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DonkeyRhubarb
5th October 2015, 10:47
http://www.sjdaccountancy.com/inside-IR35
The IR35 5% expenses rule

Upping this would be a simple way of bridging the gap between inside and outside.

Perhaps if they'd set it higher to start with, say 10%, many more people would have "complied".

jamesbrown
5th October 2015, 11:05
Inside IR35 Limited Company Guide - Accountants UK - SJD Accountancy (http://www.sjdaccountancy.com/inside-IR35)
The IR35 5% expenses rule

Upping this would be a simple way of bridging the gap between inside and outside.

Perhaps if they'd set it higher to start with, say 10%, many more people would have "complied".

You're probably right, but I don't see much traction in offering a "tax break" for those workers that are operating through a Ltd company and would be employees were it not for the intermediary, which is how this would be seen by many. Ironically, the dividend tax will also bridge the gap to some degree (i.e. on both ends, including the allowance, subject to seeing the actual legislation).

VectraMan
5th October 2015, 11:21
Yes, the 5% is a give away really. I can't imagine it's at all likely they'll reduce the gap by reducing the amount inside IR35 contractors pay.

DonkeyRhubarb
5th October 2015, 12:02
You are both right.

HMRC would never grasp this but sometimes, if you demand less, you receive more.

WordIsBond
5th October 2015, 12:07
They've already bridged the gap pretty significantly on the other side with the dividend tax.

It's a basic rule of economics that if the price of something is too high, people will do all they can to avoid paying it. Narrow the gap between inside and outside and you will have fewer people who want the hassle of contract reviews, IR35 insurance, etc.

So in principle the idea is sound, and since few are operating inside IR35 anyway, something like this might actually increase revenue -- the amount lost from those who are already inside would be small, and if it caused a few more to operate inside HMG would come out ahead.

But does anyone really think increasing the expense allotment from 5% to 10% would make many people decide to go inside IR35? I don't think it would influence many people at all.

So proposing this as a revenue enhancer is likely to fail. The only way to make it happen would be if you could demonstrate that those inside IR35 have expenses, greater than employees, that justify a higher percentage. You could propose it as a matter of justice if you could make the case that 5% is unjust.

If your contracts are £100K a year, are your expenses (compared to an employee) £5K more, or £10K more? If the latter, then you could argue the case.

What would convince a lot of people to operate inside IR35 would be if they didn't have to pay employers' NI. It's not just the money, it is the injustice of being told you are an employee but don't get employment rights and also have to pay the employer's taxes.

gables
5th October 2015, 12:44
They've already bridged the gap pretty significantly on the other side with the dividend tax.

It's a basic rule of economics that if the price of something is too high, people will do all they can to avoid paying it. Narrow the gap between inside and outside and you will have fewer people who want the hassle of contract reviews, IR35 insurance, etc.

So in principle the idea is sound, and since few are operating inside IR35 anyway, something like this might actually increase revenue -- the amount lost from those who are already inside would be small, and if it caused a few more to operate inside HMG would come out ahead.

But does anyone really think increasing the expense allotment from 5% to 10% would make many people decide to go inside IR35? I don't think it would influence many people at all.

So proposing this as a revenue enhancer is likely to fail. The only way to make it happen would be if you could demonstrate that those inside IR35 have expenses, greater than employees, that justify a higher percentage. You could propose it as a matter of justice if you could make the case that 5% is unjust.

If your contracts are £100K a year, are your expenses (compared to an employee) £5K more, or £10K more? If the latter, then you could argue the case.

What would convince a lot of people to operate inside IR35 would be if they didn't have to pay employers' NI. It's not just the money, it is the injustice of being told you are an employee but don't get employment rights and also have to pay the employer's taxes.

Ever since IR35 came out this (in bold) felt wrong

VectraMan
5th October 2015, 12:51
What would convince a lot of people to operate inside IR35 would be if they didn't have to pay employers' NI. It's not just the money, it is the injustice of being told you are an employee but don't get employment rights and also have to pay the employer's taxes.

If you're an employee you have to pay employee taxes. You have to pay employer taxes because you're an employer (of yourself). Are you suggesting the client should have to pay the employer's NI and give you employment rights? Then you really are an employee of the client and that changes the whole model.

