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

[professor]

Using online calculators, numbers for a typical £50/hr contract compared with employee with similar cost to the endClient:
1. Employee: cost to the endClient: £82500, takehome: £56385, tax: 31.6%
2. Outside IR35: cost to the endClient: £82500, takehome: £58080, tax: 29.6%
3. Inside IR35: cost to the endClient: £82500, takehome: £47512, tax: 42.4%

>> What is being fair in >42% tax?

Can't see the govt asking the endClient to incur 26% additional cost to fund its tax grab. At the most the govt could have asked for a 'levy' 2% on contractor companies (bridging the gap between 1 & 2)- to address the 'political cry to be fair').

With regards to PSCs being able to 'build-up' cash (lucky ones), employees could do the same via pension (again lucky ones).

[NotAllThere]

Using online calculators, numbers for a typical £50/hr contract compared with employee with similar cost to the endClient:
1. Employee: cost to the endClient: £82500, takehome: £56385, tax: 31.6%
2. Outside IR35: cost to the endClient: £82500, takehome: £58080, tax: 29.6%
3. Inside IR35: cost to the endClient: £82500, takehome: £47512, tax: 42.4%

>> What is being fair in >42% tax?

Can't see the govt asking the endClient to incur 26% additional cost to fund its tax grab. At the most the govt could have asked for a 'levy' 2% on contractor companies (bridging the gap between 1 & 2)- to address the 'political cry to be fair').

With regards to PSCs being able to 'build-up' cash (lucky ones), employees could do the same via pension (again lucky ones).

You need to remember that it's fair™ (registered to the treasury).

[BrilloPad]

Can't see the govt asking the endClient to incur 26% additional cost to fund its tax grab.

Why can't you see that?

HMRC are bullies. To take them down means overthrowing the government. The people and companies cannot stand up to them.

The best that can be hoped for is a few court victories.

Having said that, companies would be best to insure against the new rules. Using, say, QDOS. Let QDOS fight it out in court. They have not lost yet.

IPSE do a great job too - interesting to see if they offer insurance to companies for the new rules?

[WordIsBond]

1. Employee: cost to the endClient: £82500, takehome: £56385, tax: 31.6%

Would you care to say who gave you these figures for line 1? Because they are just wrong.

That take home is based on a salary of £82,500. On that salary the cost to the employer is over £92K just including NI. If the employee is in auto-enrolment the cost is over £95K. That doesn't include holiday pay, sick pay, maternity/paternity, other benefits, or any of the overheads -- payroll, HR, office space, etc. It doesn't include the cost of providing a permanent job rather than being able to drop a contractor without notice.

Employees are expensive. If the employee really only cost £82,500, his gross salary would be in the £50-60K range and his take-home pay would be much, much lower than the contractor.

IR35 is not fair for multiple reasons but this example does not even come close to making the case.

[professor]

Employees are expensive

I should have added a foot note in the OP to say that the idea behind avoiding all that calculations is to keep it simple. Both PSC and Employee has additional costs, Employee cost much more indeed.

The point being, we can easily see that the principle of horizontal equity (taxed equally) is not applied, contrary to the claim by the Chancellor for the legislation.

Did anyone investigate whether the proposed bill is discriminatory and infringed upon the equal right to work and tax?

Taxation was/is not the consideration for the PSC. Mr Osborne maxed out squeezing the PSCs by the introduction of dividend tax. There was nothing more to be taken, as (1) & (2) in OP show. Unless Mr Hammond has a personal vengeance, he should be able to see the discriminatory taxation. Has this been put to him?

Fun fact: If endClients were sellers of 'gigs', the govt is asking them to sell season tickets and day tickets at the same price. No one has given that job to the govt, who is making the industrial life difficult, yet the endClients are fearful of the govt and would want to take the easy route.

[northernladuk]

Did anyone investigate whether the proposed bill is discriminatory and infringed upon the equal right to work and tax?

You what???

Fun fact: If endClients were sellers of 'gigs', the govt is asking them to sell season tickets and day tickets at the same price. No one has given that job to the govt, who is making the industrial life difficult, yet the endClients are fearful of the govt and would want to take the easy route.

