If not IR35, then what? If not IR35, then what? - Page 2
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  1. #11

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    Quote Originally Posted by webberg View Post
    On dividends, it would be easy to arrange (and has been suggested before) that you can distinguish between those with a role in generating the profits from which dividends are paid (working owners) and those who "role" is investment (non working owners).

    A proposal was made (and rejected) that the dividend of a working owner are in reality earnings from the work. As such taxing that as work related income is both sensible and reasonable.

    In reality there are significant problems with that proposal and the idea was dropped but mainly I suspect because of the blurring of lines on workers and investors.
    Part of the problem here is defining 'working'. My wife handles invoicing on multiple contracts, payroll for 6 employees, payments for two subcontractors, purchase of equipment, consults with me on contracts, employment, salaries, and handles all the bookkeeping. She is also a director and signs off the accounts. None of her work 'generates the profits', arguably. Most of our profit comes from my contracting work, with a slice of what our other staff bring in too, of course. We both have the expected salary and split our income equally via dividends.

    One could argue without too much difficulty that her income should not be the same as mine. But one could just as easily argue that she should be getting a lot bigger cut than the wife of most of the guys on here.

    So how do you handle that in legislation?

  2. #12

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    The income splitting problem is not solvable because ideology has trumped the real world in our tax system. That is the ideology that says a wife must be treated as having her own income and her own tax treatment and her own financial affairs.

    In the real world, that is often not the case. In many cases, a wife stays home to care for the children, while her husband works and earns for the family. Sometimes these roles are reversed -- but that doesn't change my point, that often husband and wife share finances entirely and rely on the income of one whilst the other cares for children, or for an elderly relative, or engages in some other unpaid family responsibility.

    In these one-earner homes, the tax system treats these couples considerably worse than two-earner homes with the same income. This was slightly mitigated with the transferability of the PA but that does not help if the single earner is in the higher rate band -- and if the single earner is not the family is likely to struggle on one income. And it has been exacerbated by the way child benefit is taxed. And the PA change did nothing to mitigate the effect of the higher rate band on a single earner family compared to a two earner family. Two families, one with a single income of £80K and another with two incomes of £40K, have drastically different taxation.

    This state of affairs, IMO, is institutionally sexist as it denigrates the value of unpaid contributions to families and society, which are in general more commonly made by women than men.

    The solution to this would be the US system offering the option of joint taxation where couples can combine their income or be taxed separately, with both the personal allowance and the tax bands reflecting that decision. That would allow couples to have their basis of taxation be set by their real life situation, without a taxation penalty if one spouse drops out of the work force for a time for other responsibilities.

    This is unlikely to happen, but would immediately eliminate any concerns about income-splitting. It's completely a non-issue in America, I believe. We already allow full transferrability of inheritance tax thresholds, and so we should.

    This would be very expensive to implement unless you reduced the higher rate band for individuals to compensate, and then your double-income families would scream.

    But the only way to solve income-splitting concerns is to remove the imbalance. As long as two incomes split equally receive much better tax treatment than one income, you will always have people looking for ways to split it. And people who have their own businesses will have opportunities.

    If you pour out water on the side of a hill, it runs down the hill. If you tax the same amount of income differently depending on anything that people can control, they are going to do all they can to push as much of that income into the lower tax category. That's just real life, and income splitting is just another example of that.

  3. #13

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    That's all a rather long-winded way to say that income splitting is an issue that isn't going to be solved with IR35. But, if you removed the income splitting imbalance, you would remove much of the incentive to cheat on IR35. You would also, in my view, have a fairer society / tax system. I do not believe it is fair for one family to have £90K income without touching the higher rate band or losing their child benefit, and another to have £90K and lose their child benefit and pay 40% on half their income.

    The contractor who is taking home £90K, therefore, has a compelling reason to try to stay on the right side of the IR35 line. Once you have that, then you will have contractors who will cheat.

  4. #14

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    Quote Originally Posted by WordIsBond View Post
    Part of the problem here is defining 'working'....
    And there you have one reason why this has never become policy or law.

    For the record I was not suggesting that the working dividend rule was an alternative, just that it was one response suggested by HMRC after they lost Arctic Systems.

    If you recall, there HMRC promised legislation to "restore" the situation to what they thought it was. We've never really seen it. Sure, a few bites around the edges, but nothing full on.

    That case was in any event peripheral.

    The root action should not have been around sharing income in a company, but rather why a company which was little more than clothing worn by an individual, should be allowed to "benefit" from a supposedly more generous tax regime?

    When HMRC came to think about their retribution, I suspect a number of problems along this line prevented them from carpet bombing PSCs.
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    Quote Originally Posted by webberg View Post
    And there you have one reason why this has never become policy or law.

    For the record I was not suggesting that the working dividend rule was an alternative, just that it was one response suggested by HMRC after they lost Arctic Systems.

    If you recall, there HMRC promised legislation to "restore" the situation to what they thought it was. We've never really seen it. Sure, a few bites around the edges, but nothing full on.

    That case was in any event peripheral.

