance/check-employment-status-for-tax https://www.gov.uk/guidance/check-employment-status-for-tax). For the latter, any incorrect determination is on them.
  - stuaxo 4y ago
    Inside IR35 is basically being an employee but with the precariousness of a contractor.
    - deleted 4y ago
      [deleted]
    - logisticpeach 4y ago
      This is an excellent framing that's rarely expressed. Most people focus on the tax aspects, and that makes sense - it's easy to feel a sense of injustice if you think others are somehow getting away with paying less tax. In reality, the actual difference is marginal, and in return contractors forfeit every protection taken for granted by permanent employees. Paid leave, sick pay, redundancy pay, protection from indiscriminate firing, (often generous) pension contributions etc.
      - ukoki 4y ago
        > This is an excellent framing that's rarely expressed. These folk express is quite well https://norightsemployee.uk/ https://norightsemployee.uk/
sparsely 4y ago
It's messed up that the UK has such differential tax rates between employment and self employment that this matters at all.
- Silhouette 4y ago
  The irony is that it mostly doesn't any more. There are several different types of employment status and business relationship recognised in legal and tax rules but one way or another the person actually doing the work ends up paying a very similar rate of tax in all of them now. Since the government started taxing dividends at significant rates on top of the corporation tax already paid any small owner-run businesses that pay out via salary+dividend arrangements are close to the same total tax level as an employee pays in income tax and NI. You're actually quite a bit worse off financially now if you equate gross revenue for the business with salary for an employee because the business has to cover all its own costs in terms of paid time off, pension contributions and so on. And of course you have none of the job security and other protections that employees have under our system. The only ones who really win big under the current system seem to be the employers of disguised employees because they can dodge employer NI contributions if they pay via a Ltd company outside IR35. But they solved the problem of getting hit with employer NI under IR35 by forcing contractors to work through umbrella companies and then pay all of the costs for both employee and employer themselves. And since that has widely been done inappropriately through blanket policies and lazy status determinations since the rules that are now to be repealed were introduced the one really big tax anomaly in the whole system is the legitimate contractors (and other independents like freelancers) who have been hit with a far higher tax bill than anyone else.
  - sparsely 4y ago
    The dodged NI contributions can be passed through via higher comp though - it ends up reducing the total cost of employment.
    - Silhouette 4y ago
      If you're going to look at the wider picture like that then you should also consider the extra costs though. A typical employee in this country might receive around 7 weeks of paid time off per year at their employer's expense, mostly holidays plus a few sick days on average. That alone would be a far greater benefit in terms of effective rate than receiving a rate increase equivalent to dodged employer NI that are being passed through instead. Then there are pension contributions, more exotic paid time off that most employed professionals could benefit from like parental leave or cover for jury service, and the expenses of running the Ltd including statutory obligations to file accounts and some other paperwork.
TamDenholm 4y ago
About damn time, luckily i've not been a contractor for some years now and have missed the IR35 shitshow of recent years. Having a client offering a contract having to determine if my company is an actual business or i'm just a disguised employee is a ridiculous way of doing it. Sorry but when i was contracting i was also taking on other freelance work, had long standing retainers for maintance for past clients and having junior developers working in my company doing the grunt work, thats a business, i'm not a disguised employee. The responsiblity should be on the person to argue with HMRC that they are a business and for those legitimately operating as such, then its not at all difficult.
- mutatio 4y ago
  It is difficult, for HMRC - it doesn't scale. I am actually in favour of the IR35 legislation as it removed entire swathes of "permietractors" from the market and allowed people like myself (and you judging off the working practices you described) to operate in a true business fashion. It is no doubt to me that 95% of "contractors" previously working "outside IR35" at large FTSE companies were indeed employees in disguise. Tenure even matched permanent staff, quite frankly it was a joke.
  - bambataa 4y ago
    I agree that many contractors were more or less perm. That in turn seemed to be a consequence of the pay differential, rather than an actual desire to be a contractor.
