If not IR35, then what?

[webberg]

There are many excellent and insightful posts in these threads pointing out that the real harm in IR35 reform is that it goes too far.

Tax philosophy as reflected in Government policy has for many decades been that there is a choice between employment and self employment and that these options have different tax consequences.

Tax rules and rates vary over time but certainly pre 2000 it would have been reasonable to expect that the difference between the net retention of remuneration from employment and self employment to be significant. Even without aggressive tax avoidance, an employee might have kept 70% whereas a self employed person perhaps 90%.

Those values are now closer, mainly as a result of the self employment retention dropping.

There remains however a difference.

One of the key reasons for IR35 reform now is to reduce still further that difference.

Arguably, as the difference is caused by fundamental tax policy as enacted by Government, the entire raison d'etre of the reform is flawed. That position is further exaggerated by the fact that the reforms are now claimed to create a situation in which the self employed are actively penalised in comparison to the employed.

We can defend or attack the reforms via many channels. Damage to the economy as a flexible workforce is reduced: increase to tax revenues as employment becomes the default: fairness or lack thereof: competence of those administering the tax system, or lack thereof.

Here then is a chance to say what you think is the answer.

Is it more tinkering with tax systems?

Is it changing/aligning work status and tax status?

Is it a flat rate tax on gross money received, regardless of source?

Is it no income tax but a 50% VAT rate?

Is it a wealth tax?

[malvolio]

It's certainly not tinkering with the tax system. What's really needed is a clear distinction between employed and self employed, with the existing tax regime applied correctly to either one.

However, it is not that simple. While IR35 was conceived a s away to prevent Friday-to-Monday tax avoidance, and while the Treasury still belives that to be necessary, what it has failed to do is prevent employers (including public sector bodies) moving people from employment to self-employment purely to avoid employment costs and risks. I've said any times that there are thousands and thousands of self-employed workers who have absolutely no need or right to be in that position.

A separation of the two classes, with rigorous qualifications necessary to be called self-employed that require the worker to be closely involved in the decision is the way forward. Add to that the requirement to offer basic employee rights to inside-IR35 workers then we might be getting somewhere closer to sanity in the whole area.

However, every suggestion or even attempt to define a qualification to be self-employed has been met with howls of outrage - most often from those who are not affected by the damage done to the lower end of the self-employed workforce. And adding employee rights to non-employees will create similar howls of outrage from employers who are suddenly faced with an uplift in costs they thought they had got rid of years ago.

Perhaps what is needed is less emphasis on taxation overheads (someone on over £100k a year gross moaning about a 15% drop in their personal income is not going to get a sympathetic hearing...) and more focus on appropriate workers' rights in the broadest sense of the term, as per the Susan Winchester case is probably the better way forward.

[Maslins]

I (wrongly) thought the introduction of the "dividend tax" was going to lead to the end of IR35. Ie acceptance that IR35 didn't really work, instead just reducing the tax differential of operating via a Ltd Co vs employment, so HMRC wouldn't be bothered. There may still be some tax saving, but it would be more modest, and HMRC would just accept it.

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.
Possibly a combination of these, or taxman greed, or simply refusal to admit defeat are why IR35 is still with us.

I note there's been a fair bit of speculation recently about the possible abolition of ER (which would greatly reduce one benefit of moneyboxing, though not negate it completely). Perhaps combine this with revisiting income splitting rules in some way, when combined with dividend tax, might fully negate the need for IR35. However, I appreciate if nothing else income splitting rules could be the next big grey area causing lots of grief (ie IR35 2.0).

[webberg]

The above is sensible.

I'll throw this into the mix though.

We have seen big business use their considerable lobby to stall and prevent anything that costs them money.

Now though we see them faced with a choice:

Fewer flexible workers or

Increased employment costs.

Why has the big business lobby failed here?

Why did we not see the big business lobby - AT ALL - get involved in this?

Is there a quid pro quo (reduced CT rate?) that we are missing out from the equation?

[JohntheBike]

I (wrongly) thought the introduction of the "dividend tax" was going to lead to the end of IR35. Ie acceptance that IR35 didn't really work, instead just reducing the tax differential of operating via a Ltd Co vs employment, so HMRC wouldn't be bothered. There may still be some tax saving, but it would be more modest, and HMRC would just accept it.

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.
Possibly a combination of these, or taxman greed, or simply refusal to admit defeat are why IR35 is still with us.

I note there's been a fair bit of speculation recently about the possible abolition of ER (which would greatly reduce one benefit of moneyboxing, though not negate it completely). Perhaps combine this with revisiting income splitting rules in some way, when combined with dividend tax, might fully negate the need for IR35. However, I appreciate if nothing else income splitting rules could be the next big grey area causing lots of grief (ie IR35 2.0).

However, I appreciate if nothing else income splitting rules could be the next big grey area causing lots of grief

agreed and even if the SDS declares a contract outside of IR35.

[Amanensia]

agreed and even if the SDS declares a contract outside of IR35.

I agree income splitting is likely to be a target, but it's not immediately obvious how this can be stopped without unintended consequences. It's pretty well established now (and for many years) that income splitting between bona fide spouses is perfectly legal as things stand, so it'd require legislation. Requiring shareholders to "earn" their dividends would be a fundamental change and would be difficult to target appropriately - you can't require a BP shareholder to pop out to an oil rig for six months of the year to qualify for a dividend!

Perhaps something specific to close companies - although that would hit far more than just contractors.

[JohntheBike]

I agree income splitting is likely to be a target, but it's not immediately obvious how this can be stopped without unintended consequences. It's pretty well established now (and for many years) that income splitting between bona fide spouses is perfectly legal as things stand, so it'd require legislation. Requiring shareholders to "earn" their dividends would be a fundamental change and would be difficult to target appropriately - you can't require a BP shareholder to pop out to an oil rig for six months of the year to qualify for a dividend!

Perhaps something specific to close companies - although that would hit far more than just contractors.

agreed

[malvolio]

Disagreed, totally.

For one thing, the Supreme Court ruled that it is perfectly legal between spouses and an attempt to resurect it under a different guise was firmly defeated, largely on the back of that decision.

Any attempt to modify the rules for dividends will fail, since it it is almost impossbible to achieve without screwing up most of the major companies in the country. Go look at how many major ones are actually owned by three or four people or, for another example, tell Philip Green that he has to pay major taxes on the income he hands over to his wife in Monaco. They will simply move out to somewhere more accommodating.

Forget tax, the line of attack to influence government has to be through employment rights for workers where appropriate. That way they gain kudos for improving people's lives rather than taxing them further to death.

[webberg]

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.

[WordIsBond]

Forget tax, the line of attack to influence government has to be through employment rights for workers where appropriate. That way they gain kudos for improving people's lives rather than taxing them further to death.

This goes to whether this discussion is about how to attack it in the current political environment, or what a real solution would be. The answers are very different.

You could try to legislatively define employment vs self-employment. The problem is that there are so many murky situations on the edge. You would have to draw the lines quite loosely, or you would have outrage from a lot of currently self-employed people. And if you draw the lines loosely then unscrupulous employers would find ways to get on the 'right' side of the line to declare their workers self-employed, and so not have to provide employment rights or pay ER NICs.

So, no government has tried to define employment in legislation. A Corbyn government might, but they'd just say we are all employees, or slaves, of the state.

A statutory definition of employment/self-employment is the obvious solution but for the reasons I've just given I don't think it is either politically feasible nor actually effective. I think that takes us back to changes in the tax system.