IR35 - Is there a better way? IR35 - Is there a better way?
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  1. #1

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    Default IR35 - Is there a better way?

    Hi all

    First let me first apologise in advance, as I'm mainly here to have a rant.

    Now down to it: IR35, including the new reforms, are complicated and controversial. They require application of a set of loosely defined principals to determine whether a person is an employee for tax purposes. HMRC do not understand these principals and apply them incorrectly in many cases, and highly experienced judges often disagree on their application.

    All of these stem from a perceived unfairness in the different tax treatment of Ltd contractors and employees, and there is also a perceived unfairness in taxing a contractor as an employee without giving them the rights and benefits of employment.

    All of this started me thinking: Is there a better way?

    Many have espoused aligning tax and employment law to ensure an "employee for tax purposes" is treated as an employee in other ways, too. However, even this misses the mark as employment law is just as complicated (if not more so).

    So, what if we removed the perceived unfairness a different way?

    The perception of unfairness stems from an overcomplicated tax code. If this were simplified and aligned, much of this perception would be rectified.

    My solution would be as follows:
    • Remove the different tax treatment of different types of income
    • Abolish National Insurance and roll it into income tax
    • Ensure a one-off payrise for all employees to account for employers NI now being part of income tax
    • Apply a pre-tax adjustment for dividends to "refund" the corporation tax already paid


    This would completely remove any advantage of declaring dividends rather than taking a salary. It would also make taxation more transparent. Employers NI would stop being seen as a tax on the employer (which it has never been, it's really a tax on the employee but hidden from them, all employers have to consider this cost when calculating an employee's salary).

    However, it does retain legitimate advantages available to contractors. As business owners, for instance, we can offset valid business expenses, and we can choose how much to pay ourselves and how much to retain in the company. None of these are tax avoidance, just business decisions.

    Now, I don't see common sense taking over in government any time soon, nor in HMRC. I am aware that these would increase our tax bills. However, this would appear to be a much simpler and more honest way to deal with taxation in general, and IR35 especially.

    Again, apologies for the rant.

    Anyone have any thoughts?

  2. #2

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    it's what I would do if I was chancellor.
    Too much politics in the way though.
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    Not just positics. Changing the headline tax rate from 20% to roughly 45% for a basic rate payer wouldn't exactly be a vote winner...

    What gets lost in all this noise are a couple of salient details:

    There is more than one major multinational organisation that is, in reality, a three-man company. Virgin for example. There are a lot of companies that exist solely to save taxes on income that wouldn't be there if it weren't for people's day jobs. "The Office of <insert politician here>" for example. There is nothing intrinsically wrong in having a company to process your income. They are all there in the legal interests of tax efficiency, not to deprive HMG of taxes that don't actually exist since they are not owed.

    I pay taxes at the same rates as the burger flipper at McDonalds and a UK resident millionaire. At my peak I was paying rather more taxes than an employee on an equivalent salary. This whole notion of "fairness" is merely HMRC propaganda and has no basis in reality.

    Meanwhile IR35 remains an unworkable abomination dreamt up by a Civil Service that has no understanding of freelance working nd sold to a gullible and naïve government by a failed tax evader.
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    Quote Originally Posted by malvolio View Post
    Changing the headline tax rate from 20% to roughly 45% for a basic rate payer wouldn't exactly be a vote winner.
    Yeah, that's always going to be the difficult bit, even though it's not actually a change to the rates being paid. The govt & HMRC thrive on obfuscating what people actually pay...

    If I've worked it out right, and assuming we just aligned the rates to the basic/higher/additional bands (getting rid of all other combos), it would mean approx:
    Basic: 40%
    Higher: 49%
    Additional: 53%

  5. #5

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    Quote Originally Posted by drmouse View Post
    there is also a perceived unfairness in taxing a contractor as an employee without giving them the rights and benefits of employment.
    You really need to understand that tax is something you give to HMRC, to fund our modern society. About 50% of GDP is state-funded, so you have to get it off citizens.

    By contrast, rights and benefits of employment are nothing whatever to do with tax. Tax funds your unemployment, and a small part of your retirement.

    You must stop this "It's not fair: you're taxing me like an employee but not letting me have employee benefits". That's like saying "You are taxing me like a BA pilot so why can't I fly airliners?"

    If you want employee benefits you can have whatever you want. The Revenue are not stopping you. You however have to fund every last drop of it because you are the employer.

    The system of tax breaks like dividends, delayed tax payment, smoothing of income etc is a necessary part of a capitalistic economy. There is nothing wrong with tax avoidance. The problem is when the people who are using tax avoidance opportunities are not the people those opportunities were intended for.
    "Don't part with your illusions; when they are gone you may still exist, but you have ceased to live" Mark Twain

  6. #6

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    Even HMRC admitted last week that £5,000 out of the perceived £6,000 tax saved on £50k is employer NICs.

    Therefore introducing a new tax payable by clients for all such engagements, circa 10% based on those figures, would be a much fairer outcome than what is in the draft bill.


    Even so, all of this mess, I wouldn't have such a problem with if they changed things back to being allowed to claim expenses when inside IR35. There was already the test of them being "wholly, exclusively and necessarily". Surely that prevents abuse and it is still in my interests to keep costs as low as possible e.g. pay £70/night B&B instead of £150/night 5* hotel.
    Last edited by PTP; 31st October 2019 at 14:29.

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    Quote Originally Posted by Cirrus View Post
    If you want employee benefits you can have whatever you want. The Revenue are not stopping you. You however have to fund every last drop of it because you are the employer.
    This is thoroughly disingenuous, because they are specifically changing the rules to stop us from acting like employers. How do you give an employee perk when all your money has already been taxed? How do you keep some reserves to cover lean times, when it's already been taxed at a high rate?

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    Quote Originally Posted by Cirrus View Post
    rights and benefits of employment are nothing whatever to do with tax
    I know this, which is why I said perceived unfairness.

    However, this is where the system doesn't help. Consider the IR35 legislation: Its stated aim is to combat "disguised employment". If this is the case, then HMRC/the govt are saying those who are inside IR35 are in disguised employment, which would be employment, which would entitle them to employment rights and benefits.... See where the perception comes from? Similarly, if they are not entitled to employment rights and benefits, it would follow that they are not in employment (disguised or otherwise) and, therefore, outside IR35.

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    Quote Originally Posted by Cirrus View Post
    If you want employee benefits you can have whatever you want. The Revenue are not stopping you. You however have to fund every last drop of it because you are the employer
    But if that were the case, it would also be between myself (the employer) and myself (the employee) to determine the compensation package. It would also be between myself (the company), myself (the director) and myself (the shareholder) how the business was run, how much was paid out in dividends, how much held in reserve to cover holidays/sick pay/investment etc.

    Instead, HMRC effectively say that if you are inside IR35, you must take all the money as salary. They are stopping you (the company) from being the employer. They are stopping you (the company) from maintaining a reasonable amount to cover holidays, sick pay, or anything. It changes the entire dynamic such that you (the company) can no longer grant yourself (the individual) employment rights and benefits, because you (the company) are barred from making any provisions for that.

    EDIT: I've just re-read this. After several year of contracting the split-personality mental gymnastics come naturally to me, but reading it after I've written it down.... That's still odd!
    Last edited by drmouse; 31st October 2019 at 16:05.

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