  - TamDenholm 4y ago
    I wholeheartedly agree with you, those dodging tax by just operating like a permanent employee but through a Ltd company are on the wrong side of the law. The problem i had is it punishes those operating legitimately. Lots of laws are like this, for instance the piracy warnings that they used to put at the start of DVD's that only punished lawful users cuz if your pirated it, the warnings would be cut out. Theres many more examples like this.
    - 4y ago
Silhouette 4y ago
Note to mods: The current headline ("IR35 will be repealed from April") is wildly misleading and potentially dangerous. The underlying IR35 rules don't appear to be changing. The announcement today is about winding back some relatively recent reforms about who is responsible for determining whether those rules apply to any given contract.
bilsbie 4y ago
Can we get a better headline?
LatteLazy 4y ago
This is good news, it's poorly defined, badly thought out, keep failing even in english courts) and unfairly (and unproductively) stops people from earning more and taking more risk.
cletus 4y ago
What you see with IR35 and various laws in the US (eg preferential tax treatment for passthrough corporations that produce stuff since the Trump tax cuts) can all be boiled down a complete failure in dividend taxation. In the US, corporate profits get taxed. You pay a dividend (for the sake of argument; in reality it's a share buyback these days). You then have to pay tax on that dividend. That's dumb and unnecessary. In the UK as a contractor you pay yourself a low wsage (IIRC ~32K GBP) then a certain amount in dividends because of preferential tax treatment and then you'd try and deduct a bunch of stuff (eg car leases). You might retain profits and then dispose of your business at a preferential tax rate after a few years. Australia on the other hand is one of the few countries in the world with a simple system of dividend imputation. Say the corporate tax rate is 30% (it was; not sure if it still is). Say you make $1000 in profits and pay 4300 in corporate tax and decide to distribute the remaining $700 as a dividend. That $700 is what's called fully-franked meaning it comes with $300 in franking credits. When you file your taxes, you get credit for paying $300 in taxes. If your overall tax rate is lower you'll get a refund (essentially). If it's higher, you'll have to pay a little more. But this way there's almost no difference between paying yourself ordinary income and paying a dividend so a lot of problems just do not exist. There are some differences (eg the Medicare levy and superannuation requirements). I truly do not understand why the US cannot do this and why the UK spent 20+ years trying to enforce stupid legislation like IR35 rather than simply fixing the dividend system. It's mind-blowing. The solution is so simple. IR35 enforcement was such a huge waste of money that simply could've been avoided by not caring if someone gets a tax deduction for a car lease.
- LatteLazy 4y ago
  The fact that this is such an easily solved "problem", and that the solution is so poor (force contractors to pay very high deductions and not give them any credit for doing so) has led many (including me) to believe this is just an attempt to outlaw individual contracting by the back door...
- mindslight 4y ago
  > I truly do not understand why the US cannot do this and why the UK spent 20+ years trying to enforce stupid legislation like IR35 rather than simply fixing the dividend system Because politicians work for rich people, and rich people do not like to pay taxes. Rich people mostly get dividends, and so the dividend tax rate remains low. The entire legal system is warped around the desires of wealth. Look at the LLC regime in the US. LLCs actually provide very little protection for individuals or small groups running their own businesses, since it can always be argued that active owners should be held personally liable, or even that the business is undercapitalized because the owners have to be directly involved instead of just paying employees. To actually get the big print liability shield, you must only supplying dumb money while hiring patsies to do all the actual work. The regime that LLCs grew out of, Limited Partnerships, openly make this distinction between general partners who actually do work and can be held fully liable, and limited partners who invested money and thus must be held harmless.
robga 4y ago