    The root action should not have been around sharing income in a company, but rather why a company which was little more than clothing worn by an individual, should be allowed to "benefit" from a supposedly more generous tax regime?

    When HMRC came to think about their retribution, I suspect a number of problems along this line prevented them from carpet bombing PSCs.
    The answer to that one is very simple. Look at how many companies are owned by people whose market value derives from their day jobs rather than any intrinsic ability. There are quite a few "From the Office of <poltico or newsreader or footballer> " companies out there. It would be difficult to prove these are anything other than tax avoidance vehicles right now, much less as an alternative to income splitting.

    MyCo however, derives all its income from our joint efforts and always has done, just like many many others.
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  6. #16

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    Quote Originally Posted by Maslins View Post
    Two things the dividend tax can't fix that IR35 (when it works) does are:
    - splitting the income with a spouse/similar,
    - "moneyboxing"...ie preventing people earning £100k+ just taking dividends up to basic rate band and paying minimal tax relative to their overall earnings that way. In time an MVL or some other transaction can deal with the excess money.
    I've already talked about income splitting. You are 100% correct, IMO, that the dividend tax change should mostly kill IR35, because it removed a significant imbalance. Perhaps it needs tweaked a little bit but the difference between CT + Div Tax on one hand, and IT + NIC on the other, is no longer big enough to provide a significant incentive to cheat. Income splitting and moneyboxing are the other big factors.

    In my view, some moneyboxing is appropriate. Those who work in industries / roles where there can be significant down time should be able to "moneybox" to have a reserve to carry through them those times. They could, of course, pay tax on all their income and hold that reserve personally, but it's neither equitable nor economically beneficial to society to force flexible workers to pay more taxes than their permie peers because their income all comes in one year, rather than spread over two.

    The issue, as you said, is allowing an enormous reserve to be extracted as capital.

    I don't see a way to get around this. You could remove ER but ER is probably quite beneficial, and how do you remove it only for contractors? You could increase the ER rate to 15% from 10% but again, ER is there to incentivise behaviour which boosts the economy. You could get rid of MVLs but an industry would spring up of people who buy contractor businesses that have a lot of cash, and it would still be a capital gain. The only way to get around this is to eliminate tax incentives for entrepreneurship and investment with beneficial treatment of capital gains. I think you just have to accept that for the most part contractors are indeed entrepreneurs, they have indeed made an investment at some risk, they've worked hard to build up a significant sum, and it actually isn't particularly detrimental to let them have ER or at least MVL. They have already paid CT on the retained funds in the company. The net tax rate even with ER is therefore over 25%. That's not horrible.

    I also think that this particular imbalance is not a major driver of IR35 cheating. The ability to smooth income over periods of sitting on the bench might be a big factor in contractors' going the extra mile (or 50 miles) to deem themselves outside IR35, but I don't think the ER/MVL option is that significant. The biggest thing, as you said is income splitting. I would not be in favour of messing with this one, I don't think ER/MVL changes are needed.

  7. #17

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    I have one more issue that I think contributes to the IR35 problem. Very simply, it is punitive and so encourages people to tilt the scales in weighing whether they are inside or outside.

    Again, it comes down to the fact that the tax situation doesn't fit the reality. The reality is that all of HMRC's examples of "same job/same pay should pay the same tax" are silly because contractors don't do the same job for the same pay. Contractors are paid more, not because they are nasty or evil, or because the companies just like to pay them more. Contractors are paid more because they give up something that the clients would rather not give them, and are willing to pay extra for the privilege.

    What do they give up? ERNI, of course, but all employment rights, including stability. In exchange, contractors get a few expenses, such as accountancy fees, etc. To compensate for all that, contractors get a rate uplift of perhaps 30-40% on average. That 30-40% is for things that the permie receives but for which he does not pay tax.

    IR35 has historically forced the contractor to pay tax on the 30-40%, minus 5%, even though the permie does not pay tax on it. With IR35 'reform', the contractor doesn't even get the 5%. Furthermore, with the 'reform', the contractor now has to pay NI on insurance (edit: PENSION, NOT insurance) contributions, something the permie does not have to do. In other words, the tax system, rather than incentivising entrepreneurship, is now punishing it.

    If HMG had wanted better compliance with IR35, they never should have made it punitive. They gave a strong incentive to cheat. Now, they've made it even more punitive, and as a result will destroy the flexible workforce. Why should a contractor accept the risk of providing flexibility if HMRC is going to take more than 50% of the financial reward? And that's what it will be. Because the financial reward for flexibility is the top slice of the contractor's income. If that happens to fall below £100K he will be paying 40% IT plus 13.8% ER NIC plus 2% EE NIC. If it happens to nudge above £100K he will effectively be paying over 70% as the PA is withdrawn. This is absolute insanity, it's taxation on Corbyn levels.

    They should have exempted at least 20-25% from the IR35 deemed payment, rather than 5%, to recognise that a large slice of a contractor's income is cash in lieu of non-taxed employment benefits/rights. If they had done so, it would have been more fair, and there would have been less incentive to cheat.

