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WordIsBond
27th August 2015, 09:37
The IR35 discussion document has two case studies. The one that is probably closest to most CUK people is the Ben/Jo study. We're in general agreement that this case study is deeply flawed, but it would be good to work through exactly which points should be raised with HMRC.

The description:

Case study 1:
A legal company hires two lawyers in 2015-16 who do the same job and work on the same cases.
The company pays the lawyers gross payments of £70,000 per year.
Jo works as a direct employee. The company deducts income tax and employee NICs from her salary and pays
employer NICs on top. The total tax and NICs paid on Jo’s salary is £30,612 (£22,071 by Jo and £8,541 by the
company).
Ben works through a PSC and does not operate IR35. He pays himself the most tax advantageous remuneration
strategy combining a low salary and dividends. His total tax and NICs liability is £16,900.
There are multiple issues, but we'll start with just clarifying how they arrived at the numbers. They are clearly using 2015-2016 thresholds and rates, even though they are proposing changes for future years.

They assume no pension contribution, no expenses. Jo's taxes, in the example, are based on PAYE on £70K. (I got a difference of £3, not sure what is up with that, but it doesn't matter).

Ben's taxes. They appear to be using a salary of £10,600, with Ben's Ltd co neglecting to claim the employment allowance.

THE DIVIDEND TAX
In a classic example of the failure to have joined up thinking, this example was apparently prepared by someone who didn't know about the dividend tax changes. So the first, glaring point is that the dividend tax has already dramatically reduced the disparity between Ben and Jo, even if all other things were equal.

In 2016-2017, Jo will pay £21,976. In 2016-2017, using a salary of £11K and no employment allowance (no longer allowed), Ben and his Co will pay £19,516. Ben's take-home pay is only £2460 better than Jo's, despite the fact he has no employment rights (and the other things we'll cover here).

IF BEN WERE IR35-CAUGHT
If Ben were IR35 caught in 2016-2017, he would be allowed £3500 of expenses, but let's just assume he doesn't have any at all, so that is take home pay for him. Ben and his company will pay £25078 in taxes, which means Ben's take home pay will be more than £3000 LESS than Jo's, even though they do "the same job and work on the same cases." So Ben gets less take home, and has no employment rights, benefits, etc.

If HMRC drags Ben into IR35, they are shafting him badly, even if all other things were equal.

JO IS PAID MORE THAN BEN
Jo's employer pays employer NI for her, but leaves the responsibility for Ben's employer NI to his company. That means Jo has a benefit of £8,541 paid on her behalf at no cost or tax to herself. This does mean more revenue for HMG, but it also means the comparison between Jo and Ben, and the amount of tax they pay, is deeply flawed. Ben and Jo are not equally compensated.

HMG SUBSIDISES JO MUCH MORE THAN BEN
Jo's maternity pay is subsidised at a high level by HMG. Since Ben's salary is low, any corresponding subsidy would be very low.

PENSION AUTO-ENROLMENT
Last time I checked, this was not optional, but it is left out of the calculations here.

If auto-enrolment is functioning, Jo will have a minimum of £2,100 paid into her pension by the employer. For Ben to have the same pension provision, he will have to pay £2,100 out of his gross £70K.

[Jo will also have £3500 of her £70K paid into her pension. If Ben pays £3500 of his £70K into his pension, the tax impact of the £3500 pension contribution is roughly equal between the two of them. Jo's will reduce employer NI (13.8%), employee NI (2%), and income tax (40%). Ben's will reduce corporation tax (20%) and higher rate dividend tax (32.5%). Jo gets slightly more tax benefit from the dividend contribution, but it isn't significant.]

EMPLOYMENT RISK
Jo's employer gives her employment rights. Ben has none, and is not compensated for the difference. The monetary value of these rights may be debated, but they are important. This is something of value which Jo is receiving and Ben is not, so it hardly seems inequitable to have Jo pay some amount of higher tax than Ben.

Jo does not have to set aside funds for times when she is out of contract. Ben does. Again, the cost of this is hard to quantify, but it is important. Just because two people are doing the same work on the same cases and being given the same amount of pounds does not mean their situation is the same. Jo is being given security as well as the monetary compensation. It is not equitable for them to pay the same tax.

The case study doesn't match the reality that there will be periods where Ben's services are not needed, and the engager will not provide work for him and pay him for those times.