IR35 is not being repealed, only the 2017 amendments (which required Public Sector buyers to make an assessment) and the 2019 amendments (which required Private Sector buyers to make an assessment). Prior to 2017, the onus was fully on the Seller and presumably we revert back to that status. This is in line with the Truss/Kwarteng "cutting red tape" and "personal responsibility" philosophy. All along, IR35's problem has been the difficulty of codifying what is politically determined as a "real" business. Attributes like company size, number of clients/customers, ability to choose your own place of work, the degree to which you're under supervision or direction, the length you've been with a sole customer, your contracted right to walk away or to replace yourselv, and so forth are all indicators toward what may politically seen as "not real", but they are not concrete or absolute. All that is happening is that the onus is shifting back to the Seller and the Buyer's may not longer be on the hook quite so much. But some of it will be baked in now - the changes public sector made might live on despite the repeal, since they continue to work toward the political incentive that brought them in.
4ndrewl 4y ago
This is big news for anyone working as an IT contractor in the UK economy after 2023. Assuming there is still an economy in the UK in 2023 :)
nickdothutton 4y ago
One of the best things about this is the end of the parasitic “IR35 assessment” industry. Companies who ask you 20 questions, the same 20 questions asked for free on the HMRC ruling web site, but charge you for the privelidge.
cosmodisk 4y ago
For those commenting that it doesn't make much sense anymore from the tax perspective, forget the difference between employee and contractor rates. If I would switch to contracting, my earnings would almost double... For instance: £500/day contracting? Easy. As an employee? Not a chance.
- Nextgrid 4y ago
  You need to account for corporation tax, dividend tax, expenses of running a company, sick pay & holidays, etc. Once you account for all that, it's not as much. It's really advantageous if you work on a startup or side-project that requires capital; in this case your company accumulates the money and can spend it without incurring any tax (not to mention claiming back VAT), where as buying that same equipment as an employee means not only did you already pay tax on that money, but you can't even claim back VAT. If you're just looking for an equivalent to a long-term permanent job but as a contractor (even with a legitimately Outside IR35 contract with no tax-avoidance shenanigans), it's not worth it. A conservative calculation on a 500/day rate assuming 44 weeks worked in a year, 11k/year salary (with the rest as dividends), 6k/year pension contributions and 2k/year expenses suggests that it's equivalent to ~110k permanent salary. In practice, you might actually get a bit less due to downtime in between contracts.
  - haspok 4y ago
    But the original statement still stands. Which one do you think is easier: A. Finding a contract 500 per day, or B. finding a job 110k per annum? The latter is a challenge even in London (for a techie), let alone anywhere else, while 500 is achievable anywhere, in London / the City it would actually be comically low even.
iamflimflam1 4y ago
Sadly the reasons for introducing IR35 were completely valid. A lot of companies were exploiting the fact that they could avoid responsibility for paying national insurance and providing employee benefits by making everyone "self employed". This had a dramatic impact on low paid workers - being self employed meant that they no longer received any benefits that would have come to a proper employee (e.g. sick pay, paid time off). Unfortunately the legislation also impacted highly paid contractors and consultants. Disguised employment is a big issue and a large number of people are being exploited. It's a shame that our governments have been unable or unwilling to legislate effectively.
- mrcartmeneses 4y ago
  I guess this move is a recognition that the unintended consequences were too significant for Tory voters. It meant a suppression of wages in the IT sector (because employers don’t need to compete with contract rates) and reduced the ability of businesses to quickly spin up a team for a project because of the extra risk and process involved in hiring perm employees.
  - Silhouette 4y ago
    There are plenty of people operating in the world of small tech businesses that others might assume are natural Tory voters but who definitely aren't in reality. With today being a rare exception the Tories haven't really done much to help small independent businesses over the years. That of course includes contractors and freelancers working in tech but also tradespeople, drivers who come with their own specialist vehicles, some childcare providers, many people who work in health, fitness or beauty occupations, and a very long list of others. At some point the Tory leadership had to notice that there are now vast numbers of voters who work as independents or have a second part-time independent gig on the side. I won't cite specific figures here because I don't know the methodology behind the ones I've seen but apparently we're talking about several million people now so that's a significant proportion of the entire working age population. Given that the age profile in this country means they're going to lose much of their reliable support from older "Tory all my life" voters over the next 10-20 years they urgently need to find other large demographics who might vote for them instead.

