Increase the 5% allowance for being inside IR35?

[DonkeyRhubarb]

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]

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]

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]

You are both right.

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

[WordIsBond]

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]

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]

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]

...
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]

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.

[MicrosoftBob]

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