CONTINUING PROFESSIONAL DEVELOPMENT
This is required by the Solicitors Regulation Authority to stay on the register and continue in practice. CPD points can be acquired by doing quizzes in journals. Jo's employer will subscribe for her. Ben's will be paid by his company, but that still has to come out of the £70K. A one year subscription to the New Law Journal is £348. They can also attend conferences for CPD, which Jo's employer will cover, perhaps in excess of £1000.

OTHER DIFFERENCES
Jo's employer will purchase her professional indemnity insurance. Ben's will have to be purchased out of his £70K. Jo's employer probably provides a computer for her. Ben very possibly has to pay for his own laptop, including maintenance, software, and upgrades, out of his £70K, spending on average perhaps £400 a year or more.

Jo's employer can provide the following, tax free, in addition to her salary, while Ben, if he wishes any of them, must pay for them out of his £70K: relevant life plan, mobile phone, registration with the Information Commission, access to company canteen, hosting client entertainment (football matches, etc), business cards, health screening/medical checkup, childcare vouchers, training, etc.

COST OF LTD CO
Ben has to pay accountancy fees, and other costs associated with his limited company, such as stationery, website, etc. This all comes out of his £70K.

VAT
Ben's company does not have enough turnover to hit the VAT threshold. He can still register for VAT, of course, and recover the VAT on the expenses above -- but he will have higher accountancy fees if he does, and the VAT he would recover may not be enough to justify the time and expense. Alternatively, he can just pay the VAT on all those expenses.

Jo's employer will recover the VAT they spend in providing all those benefits to Jo. VAT differences were left out of the case study.

CONCLUDING
The differences are so significant that it is hardly inequitable if Ben takes home £2500 more than Jo. If he purchases the same pension provision that Jo receives, the difference in their take-home pay becomes nil, without even considering the other benefits Jo has that he does not have. It would be a gross injustice if Ben, under IR35, were to take home £3000 LESS than Jo, given all the other benefits she receives.

so....

Soliciting corrections, additions, etc.

pr1
27th August 2015, 10:24
just to play some devils advocate:

HMG SUBSIDISES JO AND NOT BEN
1. Ben does not get statutory sick pay, Jo does.
2. Ben does not get statutory maternity/paternity pay, Jo does.

HMG don't pay SSP, Jo's employer does (and can't claim it back) - (https://www.gov.uk/employers-sick-pay/help-with-sick-pay)

Ben (if he were female) gets the same statutory maternity pay as Jo for all but the first six weeks (as an employee of HisCo) and HisCo can claim back 92% of that amount, so to say he gets none is incorrect (https://www.gov.uk/employers-maternity-pay-leave/help-with-statutory-pay)

jamesbrown
27th August 2015, 10:35
Agree with a lot of that, although not so much the IR35-caught scenario. The point of IR35 is to tax at a rate that is "broadly consistent" with employment, so the argument here is a non-starter w/ HMRC (regardless of the merits either way). This goes to the heart of how you regard Employer's NI and who you believe pays, ultimately. Completely agree w/ the point on dividend taxation, that is a schoolboy error.

WordIsBond
27th August 2015, 10:37
Thanks for that, I didn't actually know the SSP rules changed.

Re: maternity pay, it is based on salary. The whole point of the comparison is that Ben is paid a very small salary, which means maternity pay for the first six weeks will be negligible for the contractor and 90% of normal pay for Jo.

So we'll drop the SSP part of the comparison, but the maternity comparison still stands, I believe. The employee gets a significant state-funded maternity pay, the contractor doesn't.

WordIsBond
27th August 2015, 10:45
Agree with a lot of that, although not so much the IR35-caught scenario. The point of IR35 is to tax at a rate that is "broadly consistent" with employment, so the argument here is a non-starter w/ HMRC (regardless of the merits either way). This goes to the heart of how you regard Employer's NI and who you believe pays, ultimately. Completely agree w/ the point on dividend taxation, that is a schoolboy error.
HMRC are trying to make the case that IR35 is "fair" in this case by constructing this scenario of two people being paid the same amount for the same job. Well, what they want in this scenario isn't "fair" either. Ben gets the shaft. If they refuse to acknowledge that, then our MPs need to hear about it, and perhaps take our case to the media as well.

pr1
27th August 2015, 10:47
Thanks for that, I didn't actually know the SSP rules changed.

Re: maternity pay, it is based on salary. The whole point of the comparison is that Ben is paid a very small salary, which means maternity pay for the first six weeks will be negligible for the contractor and 90% of normal pay for Jo.