82 points by saos 4y ago

Note that the liability is shifting back to contractors. I don’t consider this a win for the contractor. The end client should be the one to determine status and shoulder the responsibility if it turns out to be incorrect.

988747 4y ago
If you are contractor then you are a business owner, and you should bear responsibility for your own taxes. The upside of this liability shift is that your customers will be more willing to negotiate with you. Right now some of them are assuming very defensive positions, like treating all contractors as being inside IRS35, because claiming that you're outside is a risk for them.
danparsonson 4y ago
That was ever the case in the past though, and previously dealt with by means of a well written contract and appropriate working arrangements. The alternative (status determination by client/'employer') meant an instant ~15% pay cut for anyone unable to negotiate a rate increase to cover the additonal tax burden.
jsty 4y ago
> The end client should be the one to determine status and shoulder the responsibility if it turns out to be incorrect. I'd say the opposite, the incentives / risk structure are otherwise completely misaligned. If the end client says you're outside IR35 and you should be in, they get whacked for income tax + 2x national insurance (employer and employee contributions). If they say you're inside and you should be outside they only have to pay the employer NI contributions. That's a recipe for blanket "inside IR35" decisions, which is exactly what happened to the detriment of many genuinely independent contractors.
- gpderetta 4y ago
  It would have made sense that if 'employee for tax purpose' also meant 'employee for employment law purpose', so that the declaring someone inside IR35 would have significant consequences for the employer as well.
  - Silhouette 4y ago
    Double standards are a big part of the problems in this area for sure. Another obvious example from recent times was the COVID support schemes. If you were an owner-operated business that paid out through the usual salary+dividend combination then you would have got far less if you needed to use something like the furlough scheme than if you'd been paying everything out as salary or registered as self-employed. IMHO that's fair enough in itself - if you claim to be operating like a business and treating your income as business profits rather than salary normally then you don't magically get to change your mind to claim a different support scheme. But it's pretty hypocritical for the government/HMRC to then come along the next day and try to interpret the income of that business as if it were all salary and tax it as such to their benefit.
varispeed 4y ago
There is a whole host of unintended consequences with that, that negatively affect the market. It gives the larger entity in b2b relationship an effective say how the smaller partner is being taxed. This gives them literally an instrument to wipe their competition. For instance, a big haulage company can't find drivers to do a certain route, but there is a small company in the area happy to subcontract. Big company can now say, alright guys, I can only give you the contract in-scope of IR35. If every big company in the area does that (and they do), then suddenly that small business can no longer operate. Company folds and its workers can either seek employment in the big company or do something else.
Silhouette 4y ago
This shouldn't be a win for genuine contractors but it very obviously is. Since the reforms that are being wound back were introduced there has been a huge chilling effect on the flexible labour market here because a huge proportion of larger clients are highly risk-averse and push all contractors into IR35/umbrella arrangements as a blanket policy. Of course they aren't supposed to do that and they are supposed to assess each contract individually and there are supposed to be appeals processes if the IR35 status is then determined incorrectly. However we live in the real world and what is "supposed to" happen means very little. The market for contractors today is a fraction of the size it used to be before the new rules came in. Typical rates in many parts of the market actually fell since the changes when logically several factors should have been pushing them up if the market was functioning properly. No doubt some part of that was getting rid of disguised employees because those people do exist. However the effect has been far too widespread and affected far too many genuinely independent workers and their clients as well.
- varispeed 4y ago