The whole point of IR35 is to make you pay the same taxes as everybody else. They're hardly likely to let you off 13% of it.

NotAllThere
5th October 2015, 13:43
...
The whole point of IR35 is to make you pay the same taxes as everybody else. They're hardly likely to let you off 13% of it.Even if you convince yourself that everyone else pay ernic, under IR35, legitimate non-T&S expenses are not claimable. You also cannot deduct business expenses that other non-IR35 affected businesses can. There's just the 5% allowance.

A non-IR35 affected business can deduct accountancy and other advisor costs.
A non-IR35 affected business can deduct training costs
A non-IR35 affected business provides hardware (laptops) for employees that are deductable.

Therefore if you're affect by IR35, unless all your expenses are within the 5%, you pay more tax than "everyone else".

VectraMan
5th October 2015, 14:22
Even if you convince yourself that everyone else pay ernic, under IR35, legitimate non-T&S expenses are not claimable. You also cannot deduct business expenses that other non-IR35 affected businesses can. There's just the 5% allowance.

A non-IR35 affected business can deduct accountancy and other advisor costs.
A non-IR35 affected business can deduct training costs
A non-IR35 affected business provides hardware (laptops) for employees that are deductable.

Therefore if you're affect by IR35, unless all your expenses are within the 5%, you pay more tax than "everyone else".

Of course by "everyone else" I meant the working public at large, as I'm sure you realise, and not other businesses.

5% is quite a lot. And you get 5% whether you have any expenses or not. My expenses at the moment are £6 p.m. for a bank account.:cool:

MicrosoftBob
5th October 2015, 14:29
If you're an employee you have to pay employee taxes. You have to pay employer taxes because you're an employer (of yourself). Are you suggesting the client should have to pay the employer's NI and give you employment rights? Then you really are an employee of the client and that changes the whole model.

The whole point of IR35 is to make you pay the same taxes as everybody else. They're hardly likely to let you off 13% of it.

With IR35 you're deemed to be an employee

How many employees pay employers NI ?

Surely the whole point of IR35 is to make you pay more taxes than everybody else

HTH

VectraMan
5th October 2015, 14:52
With IR35 you're deemed to be an employee

How many employees pay employers NI ?

Surely the whole point of IR35 is to make you pay more taxes than everybody else

HTH

All employees pay employers' NI.

The alternatives are:

1. Client pays employers' NI for you. Reduces your rate by 13% and costs them more in admin.
2. Contractor Ltd. co. pays employers' NI.
3. Neither pay employers' NI and Ltd. company contractors get to pay less tax than a similar employee.

MicrosoftBob
5th October 2015, 15:15
All employees pay employers' NI.

The alternatives are:

1. Client pays employers' NI for you. Reduces your rate by 13% and costs them more in admin.
2. Contractor Ltd. co. pays employers' NI.
3. Neither pay employers' NI and Ltd. company contractors get to pay less tax than a similar employee.

When I was an employee I didn't pay employers NI, neither does my GF, my ex wife or anyone I know

No employee in the UK pays employers' NI, that would be illegal

VectraMan
5th October 2015, 15:45
When I was an employee I didn't pay employers NI, neither does my GF, my ex wife or anyone I know

No employee in the UK pays employers' NI, that would be illegal

Now you're just being deliberately obtuse. What you know as your salary is after employers' NI is paid, but that's still a tax on your employment. You can put your head in the sand and say it isn't paid by you, but you cost your employer more and/or earn less because of it so the end result is the same - you've paid the tax. And to be literal, you don't pay any tax. Your employer deducts it all.

There's no justification for saying contractors shouldn't pay employers' NI, unless you're saying the clients should pay it instead. Otherwise it's just a tax break for contractors, which is what IR35 is meant to stop, rightly or wrongly.