So we'll drop the SSP part of the comparison, but the maternity comparison still stands, I believe. The employee gets a significant state-funded maternity pay, the contractor doesn't.

agree - just don't want you saying "he gets none" - should be "he gets significantly less" (or words to that effect)

WordIsBond
27th August 2015, 10:51
agree - just don't want you saying "he gets none" - should be "he gets significantly less" (or words to that effect)
Fair enough.

jamesbrown
27th August 2015, 10:52
HMRC are trying to make the case that IR35 is "fair" in this case by constructing this scenario of two people being paid the same amount for the same job. Well, what they want in this scenario isn't "fair" either. Ben gets the shaft. If they refuse to acknowledge that, then our MPs need to hear about it, and perhaps take our case to the media as well.

Sure, but there's an element of psychology about this. If you argue a position that has been made, and pushed back against, countless times before, it has the potential to dilute the other, very legitimate, points that are being made. Otherwise, we can continue arguing against the fundamental premise of IR35, which we know that HMRC and HMG both view as necessary. My 2p.

ps. and thanks for doing this; I like it :D

pr1
27th August 2015, 11:00
Also, there's associated costs with running a LtdCo - accountancy fees etc

WordIsBond
27th August 2015, 11:07
Sure, but there's an element of psychology about this. If you argue a position that has been made, and pushed back against, countless times before, it has the potential to dilute the other, very legitimate, points that are being made. Otherwise, we can continue arguing against the fundamental premise of IR35, which we know that HMRC and HMG both view as necessary. My 2p.

I suppose you've got a point there. Still seems legit, if they are saying, "This isn't fair," to say, "Yeah, but your solution isn't fair, either."

Of course, the real villain in the plot is employer NI. That's the part that makes Ben significantly worse off than Jo under IR35. So what this is really illustrating is the injustice of making the worker, rather than the engager, liable for employer NI under IR35. And this illustration, and pointing out that "inside" makes Ben worse off, and "outside" makes Jo arguably worse off, highlights that. The big issue here is not really Ben and Jo's tax, especially after the dividend tax hit. The big issue is the £8.5K that the engager is dodging.

So comparing the two scenarios may be useful for making the case that the best solution here is to hold the engager liable for employers NI under IR35.

ps. and thanks for doing this; I like it :D
Well, there are so many interrelated issues, seemed like it would be good to try to isolate some of them. I'm assuming eek or IPSE (if they want to be bothered to read here) or someone will want to say something about the Ben/Jo thing, so I thought I'd do some of the work and draft in the community for further input, so that they can pretty much just take what we come up with. Sharing the load and all that. :D

WordIsBond
27th August 2015, 11:12
Also, there's associated costs with running a LtdCo - accountancy fees etc
Good catch. I talked about that on an earlier thread but forgot it here. I've edited to add this and correct the SSP / SMP wording.

jamesbrown
27th August 2015, 11:14
Yep, it always comes back to the Employer's NI (in part) and how you view it. I think most of us would support wrapping together NI and income tax and reducing the overall tax burden on income, perhaps increasing the taxation of assets, as necessary. Even Gideon wants this in the longer term, but they have to get past that niggling little issue of making tax transparent (pensioner issues can be dealt with).

Zero Liability
27th August 2015, 11:25
And eventually reduce spending and all taxes with it, even if the very idea makes them febrile. :tongue

Thanks for doing this btw WIB. I think this does rather highlight that they're comparing apples to oranges, and I think that'd be the case even without the dividend tax; that it now applies only worsens their case.

Antman
27th August 2015, 11:37
+1 Thanks

The Spartan
27th August 2015, 11:52
Also, there's associated costs with running a LtdCo - accountancy fees etc

Spot on, PI, EL and PL insurance

eek
27th August 2015, 11:55
Spot on, PI, EL and PL insurance

EL isn't required if you don't have employees...

WordIsBond
27th August 2015, 12:13
Yeah, I included PI insurance but not the others. I've got the others, but I have employees, too, and Ben doesn't.

Danglekt
27th August 2015, 12:22
I like it a lot

So once it's finalised who is submitting it?

WordIsBond
27th August 2015, 12:48
I like it a lot

So once it's finalised who is submitting it?
Whoever wants to. :D

If eek wants to include it in his writeup, that's fine with me. If no one else wants to submit it, I can. Or we could all copy and paste and send it to all our family and friends and ask them to send it to their MPs.