  > Of course they aren't supposed to do that and they are supposed to assess each contract individually and there are supposed to be appeals processes if the IR35 status is then determined incorrectly. That part was completely botched. The HMRC themselves admitted that role based assessments are permitted. Also they have deceived the public what assessment actually means. If the client writes the contract in a way that puts service provider in-scope (to minimise the risk), then there is not much that can be done. The appeal is basically requesting the client to change the contract, which for obvious reasons they won't do, because that would put them at risk. So the client can always walk away when you appeal. From the IR35 perspective, the individual situation of the contractor does not matter.
- Nextgrid 4y ago
  I wonder whether the net tax revenue even from "disguised employees" (both the taxes they pay directly such as Corp & Dividend tax, as well as indirect taxes such as those they pay when they actually spend their gains) was still more in volume thanks to a healthy, flexible contracting & IT market rather than the sad & deserted wasteland we have now. Tax avoidance is a problem but maybe it's better to skim off a little bit from many people than take a lot from a very few people while scaring the rest away?
petesergeant 4y ago
Many eons ago, when I was a contractor in the UK, insuring against IR35 risk was much, much less expensive than being inside IR35.
- Nextgrid 4y ago
  At least one IR35 insurance policy I've reviewed essentially gave the insurer a way out from litigating the case "if they didn't believe they'd prevail". If the same party that stands to lose money if they get involved is the one deciding whether to get involved or not, surely that's a conflict of interest and makes the policy pointless? Sure, I guess you could litigate against the insurer (and still litigate against HMRC), but the whole point of this insurance is to protect against legal costs - if you're going to spend money anyway, what's the point of insurance?
  - petesergeant 4y ago
    The insurance I had wasn’t just litigation, it also covered paying the penalties and tax.
gadders 4y ago
But the end client won't do this and will just blanket put everyone inside IR35, as happens now. This is absolutely a win for the contractor.
trhoad 4y ago
There is no risk if you're genuinely running a small business. If you're a permalancer, coining a freelance rate whilst paying very little tax (no PAYE), then you _should_ be caught out. You _should_ have the liability.
- darkr 4y ago
  You're still liable for corporation & dividend tax. Though the rates are favourable towards the independent contractor, there isn't a huge amount of difference between a perm. employee these days; when you factor in the additional risk taken on by the independent contractor, it's difficult to say either way which one has the better deal.
- Nextgrid 4y ago
  The problem is that the rules are ambiguous and in some industries (such as software development) it is not possible to effectively separate employees from contractors which means that even legitimate contracting activity can look like disguised employment. If you operate a business that provides software development services and want to help a client with their existing software project (who already has full-time employees working on it) you will often need to become embedded within their team which includes participating in regular meetings (including daily standups) and do "employee-ish" things that look risky from an IR35 point of view. Just speccing out a clear scope of work in advance is very difficult as sometimes the scope will vary over time as edge-cases are discovered during development, so the SOW will end up very broad and may look employee-ish. Your best bet is to have mitigating factors such as working for multiple clients, using your own equipment, etc and possibly contract length (I am not sure if it counts, IMO it definitely should) but none of those are bulletproof either. Contributing to an existing codebase in parallel with a client's in-house development team is risky from an IR35 point of view even if you are doing so in good faith and want to operate a business rather than just be a "permalancer". That's also why with the new rules (that are now being repealed), a lot of companies did a blanket determination of putting everyone "Inside" IR35 because the rules are not only unclear to begin with, but even more difficult to correctly interpret and apply in certain industries.
  - 4y ago
varispeed 4y ago
Liability ultimately was always with contractors, just now when HMRC claims the assessment was wrong and the client gets fined, they pay, but they can claw the money back from the contractor. Usually it is in the contract terms. The PAYE that becomes due is contractor's personal tax and the client could likely use unjust enrichment - the contractor was paid in error if it wasn't defined in the contract. These IR35 changes were really poorly written with only the happy path in mind.