But they aren't so it can't be a fact and it's not really fun.

[WordIsBond]

The point being, we can easily see that the principle of horizontal equity (taxed equally) is not applied, contrary to the claim by the Chancellor for the legislation.

I can easily see it but not from your example. You may be a professor but your field is not business, economics, or maths.

In the real world, if the cost to the client is £82K, the employee is going to take home maybe £15K less than the contractor. Go tell Philip Hammond that it isn't fair to the contractor that he pays more tax but takes home £15K more than the guy working next to him, and see how far you get.

IR35 before this reform is unfair for one reason, and really only one. Employees get employment rights, and contractors get extra pay in lieu of employment rights. Employees are not taxed on those employment rights, but contractors, within IR35, are taxed on that extra pay. If employment rights are valuable (and they are, very valuable), that is unfair.

It is bad policy for other reasons. It discourages rather than encourages entrepreneurship. It is a deterrent to the flexible workforce. There are other things that could be said. That is bad policy. But those things aren't 'unfair'.

After the reform, it will also be unfair because an employee can make pension contributions (at least 5%, many can do more) out of gross earnings without any NI. In most cases an IR35 contractor won't have that option unless he joins an umbrella, and has to pay umbrella fees. So it will be even more unfair.

But you can't show it with the kind of simple maths you've used here. Anyone with any knowledge at all will laugh you off as a crank. Sorry, won't fly.

[JohntheBike]

I can easily see it but not from your example. You may be a professor but your field is not business, economics, or maths.

In the real world, if the cost to the client is £82K, the employee is going to take home maybe £15K less than the contractor. Go tell Philip Hammond that it isn't fair to the contractor that he pays more tax but takes home £15K more than the guy working next to him, and see how far you get.

IR35 before this reform is unfair for one reason, and really only one. Employees get employment rights, and contractors get extra pay in lieu of employment rights. Employees are not taxed on those employment rights, but contractors, within IR35, are taxed on that extra pay. If employment rights are valuable (and they are, very valuable), that is unfair.

It is bad policy for other reasons. It discourages rather than encourages entrepreneurship. It is a deterrent to the flexible workforce. There are other things that could be said. That is bad policy. But those things aren't 'unfair'.

After the reform, it will also be unfair because an employee can make pension contributions (at least 5%, many can do more) out of gross earnings without any NI. In most cases an IR35 contractor won't have that option unless he joins an umbrella, and has to pay umbrella fees. So it will be even more unfair.

But you can't show it with the kind of simple maths you've used here. Anyone with any knowledge at all will laugh you off as a crank. Sorry, won't fly.

It's surprising that more hasn't been made of the pensions issue. I've suggested elsewhere that perhaps this issue needs to be given a higher profile and viewed in relation to EU tax targeting laws.

[Hobosapien]

After the reform, it will also be unfair because an employee can make pension contributions (at least 5%, many can do more) out of gross earnings without any NI. In most cases an IR35 contractor won't have that option unless he joins an umbrella, and has to pay umbrella fees. So it will be even more unfair.

Contracting inside IR35 via a Ltd will be less efficient than via an umbrella (already is if contracting in public sector) as the accounting fees alone will likely offset the umbrella fees if not being fleeced. Then there's all the other hassles and costs of running a Ltd if used solely for contracting.

Even the idea of avoiding inside IR35 contracts if persevering with a Ltd is not guaranteed to be more efficient, as the bench time between contracts if the outside IR35 contracts are scarce means those doing inside IR35 gigs via a brolly (with a suitable rate uplift if can secure it ) have one less thing to worry about when looking for new contracts and whether to dismiss them.

So in preparation for next April, assess how many of your previous contracts have been truly inside or outside IR35 by way of proper independent review and how likely that is to continue, to decide whether continuing via a Ltd will make sense. If not or it's not clear cut, consider closing it down (or making dormant) and taking the less stressful route if the prospect of piling as much as you can into a pension pre-tax appeals.

[SussexSeagull]

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.