It probably needs boiled down into a summary, at this point this is getting the details. Key points -- (1) you are comparing apples to oranges (they know that but should be told anyway), so completely even tax treatment is not fair (2) the dividend tax changes the picture and you guys are too dumb to know it (perhaps more diplomatic language could be used :D) (3) the IR35 solution is really unfair to Ben, so if you are going to make it apply here you have to modify it somehow (4) the elephant in the room is employers NI.

eek
27th August 2015, 12:58
Whoever wants to. :D

If eek wants to include it in his writeup, that's fine with me. If no one else wants to submit it, I can. Or we could all copy and paste and send it to all our family and friends and ask them to send it to their MPs.

It probably needs boiled down into a summary, at this point this is getting the details. Key points -- (1) you are comparing apples to oranges (they know that but should be told anyway), so completely even tax treatment is not fair (2) the dividend tax changes the picture and you guys are too dumb to know it (perhaps more diplomatic language could be used :D) (3) the IR35 solution is really unfair to Ben, so if you are going to make it apply here you have to modify it somehow (4) the elephant in the room is employers NI.

given the option I will take it. Quick summary in the document and the detail in an appendix....

sociopath
27th August 2015, 17:30
What about also providing them with an example of more appropriate cases like project based roles (one inside and one outside) from our knowledge and experience of the industry. Considering SDC in the examples. To avoid the one brush fits all approach. Just a thought.

SueEllen
27th August 2015, 18:32
Yeah, I included PI insurance but not the others. I've got the others, but I have employees, too, and Ben doesn't.

If you have subcontractors you use how ever infrequently then you need EL

However lots of insurers bundle it with PI so you may as well include it in the calculations.

Zero Liability
27th August 2015, 19:41
What about also providing them with an example of more appropriate cases like project based roles (one inside and one outside) from our knowledge and experience of the industry. Considering SDC in the examples. To avoid the one brush fits all approach. Just a thought.

I bet hector will love the screen name, maybe they'll even add it into their obviously very objective, balanced and fair case studies. :D That said, it'd be an instance of pot calling kettle black.

WordIsBond
31st August 2015, 10:29
As suggested on another thread, I've added the cost of a laptop to something Ben may have to pay for himself, while Jo probably has hers provided.

suityou01
31st August 2015, 10:53
As suggested on another thread, I've added the cost of a laptop to something Ben may have to pay for himself, while Jo probably has hers provided.

I think whoever suggested it also suggested the ongoing maintenance costs, upgrades, software licensing etc.

The cost of a laptop is 300 quid on eBay.

WordIsBond
31st August 2015, 11:04
Whoever it was would be annoying me if he wasn't right. :D

Ok, I've edited it again.

suityou01
31st August 2015, 11:23
Another thought. Would Ben be entitled to severance / redundancy pay?

WordIsBond
31st August 2015, 11:24
Covered under "employment risk/employment rights"

SueEllen
31st August 2015, 15:37
I think whoever suggested it also suggested the ongoing maintenance costs, upgrades, software licensing etc.

The cost of a laptop is 300 quid on eBay.

No one who isn't in the IT industry will use a second hand laptop for their business.

Put in the price of a mid-range one from the likes of Currys-PC World which is about £600.

WordIsBond
31st August 2015, 16:02
No one who isn't in the IT industry will use a second hand laptop for their business.

Put in the price of a mid-range one from the likes of Currys-PC World which is about £600.
Someone in the IT industry DOES use a second hand laptop? To each his own, but I need fast equipment.

Anyway, a lawyer might spend a little more than £600, but he'll also use the computer for three or four years, right? So how much are we talking? Perhaps not more than £300 / year.

I don't think the amount matters, particularly. It's just one more thing that demonstrates the injustice of their comparison. If we say, "Well, you forgot pension and accounting fees," that doesn't have the same impact as saying, "You forgot pension and PI and computer and accounting fees and stationery and mobile phone and relevant life plan, all of which Jo has paid for her by her employer." We can debate amounts but none of it is free and it all adds up.

SueEllen
31st August 2015, 16:50
Someone in the IT industry DOES use a second hand laptop? To each his own, but I need fast equipment.

I use new laptops and mine vary greatly in price.



Anyway, a lawyer might spend a little more than £600, but he'll also use the computer for three or four years, right? So how much are we talking? Perhaps not more than £300 / year.

That's fair but I would exclude software e.g. anti-virus, office package, e-signatures from those costs.

I sent you a PM with information I've gleamed.

Anyway the point of the whole exercise is that HMRC actually did proper background work for their lawyer case study it would not be so full of holes and be discreditable. Next time they should choose case studies where these things weren't relevant.