DoingIsLearning 4y ago

I have been outside the UK for more than 8 years but I still get approached by UK recruiters offering contracting gigs. 7 out of 10 of them always write "Outside IR35" and I never really grasped what it meant exactly, can any UK contractors ELI5?

mutatio 4y ago
"Inside IR35" would mean you're controlled like an employee, and taxed so. "Outside" could mean one of two things, the company you're contracting for doesn't qualify to determine your status (and the tax burden if investigated is on you, if you deem yourself "outside") or they have provided a statement outlining why the role is truly considered outside IR35 (https://www.gov.uk/guidance/check-employment-status-for-tax https://www.gov.uk/guidance/check-employment-status-for-tax). For the latter, any incorrect determination is on them.
- stuaxo 4y ago
  Inside IR35 is basically being an employee but with the precariousness of a contractor.
  - deleted 4y ago
    [deleted]
  - logisticpeach 4y ago
    This is an excellent framing that's rarely expressed. Most people focus on the tax aspects, and that makes sense - it's easy to feel a sense of injustice if you think others are somehow getting away with paying less tax. In reality, the actual difference is marginal, and in return contractors forfeit every protection taken for granted by permanent employees. Paid leave, sick pay, redundancy pay, protection from indiscriminate firing, (often generous) pension contributions etc.
    - ukoki 4y ago
      > This is an excellent framing that's rarely expressed. These folk express is quite well https://norightsemployee.uk/ https://norightsemployee.uk/

sparsely 4y ago

It's messed up that the UK has such differential tax rates between employment and self employment that this matters at all.

Silhouette 4y ago
The irony is that it mostly doesn't any more. There are several different types of employment status and business relationship recognised in legal and tax rules but one way or another the person actually doing the work ends up paying a very similar rate of tax in all of them now. Since the government started taxing dividends at significant rates on top of the corporation tax already paid any small owner-run businesses that pay out via salary+dividend arrangements are close to the same total tax level as an employee pays in income tax and NI. You're actually quite a bit worse off financially now if you equate gross revenue for the business with salary for an employee because the business has to cover all its own costs in terms of paid time off, pension contributions and so on. And of course you have none of the job security and other protections that employees have under our system. The only ones who really win big under the current system seem to be the employers of disguised employees because they can dodge employer NI contributions if they pay via a Ltd company outside IR35. But they solved the problem of getting hit with employer NI under IR35 by forcing contractors to work through umbrella companies and then pay all of the costs for both employee and employer themselves. And since that has widely been done inappropriately through blanket policies and lazy status determinations since the rules that are now to be repealed were introduced the one really big tax anomaly in the whole system is the legitimate contractors (and other independents like freelancers) who have been hit with a far higher tax bill than anyone else.
- sparsely 4y ago
  The dodged NI contributions can be passed through via higher comp though - it ends up reducing the total cost of employment.
  - Silhouette 4y ago
    If you're going to look at the wider picture like that then you should also consider the extra costs though. A typical employee in this country might receive around 7 weeks of paid time off per year at their employer's expense, mostly holidays plus a few sick days on average. That alone would be a far greater benefit in terms of effective rate than receiving a rate increase equivalent to dodged employer NI that are being passed through instead. Then there are pension contributions, more exotic paid time off that most employed professionals could benefit from like parental leave or cover for jury service, and the expenses of running the Ltd including statutory obligations to file accounts and some other paperwork.

TamDenholm 4y ago

About damn time, luckily i've not been a contractor for some years now and have missed the IR35 shitshow of recent years. Having a client offering a contract having to determine if my company is an actual business or i'm just a disguised employee is a ridiculous way of doing it. Sorry but when i was contracting i was also taking on other freelance work, had long standing retainers for maintance for past clients and having junior developers working in my company doing the grunt work, thats a business, i'm not a disguised employee. The responsiblity should be on the person to argue with HMRC that they are a business and for those legitimately operating as such, then its not at all difficult.

mutatio 4y ago
It is difficult, for HMRC - it doesn't scale. I am actually in favour of the IR35 legislation as it removed entire swathes of "permietractors" from the market and allowed people like myself (and you judging off the working practices you described) to operate in a true business fashion. It is no doubt to me that 95% of "contractors" previously working "outside IR35" at large FTSE companies were indeed employees in disguise. Tenure even matched permanent staff, quite frankly it was a joke.
- bambataa 4y ago
  I agree that many contractors were more or less perm. That in turn seemed to be a consequence of the pay differential, rather than an actual desire to be a contractor.
- TamDenholm 4y ago
  I wholeheartedly agree with you, those dodging tax by just operating like a permanent employee but through a Ltd company are on the wrong side of the law. The problem i had is it punishes those operating legitimately. Lots of laws are like this, for instance the piracy warnings that they used to put at the start of DVD's that only punished lawful users cuz if your pirated it, the warnings would be cut out. Theres many more examples like this.
  - 4y ago

