|WikiProject Taxation||(Rated Start-class, Mid-importance)|
- 1 Re-instated criticism that IR35 results in a higher tax than employment
- 2 Article on Information World Review
- 3 Impact on UK economy
- 4 Workers under IR35 and Employers NI
- 5 Number of investigations and are those caught Are they actually employees
- 6 Image
- 7 Assessment comment
- 8 External links modified
Re-instated criticism that IR35 results in a higher tax than employment
I've deleted the claim that IR35 results in a higher tax than employment. I think this relies on an implicit assumption that a rate is agreed and only afterwards a decision made about who is liable for any employers NI. The opposite is far more likely to be true. A client or agency might offer the contractor the choice between being paid as a temporary employee or receiving a gross payment to their company, but the client would take into account any liability for employers NI resulting from this choice and offer different rates so that their overall cost was the same regardless.--Chris King 18:15, 16 October 2005 (UTC)
I have not seen the original article, but Chris King's comments are not supported by reality in the areas of statute law (the intermediaries legislation, still playing itself out but so far does not in any fashion support Chris's interpretation), the common law of employment status (contractual nexus determinant of "of service" or "for services" is always assessed by the Court after the fact, until then it is guesswork and brinkmanship), and tax law (self-assessed by worker, usually without having sighted the contracts on which the assessment is predicated and subject to HMRC or Court approval). All of these come together for IR35. As I too declare an interest I will not express a positive opinion. However this is an extremely technical area, opaque equally to workers, employers whether hypothetical or real, accountants, and most lawyers. For a neutral expert perspective I suggest Ann Redston of (I believe) CIOT and KPMG. These comments may not be construed as legal advice - Stuart Ritchie LLM 126.96.36.199 16:51, 30 November 2005 (UTC)
I'm a bit bemused by Stuart's response as I didn't think I was making a legal point. I was making points about economics and business practise in order to show that the original argument that IR35 results in "higher tax than employment" relied on fixing a false reference point. Chris King 14:57, 13 December 2005 (UTC)
What you are missing Chris is that Employers National Insurance Contributions are never paid by a client, it is only ever paid by the workers actual employer. Which for both caught and not caught workers is the limited company (or intermediary) they work for. The central deceit in IR35 is that on the one hand the IR say that the client is the employer, so go to the worker for the employees contributions. Then they say that the intermediary is the employer and please can we have the employers tax (out of the same pot they previously taxed as salary).PaulSC
The original statement that prompted this whole section said that an IR35-caught intermediary would pay more tax on a given income than an employee. Although this is literally true, it is extremely misleading. The OP should have compared like with like. An IR35-caught intermediary with caught income X should be compared with an employee costing the client the same amount, i.e. an employee on salary Y such that Y+[employers NI on Y] = X. Then, if we ignore the effect of the 5% allowance, the salary paid by the intermediary to the worker as mandated by IR35 will be Y, and of course the taxes received by the government are exactly the same as if the worker had been an employee of the client. In other words, the difference between a "disguised employee" and a real one is not the total cost to the client nor the net amount the worker receives, it is who is responsible for handing over the difference to the government. Chris King 16:57, 16 December 2005 (UTC)
It is hardly misleading. When an employer quotes to you a wage he does not add 12% Employers contribution to your annual wage. For the vast majority of workers they never see, and never know of the Employers contribution. The central problem with IR35 and the reason why it still raises hackles 5 years after becoming law is that the tax treats one as employee and employer to extract tax and denies you the advantages of both. Granted the taxman gets the same amount of money but in the case of IR35 this is all paid by the worker, their notional employer pays no tax, so it comes out of the gross figure paid to the worker. The caught worker gets net less (i.e. the 12% Employers contribution) PaulSC 11:44, 19 December 2005 (UTC)
I think the time has come to agree to disagree. Chris King 10:09, 2 January 2006 (UTC)
There is another critical difference missed by both sides above. An employee gets paid holiday, paid sick leave, paid training, tools provided, and redundancy. Freelancers get nowt. Cerddaf 09:09, 2 February 2008 (UTC) —Preceding unsigned comment added by 188.8.131.52 (talk)
Since CJKing seems to be the only person who does not believe that IR35 causes a much higher tax bill for those Inside IR35 versus employees, and that this is due to the effect of Employers NI, the criticism has been re-instated. Please see section below "Workers under IR35 and Employers NI" for details. TTD911
Article on Information World Review
This entry was written by members of the Professional Contractors Group, a potentially biased party. See this article for details. I know nothing about this topic, but someone with knowledge of the field should take a look for any POV in the article. —BrianSmithson 14:18, 10 November 2005 (UTC)
Disputed per "Information World Review"
- Agreed. Here is the quote: "The Professional Contractors Group (PCG), an organisation for freelance and temporary contract workers in the UK, has joined the authoring ranks of Wikipedia, the open source encyclopaedia. John Kell, political researcher for the PCG, has written three entries, two on British taxation law, with a decidedly pro-PCG bias." —The preceding unsigned comment was added by Joaquin Murietta (talk • contribs) 04:47, 14 November 2005.