DonkeyRhubarb
5th October 2015, 15:45
Surely the whole point of IR35 is to make you pay more taxes than everybody else


That is certainly the net effect and the idiots who came up with it should have realised that compliance would be a massive problem. They took it too far and then seemed surprised that people went to great lengths to circumvent it one way or another.

centurian
5th October 2015, 16:51
When I was an employee I didn't pay employers NI, neither does my GF, my ex wife or anyone I know

No employee in the UK pays employers' NI, that would be illegal

When I was a permie line manager, I didn't even know the gross salary of staff as written on their payslip - only how much it was charged to my cost centre, which included employers pension contributions and employers NI.

As far as bean counters are concerned, an employee gets "paid" 100 beans, of which 80 beans appear on their payslip - and 50 beans they are actually paid in net salary.

https://en.wikipedia.org/wiki/Payroll_tax


The economic burden of the payroll tax falls almost entirely on the worker, regardless of whether the tax is remitted by the employer or the employee, as the employers’ share of payroll taxes is passed on to employees in the form of lower wages than would otherwise be paid.

BolshieBastard
5th October 2015, 17:23
Saying you can have 10% 'expenses' instead of 5% sounds like a typical politician's con trick.

If you're in business, whether its selling artefacts, your intellect or your skills, you should be able to claim legitimate expenses full stop. No half measures as some sort of sop or because you are 'only' selling your it skills.

I take no business risk as an IT contractor? I have a risk I wont find another contract every time I end one. Even if I 'work' for some of the biggest companies in the UK if they engage some no mark agency, there's a risk my co ends up being in a line of creditors waiting to get paid. And that's before some of these big companies decide to renege on contract terms and unilaterally cut the agreed fees to be paid.

Settle for 10% instead of 5% that's a mug's and loser's game.

WordIsBond
5th October 2015, 17:35
If you're an employee you have to pay employee taxes. You have to pay employer taxes because you're an employer (of yourself). Are you suggesting the client should have to pay the employer's NI and give you employment rights? Then you really are an employee of the client and that changes the whole model.

The whole point of IR35 is to make you pay the same taxes as everybody else. They're hardly likely to let you off 13% of it.
The point of IR35 is to say you should pay the same taxes as everybody else BECAUSE YOU ARE AN EMPLOYEE. Hidden employment / false self-employment, that's the rhetoric always used.

IR35 says you get none of the protections of employment, but all the taxes, PLUS all of the employer's taxes. But it is even worse than that. It's the employer's gross taxes. If they were paying the 13.8%, they'd be deducting it from their corporation tax, so their net tax would be just over 11%. That doesn't matter for you, because you won't have any profit -- IR35 makes you pay it all out in salary.

WordIsBond
5th October 2015, 17:37
Even if you convince yourself that everyone else pay ernic, under IR35, legitimate non-T&S expenses are not claimable. You also cannot deduct business expenses that other non-IR35 affected businesses can. There's just the 5% allowance.

A non-IR35 affected business can deduct accountancy and other advisor costs.
A non-IR35 affected business can deduct training costs
A non-IR35 affected business provides hardware (laptops) for employees that are deductable.

Therefore if you're affect by IR35, unless all your expenses are within the 5%, you pay more tax than "everyone else".
To be fair, for most that will be within the 5%, won't it? It's not likely to be 10% as a general rule.

NotAllThere
5th October 2015, 18:52
Of course by "everyone else" I meant the working public at large, as I'm sure you realise, and not other businesses...What I wrote covers that definition:

A non-IR35 affected business can deduct training costs
Everyone else can claim the cost of training from their employers or has the training paid for directly.

A non-IR35 affected business provides hardware (laptops) for employees that are deductable.
Everyone else can claim the cost of hardware (laptops) from their employers or has the hardware paid for directly.

Therefore IR35 affected persons pay more tax than the equivalent permie on the same income.

However... contractors get paid more than permies, which ameliorates the extra cost. Many expenses, are covered in the 5%, especially as T&S expenses are on top of that. Which is why, back in 2000 when there was a chance that most people would be inside IR35, I still maintained it wouldn't be the end of contracting.

The biggest hit really is the inability (within IR35) to retain income in the company for later disbursement in hard times. Abolition of the dividend route of removing income from the company would have been a reasonable solution - however, it would have been extremely difficult to implement without knocking other "genuine" (in the eyes of HMRC) businesses.