Silhouette 4y ago

Note to mods: The current headline ("IR35 will be repealed from April") is wildly misleading and potentially dangerous. The underlying IR35 rules don't appear to be changing. The announcement today is about winding back some relatively recent reforms about who is responsible for determining whether those rules apply to any given contract.

bilsbie 4y ago

Can we get a better headline?

LatteLazy 4y ago

This is good news, it's poorly defined, badly thought out, keep failing even in english courts) and unfairly (and unproductively) stops people from earning more and taking more risk.

cletus 4y ago

What you see with IR35 and various laws in the US (eg preferential tax treatment for passthrough corporations that produce stuff since the Trump tax cuts) can all be boiled down a complete failure in dividend taxation. In the US, corporate profits get taxed. You pay a dividend (for the sake of argument; in reality it's a share buyback these days). You then have to pay tax on that dividend. That's dumb and unnecessary. In the UK as a contractor you pay yourself a low wsage (IIRC ~32K GBP) then a certain amount in dividends because of preferential tax treatment and then you'd try and deduct a bunch of stuff (eg car leases). You might retain profits and then dispose of your business at a preferential tax rate after a few years. Australia on the other hand is one of the few countries in the world with a simple system of dividend imputation. Say the corporate tax rate is 30% (it was; not sure if it still is). Say you make $1000 in profits and pay 4300 in corporate tax and decide to distribute the remaining $700 as a dividend. That $700 is what's called fully-franked meaning it comes with $300 in franking credits. When you file your taxes, you get credit for paying $300 in taxes. If your overall tax rate is lower you'll get a refund (essentially). If it's higher, you'll have to pay a little more. But this way there's almost no difference between paying yourself ordinary income and paying a dividend so a lot of problems just do not exist. There are some differences (eg the Medicare levy and superannuation requirements). I truly do not understand why the US cannot do this and why the UK spent 20+ years trying to enforce stupid legislation like IR35 rather than simply fixing the dividend system. It's mind-blowing. The solution is so simple. IR35 enforcement was such a huge waste of money that simply could've been avoided by not caring if someone gets a tax deduction for a car lease.

LatteLazy 4y ago
The fact that this is such an easily solved "problem", and that the solution is so poor (force contractors to pay very high deductions and not give them any credit for doing so) has led many (including me) to believe this is just an attempt to outlaw individual contracting by the back door...
mindslight 4y ago
> I truly do not understand why the US cannot do this and why the UK spent 20+ years trying to enforce stupid legislation like IR35 rather than simply fixing the dividend system Because politicians work for rich people, and rich people do not like to pay taxes. Rich people mostly get dividends, and so the dividend tax rate remains low. The entire legal system is warped around the desires of wealth. Look at the LLC regime in the US. LLCs actually provide very little protection for individuals or small groups running their own businesses, since it can always be argued that active owners should be held personally liable, or even that the business is undercapitalized because the owners have to be directly involved instead of just paying employees. To actually get the big print liability shield, you must only supplying dumb money while hiring patsies to do all the actual work. The regime that LLCs grew out of, Limited Partnerships, openly make this distinction between general partners who actually do work and can be held fully liable, and limited partners who invested money and thus must be held harmless.

robga 4y ago

IR35 is not being repealed, only the 2017 amendments (which required Public Sector buyers to make an assessment) and the 2019 amendments (which required Private Sector buyers to make an assessment). Prior to 2017, the onus was fully on the Seller and presumably we revert back to that status. This is in line with the Truss/Kwarteng "cutting red tape" and "personal responsibility" philosophy. All along, IR35's problem has been the difficulty of codifying what is politically determined as a "real" business. Attributes like company size, number of clients/customers, ability to choose your own place of work, the degree to which you're under supervision or direction, the length you've been with a sole customer, your contracted right to walk away or to replace yourselv, and so forth are all indicators toward what may politically seen as "not real", but they are not concrete or absolute. All that is happening is that the onus is shifting back to the Seller and the Buyer's may not longer be on the hook quite so much. But some of it will be baked in now - the changes public sector made might live on despite the repeal, since they continue to work toward the political incentive that brought them in.