WordIsBond
31st August 2015, 17:47
Very, very helpful. I have updated it again, added a new section for CPD, and modified other sections. Something you said also triggered thoughts on VAT, and I've added a new section relative to that as well.

Maybe a self-employed lawyer will chime in at some point. :D

darrylmg
8th September 2015, 22:32
Ben gets to party hard once a year on £150 tax free.
He could also be claiming home-as-office expemses for doing his accounts at home.
Unfortunately it also means Ben is probably providing his own stationary, paying for his calls to the bank and very likely does a lot less general chit chat than the employees in the office, as he thinks he's running a business and wants to instil an air of professionalism (not necessarily a financial gain that one).
Also, did Ben pay for his contract to be checked, pay for IPSE membership so he's covered for HMRC inspections etc.

WordIsBond
9th September 2015, 13:14
Ben gets to party hard once a year on £150 tax free.
He could also be claiming home-as-office expemses for doing his accounts at home.
Unfortunately it also means Ben is probably providing his own stationary, paying for his calls to the bank and very likely does a lot less general chit chat than the employees in the office, as he thinks he's running a business and wants to instil an air of professionalism (not necessarily a financial gain that one).
Also, did Ben pay for his contract to be checked, pay for IPSE membership so he's covered for HMRC inspections etc.
Jo gets to party, too, but her employer pays for it, while Ben pays for it out of the £70K.

Ben doesn't have IPSE membership or pay to get his contract checked. HMRC invented him out of thin air, so he probably doesn't even know IPSE exists.

I'd talked about a brief summary statement to headline this, and eek said the detail would go into the appendix of what he's submitting. Unfortunately, I don't have time to focus on the summary statement and probably won't have time to do so the rest of the month, so perhaps someone else can boil it all down into 3-4 short paragraphs.

pr1
10th September 2015, 13:02
Jo gets to party, too, but her employer pays for it, while Ben pays for it out of the £70K.

Ben doesn't have IPSE membership or pay to get his contract checked. HMRC invented him out of thin air, so he probably doesn't even know IPSE exists.

I'd talked about a brief summary statement to headline this, and eek said the detail would go into the appendix of what he's submitting. Unfortunately, I don't have time to focus on the summary statement and probably won't have time to do so the rest of the month, so perhaps someone else can boil it all down into 3-4 short paragraphs.

wouldn't get your hopes up for eek submitting anything

SueEllen
10th September 2015, 17:46
Ben gets to party hard once a year on £150 tax free.
He could also be claiming home-as-office expemses for doing his accounts at home.
Unfortunately it also means Ben is probably providing his own stationary, paying for his calls to the bank and very likely does a lot less general chit chat than the employees in the office, as he thinks he's running a business and wants to instil an air of professionalism (not necessarily a financial gain that one).
Also, did Ben pay for his contract to be checked, pay for IPSE membership so he's covered for HMRC inspections etc.

Since Ben deals with contract law he doesn't have to get his contract checked as he does it himself. However he does belong to a small business group as well as various groups for Solicitors which he pays for.

supersteamer
25th September 2015, 18:33
When Jo finds out she's got the job she moves house to be close by. The employer pays relocation expenses and she now has a 15 minute walk to the office.

Ben knows he might not be there more than 3 months so he can't move house. He commutes 4 hours by train at peak hours on Monday and stays in a B&B four nights a week near the office before commuting home again 4 hours at peak hours.

XLMonkey
1st October 2015, 13:51
There isn't a "right" number for the case studies, since it depends on a whole load of different factors. However, there is definitely a wrong number, which is the one that HMRC used.
The math I did on scenario 2 was as follows:

Mark - gross salary 27,345, net income 21,684
Sarah - limited company turnover £30,000, net income 25,800
- minus £3910 (to match the pension contributions made on Mark’s behalf by the NHS trust)
- minus £2379 (27 days holiday entitlement out of a total 246 working days in each year, which Mark would be entitled to but Sarah would not)
- minus £1100 operating costs associated with running a personal service company (principally accountancy and payroll administration costs)
- plus gain on Flat Rate VAT Scheme of £1050 (assuming that the gain results in a profit post corporation tax of 3.5%, which is typical for a personal service company)

Sarah’s net income is in fact £19,461, not 25,800. This of course ignores the value of sickness pay, training and redundancy entitlements that Mark might expect to accrue over a period of time that Sarah would not receive.