IR35 : >42% tax, and call it fair?

[BrilloPad]

The Treasury would probably argue, with some justification, that contractors should be negotiating a higher rate from clients to 'buy' themselves out of paid holidays, etc. and not get it from paying lower tax.

Any higher rate client pays is for flexibility. Which means increased risk for the supplier/contractor. Contractors follow the rules and pay all the taxes due under the rules. HMRC want to decide who pays what tax without any reference to any rules. With the big American companies paying almost none.....

[SussexSeagull]

Any higher rate client pays is for flexibility. Which means increased risk for the supplier/contractor. Contractors follow the rules and pay all the taxes due under the rules. HMRC want to decide who pays what tax without any reference to any rules. With the big American companies paying almost none.....

I didn't say I agreed with them, although clients paying more in the new world would be welcome, if unexpected!

For one thing long distance contracting involving staying away from home in the week is fairly much going to be killed off for contracts deemed inside IR35.

[WordIsBond]

The Treasury would probably argue, with some justification, that contractors should be negotiating a higher rate from clients to 'buy' themselves out of paid holidays, etc. and not get it from paying lower tax.

And they would have a point. But if they want to talk about 'fairness', they shouldn't be taxing contractors for payments in lieu of untaxed employment rights.

If they actually cared about the 'fairness' they keep talking about, they'd acknowledge that, all other things being equal, part of a contractor's receipts are payment in lieu of untaxed benefits/rights. And they'd use a deemed payment based on about 65-70% to reflect that, instead of 95% (or now, 100%). If they did that, then IR35 would actually be almost reasonable, though you'd lose the chance to smooth income for periods out of contract.

[professor]

Fully appreciate your comments, WordIsBond.

... takes home £15K more than the guy working next to him

The resentment in unequal pay will happen between employees too. The higher paid employee will of course get taxed. If the PSC is then asked to pay the same tax, the resentment will (rightly) be from PSC, pointing to Employee benefits. The govt need to sort this rightful claim.
In this case however the earnings are different, therefore principle of 'tax equally' doesn't apply.

The case in OP is where the earnings are equal. Using IR35 Calculator - How much does IR35 Cost you? PSC fee & Employee salary same (earning equally), takes home similar amounts, gets taxed similarly. Therefore principle of horizontal equity is achieved.

The proposed bill threatens to break this principle.

Has the bill been challenged from this point of view?

[northernladuk]

Fully appreciate your comments, WordIsBond.

The resentment in unequal pay will happen between employees too. The higher paid employee will of course get taxed. If the PSC is then asked to pay the same tax, the resentment will (rightly) be from PSC, pointing to Employee benefits. The govt need to sort this rightful claim.
In this case however the earnings are different, therefore principle of 'tax equally' doesn't apply.

It's not the PSC that's being asked to pay the same tax.

Has the bill been challenged from this point of view?

No. Your talking about the difference between tax law and employment law here aren't you and they are two different things. The latter is yet to be understood.

[professor]

Your talking about the difference between tax law and employment law here aren't you

no, just the principles of taxation.

'Horizontal equity' (equal earners taxed equally) is a fundamental principle of taxation. Govt should not be allowed to violate it (may I add: especially when dealing with non-govt business)
(Vertical equity (aka progressive taxation) is the other fundamental principle.)

[webberg]

no, just the principles of taxation.

'Horizontal equity' (equal earners taxed equally) is a fundamental principle of taxation. Govt should not be allowed to violate it (may I add: especially when dealing with non-govt business)
(Vertical equity (aka progressive taxation) is the other fundamental principle.)

I've worked in tax a long time and confess that "horizontal equity" is a phrase I've not come across.

If I understand the principle though you're discussing treating people equally.

That is a fundamental principle. (As is progressive taxation which I think is what you label "vertical")

These principles hold good so long as the taxpayers in receipt of funds in both instances are doing so in the same capacity, i.e. individuals.

As soon as you introduce another taxable entity (a PSC in this case), the equation becomes skewed because that entity is subject to its own tax. The Gov't will argue that if this causes a distortion, then don't use it.

The Gov't argument in the equation you started with is that the money from Client Co is not yours - it belongs to the PSC - in the contractor scenario. Therefore the law says that the PSC acts as an employer and is liable to deduct tax and NIC.

The reality is that you and the PSC are joined at the hip financially and you perhaps regard the PSC as little more than a staging post? That is not however what tax law sees.

The reforms will push the role of "employer" to the fee payer. In theory therefore the Client Co should be paying the fee payer £82,500 plus Em'er NIC plus agency fee. The cost to Client Co rises. The expectation is that Client Co will reduce the £82,500 to compensate for at least the em'er NIC or seek to pass that cost on to you.

I'm sure many will say that passing the em'er NIC cost to you is "illegal" but I cannot find anything saying that. I can find rules that say the employer should bear the em'er NIC cost, but these are tax rules and I have already seen contracts in which this cost is fed down the chain to the contractor.

[WordIsBond]

These principles hold good so long as the taxpayers in receipt of funds in both instances are doing so in the same capacity, i.e. individuals.

As soon as you introduce another taxable entity (a PSC in this case), the equation becomes skewed because that entity is subject to its own tax. The Gov't will argue that if this causes a distortion, then don't use it.

Exactly. And they will argue that IR35 is necessary because in reality (not in OP's example, but in the real world) the contractor is taking home more money even if they are doing 'the same job'. And in the real world, they have a point.

Which is why arguing 'unfairness' based on total tax paid is overly simplistic and won't work. They'll just flip it around to 'unfairness' on take-home pay.

[Hobosapien]

Exactly. And they will argue that IR35 is necessary because in reality (not in OP's example, but in the real world) the contractor is taking home more money even if they are doing 'the same job'. And in the real world, they have a point.

Which is why arguing 'unfairness' based on total tax paid is overly simplistic and won't work. They'll just flip it around to 'unfairness' on take-home pay.

HMRC should be basing any 'tax due' assessment on what the client has paid for permie v contractor doing same role. Then all the employer/employee taxes and employee benefits would be included, showing that yes it is right that contractors take home more post-tax pay as the equation covers all relevant aspects.

[PurpleGorilla]

The kick in the teeth is paying employers and employee NI out of that.

And remember you get feck all employment rights.


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