4ndrewl 4y ago

This is big news for anyone working as an IT contractor in the UK economy after 2023. Assuming there is still an economy in the UK in 2023 :)

nickdothutton 4y ago

One of the best things about this is the end of the parasitic “IR35 assessment” industry. Companies who ask you 20 questions, the same 20 questions asked for free on the HMRC ruling web site, but charge you for the privelidge.

cosmodisk 4y ago

For those commenting that it doesn't make much sense anymore from the tax perspective, forget the difference between employee and contractor rates. If I would switch to contracting, my earnings would almost double... For instance: £500/day contracting? Easy. As an employee? Not a chance.

Nextgrid 4y ago
You need to account for corporation tax, dividend tax, expenses of running a company, sick pay & holidays, etc. Once you account for all that, it's not as much. It's really advantageous if you work on a startup or side-project that requires capital; in this case your company accumulates the money and can spend it without incurring any tax (not to mention claiming back VAT), where as buying that same equipment as an employee means not only did you already pay tax on that money, but you can't even claim back VAT. If you're just looking for an equivalent to a long-term permanent job but as a contractor (even with a legitimately Outside IR35 contract with no tax-avoidance shenanigans), it's not worth it. A conservative calculation on a 500/day rate assuming 44 weeks worked in a year, 11k/year salary (with the rest as dividends), 6k/year pension contributions and 2k/year expenses suggests that it's equivalent to ~110k permanent salary. In practice, you might actually get a bit less due to downtime in between contracts.
- haspok 4y ago
  But the original statement still stands. Which one do you think is easier: A. Finding a contract 500 per day, or B. finding a job 110k per annum? The latter is a challenge even in London (for a techie), let alone anywhere else, while 500 is achievable anywhere, in London / the City it would actually be comically low even.

iamflimflam1 4y ago

Sadly the reasons for introducing IR35 were completely valid. A lot of companies were exploiting the fact that they could avoid responsibility for paying national insurance and providing employee benefits by making everyone "self employed". This had a dramatic impact on low paid workers - being self employed meant that they no longer received any benefits that would have come to a proper employee (e.g. sick pay, paid time off). Unfortunately the legislation also impacted highly paid contractors and consultants. Disguised employment is a big issue and a large number of people are being exploited. It's a shame that our governments have been unable or unwilling to legislate effectively.

mrcartmeneses 4y ago
I guess this move is a recognition that the unintended consequences were too significant for Tory voters. It meant a suppression of wages in the IT sector (because employers don’t need to compete with contract rates) and reduced the ability of businesses to quickly spin up a team for a project because of the extra risk and process involved in hiring perm employees.
- Silhouette 4y ago
  There are plenty of people operating in the world of small tech businesses that others might assume are natural Tory voters but who definitely aren't in reality. With today being a rare exception the Tories haven't really done much to help small independent businesses over the years. That of course includes contractors and freelancers working in tech but also tradespeople, drivers who come with their own specialist vehicles, some childcare providers, many people who work in health, fitness or beauty occupations, and a very long list of others. At some point the Tory leadership had to notice that there are now vast numbers of voters who work as independents or have a second part-time independent gig on the side. I won't cite specific figures here because I don't know the methodology behind the ones I've seen but apparently we're talking about several million people now so that's a significant proportion of the entire working age population. Given that the age profile in this country means they're going to lose much of their reliable support from older "Tory all my life" voters over the next 10-20 years they urgently need to find other large demographics who might vote for them instead.