Something for The Sage

What’s more, almost as many respondents to the survey (53pc) also blamed the introduction of new tax rules (known as IR35), which have raised the cost of agency drivers. Unfortunately, “IR35 food shortages” is not quite as catchy as ‘Brexit food shortages’.

My word, you mean that how you tax people makes a difference to labour supply? Who would have thought it?

11 thoughts on “Something for The Sage”

  1. Well, ‘IR35’ itself isn’t new. The rules (in summary) try to prevent what HMRC call ‘false self-employment’.

    If someone is contracted directly (i.e. person to company) there’s a whole raft of criteria to decide if they are employees of the company or self-employed contractors.

    These rules couldn’t apply where someone set themselves up as a one-man band company (a Personal Services Company, or PSC) and contracted for services (i.e. company to company) as you can’t employ a company. So ‘IR35’ was introduced (in April 2000). This (in effect) asked what would the position be if you ignored the PSC and looked at the relationship between the worker and company – would they be considered an employee? If so, IR35 applied and tax/NIC would apply as if the relationship was employment. This, the government said at the time of introduction, would bring in billions of extra tax/NIC. It didn’t. It barely resulted in 10s of millions extra. One problem was that this extra tax/NIC would be paid by the PSC and there were tens of thousands of such PSCs. Difficult to police and in any case, HMRC kept losing cases at Tribunals which kept deciding that, yes, these people would be considered self-employed if you ignored the PSC.

    So what the recent changes did was switch the liability. Now, any extra tax/NIC would be the responsibility of the contractor, not the PSC. This first applied to public sector contractors and now applies to all large companies. I think the government were hoping that these large contractors wouldn’t take any compliance risk and just treat and tax all PSCs as if they were employees. And indeed they did. Rather than look individually at the situation, they started telling PSC operators “we will tax you as if you are an employee”. So people running PSCs were TAXED as if they were employees but got none of the benefits of employment such as holiday pay, sick pay, employment rights and so on. With the result that many people operating PSCs said ‘sod that for a lark’ and stopped contracting with public sector or large companies.

    Which has resulted in shortages of workers in lots of sectors.

  2. Or in other words, something the government invents and thinks it solves everything actually creates more problems than it solves. Typical of government thinking.

  3. @SadButMadLad

    Indeed. The Government acts like a hunter who thinks they can shoot a deer and then come back an hour later to shoot another because the herd won’t have moved.

  4. The rules (in summary) try to prevent what HMRC call ‘false self-employment’.

    Andrew C, are there any plans to extend IR35 to the misuse of LLCs?

  5. An excellent summary, @Andrew C., although I disagree in one respect.

    Now, any extra tax/NIC would be the responsibility of the contractor, not the PSC.

    I think use of the word “contractor” is potentially misleading, as most temporary workers (certainly in IT) are referred to as contractors.

    I would add that as an “employee”, the erstwhile contractor is now forbidden from claiming a large number of expenses, making “away from home” contracts financially unviable without a huge rate increase.

  6. I would add that as an “employee”, the erstwhile contractor is now forbidden from claiming a large number of expenses, making “away from home” contracts financially unviable without a huge rate increase.

    According to the HMRC online compliance check tool, incurring expenses before the work has been performed (ie, hotel bills etc) is an indication that the work is outside IR35. (IIRC, it’s been a while since I had to check)

    The problem then becomes, trying to convince the client’s HR department that is in blanket “inside IR35” arse-covering mode.

    I chose to stop taking “inside IR35” contracts. It’s not worth the hassle, let alone the moral objections.

  7. @Justin – Fair enough. It’s why I used ‘PSC’ to try to differentiate between the two.

    If our erstwhile IT worker were working for (say) the NHS, the new rules put the NHS on the hook for PAYE/NIC. Which is why most risk adverse bean counters in the NHS decided that applying blanket “You fall under IR35” treatment was preferable to paying them gross and then being subject to HMRC challenge later. Paying them under PAYE at the outset was easier than risking enquiry and catch-up later. The same then later applied to large companies taking on IT (and other) workers.

    Trouble is, many of those IT workers decided to go elsewhere. First to private companies which were not initially included in the new rules and now to go to work at smaller private companies which are still not included in the new rules. A few of my clients decided to retire a couple of years early.

    IR35, particularly the new version, is a spiteful, petty idea. Not taking on and not being an employee suits both parties and reflects economic realities. Anyone running their own business does lose out on job security, employment perks such as holiday and sick pay and so on. The flip side of this is the chance to manage their own tax affairs. The government became obsessed with the latter.

  8. @BiW

    “I chose to stop taking “inside IR35” contracts.”

    You’re not alone. People change behaviour when tax rules change. Who would have thought it?

  9. So, in the NHS example above, does the NHS pay PAYE & NI on the VAT I add to the bill?
    Or am I somehow able to avoid the VAT rules and not add it to my company’s invoice?
    Or do I find I only get the post tax/NI VAT amount and have to make up the difference from the tooth fairy?

    Asking for a fiend, obviously.

  10. Bloke in North Dorset

    When I was contracting to the government I made a point of turning down some of the side jobs they asked me to do. Also, whenever I went on holiday I offered them a stand-in who was equally qualified, if they turned him down that wasn’t my fault.

    That was over 5 years ago.

  11. Tim the Coder said:
    “So, in the NHS example above, does the NHS pay PAYE & NI on the VAT I add to the bill?”

    Aren’t they typically used where the annual contract value is under the £85k VAT threshold? In the public sector anyway, because they can’t usually reclaim VAT, so VAT on top would pretty much cancel out the NI savings.

    I don’t know how it works now IR35 is extended to the private sector, but I assume the complication of VAT fits the policy aim of making such contracts too much of an embuggerance to even try.

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