    The removal of the 5% makes it clear, this really is a war on contractors. Unfortunately we're screwed because if we fight back with our votes we get Corbyn instead, propped up by the Nats. But the alleged 'Conservatives' are destroying one of their natural constituencies and if they don't pay a price in this election they will if there is ever a credible opposition. It's sheer lunacy.

    Anyway, that's the other major imbalance that is creating a complication here -- that the deemed payment is based on 95-100% of contracting fees, which means contractors under IR35 are taxed significantly worse than their permie peers. Remove that imbalance by making the deemed payment be based on 75%, and solve the income splitting issue by providing a joint taxation option, and you would actually have very little incentive for taking the risk of cheating on IR35. You'd also, in fact, find that HMRC would collect very close to the same amount of tax from inside and outside gigs, and as a result IR35 could actually just be abolished, simplifying the life of everyone except for people who work for QDOS, who would have to find another job.

    edit: corrected insurance to pension above, sorry for the mistake
    Last edited by WordIsBond; 11th November 2019 at 23:09.

  8. #18

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    Many great arguments there in WordIsBond's posts

    Here's some quotes from earlier posts that remind me of my thoughts/concerns
    Malvolio: someone on over £100k a year gross moaning about a 15% drop in their personal income is not going to get a sympathetic hearing.
    WordIsBond: Perhaps it needs tweaked a little bit but the difference between CT + Div Tax on one hand, and IT + NIC on the other, is no longer big enough to provide a significant incentive to cheat. Income splitting and moneyboxing are the other big factors.

    In my view, some moneyboxing is appropriate. Those who work in industries / roles where there can be significant down time should be able to "moneybox" to have a reserve to carry through them those times. They could, of course, pay tax on all their income and hold that reserve personally, but it's neither equitable nor economically beneficial to society to force flexible workers to pay more taxes than their permie peers because their income all comes in one year, rather than spread over two.

    2 things that I think keep getting understated or forgotten about are:
    * A 15% drop in net pay, is actually a far bigger % drop in the amount you can save each month/year, or equivalently, means it takes you relatively a lot more years/months to achieve a financial goal.

    * T&S Expenses! Yes the difference between CT + Div Tax on one hand, and IT + NIC on the other, is no longer big enough to provide a significant incentive to cheat or treat as outside IR35. But really what needs comparing is CT + Div Tax + T&S being tax deductible on one hand, vs
    IT + NIC and T&S not being tax deductible.........That in my view is still a critical enough difference to create an incentive or dealbreaker for a contract to be outside IR35.


    Figures here of course are rough calculations, but you should get the message:
    £500/day, 47 weeks/year, 5x£70/night B&B + £80/week return train fare, £3,000/year indemnities and fees
    Personal day to day costs of living = £2,400/month

    Inside IR35 (so T&S not tax deductible) = £69k net figure on wage slip, £45k left after T&S and insurances, meaning I get to put £17k/year into a personal savings account.

    Outside IR35 = £66k net of taxes and expenses. With day to day personal costs of living, I get to put £37k/year into a personal savings account.


    So that's a 54% drop in what I can save each year / It's now going to take more than double as long to payoff the mortgage.
    I think the £17k/year isn't enough of an incentive to go through the hassle of working away from home and longer hours.


    If they made T&S be tax deductible for inside IR35 contracts like it used to be, then it would be roughly = £57k net figure on wage slip and with expenses factored in, meaning I could put £28k/year into a personal savings account............which I think might just about be enough of an incentive still.



    So I think I'd be happy if everything was inside IR35 and either they:
    *Make your actual T&S expenses be tax deductible
    or
    *Assume a realistic fixed £/day amount for T&S


    And like WIB said but from another angle, it's not fair that a contractor would pay far more NI for earning the same amount over 6 months as they would have paid if they had earnt it over 12 months. This unfairness would be ironed out if they merged IT and NI and treated it more in line with IT.
    Last edited by PTP; 11th November 2019 at 18:49.

  9. #19

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    Just to pick up on WordIsBond's (Excellent) posts. HMG would argue they have shifted the burden of ER onto the engager/employer as part of the off payroll rules as they assume responsibility for the payment of all correct taxes.

    What we are assuming is that a £500 a day gig now will remain a £500 gig in the future and thus the hit is disproportionate. Now the market may decide (and HMG might reasonably assume) that it should be £500+13.8%. This is likely to be their assumption however that is not what was seen as part of the PS changes in 17.

  10. #20

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    Let me float an idea.

    Farmers are subject to seasonal fluctuations in prices etc. As such they have an "averaging" basis available to them by which they can average profits over a number of years, mixing good and bad and coming out with a reasonably accurate overall tax rate.

    Authors have the same.

    A lot of the differences in contractordom arise because of dividends and the ability to move funds out of companies at CGT rates.

    Why not think about averaging.

    Start with say 5 years. Over that period, assume that all dividends are subject to tax at normal tax rates and perhaps even NIC. If at the end of that period, the company/vehicle used is full of money, assume that it has been distributed as remuneration, adjust the CT and collect PAYE (for want of a better description)?
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