The article has undergone significant edits since then. See the history. Is there something specific about the current revision that you would like to dispute? ⟳ausa کui × 09:13, 14 November 2005 (UTC)
Impact on UK economy
It would be interesting to develop this article to show how this has impacted on the key UK IT sector of the economy. Certainly as a likely target of IR35, it changed the shape of my work to the extent that I now no longer accept contract assignments in the UK and I know a number of other fairly senior players in the market who have either abandoned the UK as a workplace or who have changed the structure of their business relationships to place themselves outside of the aegis of IR35. Sjc 09:12, 12 November 2005 (UTC)
I think a bigger impact would have been from offshoring. Work Permits would allow in certain circumstances the replacing of freelancers (because they are a business and therefore subject to the market), but you could not do so for an employee. This of course was based on actual not deemed employment, so a caught worker could find him/herself replaced by a cheaper resource. Treated by the tax authorities as an employee of the client, and an external supplier by Work Permits. This again is one of the injustices of IR35. PaulSC 10:41, 15 December 2005 (UTC)
Workers under IR35 and Employers NI
The intermediary is always responsible for Employers NI as is any employer within the PAYE system. For this reason the nominal tax paid by the caught worker is 12% more. Further they would pay the 1% extra over the NI ceiling. The Terms and Conditions under which a worker operates may not be clear at the time of agreeing a rate. [anon.]
Regarding "the nominal tax paid by the caught worker is 12% more." Let's assume that "worker" in this context means "worker and his company" since it's the company that pays the employers NI. Do you mean a worker caught by IR35 pays more tax than a not-caught worker? If so, no argument, but not sure why you bothered to say it. If you mean a caught worker pays more tax than an employee whose gross salary is the same as the caught workers rate, then yes, but it's a meaningless conclusion because it results from an unbelievable premise: that clients/agencies would generally agree to precisely the same rate regardless of whether or not they were going to be liable for employers NI on the payments. Chris King 15:35, 13 December 2005 (UTC)
I'll try and explain this one.
Under IR35 the worker is considered an employee for personal tax purposes, but the limited company is considered the employer for Employers NI Contributions. So in comparing the tax paid one needs to compare an employee with the IR35 caught worker.
An employee paid £30K will pay Income Tax on that plus the employees contribution of 10% (IIRC). His employer will then pay 12% Employers National Insurance Contributions
The caught contractor who makes £30K will pay the same Income tax as the employee and will also pay the employees National Insurance contribution out of that £30K, just like the employee above, but he pays out of the same £30K 12% employers National Insurance, thereby making his tax rate 12% more than any other worker.
Your conclusion that you make is also in error. A Client will never pay Employers National Insurance for the IR35 caught worker since only the actual employer pays Employers NI and for a caught worker that is the Limited Company through which they work.
Post the Y2K, Internet bubble and the increase in Offshoring have meant (certainly for IT Contractors) that the workers have not had the economic muscle to insist on higher rates for caught work. So the rate attracted will be the same for both caught and non-caught workers. To a certain extent that is still true. Another result of work being harder to get is the premium paid to a freelancers has got closer to that of the full time employee. The premium one gets for being freelance just about covers the extra costs of such things as Employers NI, training, paid holiday and all the other things which are not covered in an employees annual salary.
Remember under IR35 you are deemed to be an employee but never actually become one. If you did become an employee then IR35 cannot apply by definition.PaulSC
My response to the first post in this section was mainly repeating an argument I'd made elsewhere on this page, so I'll say no more here. With regard to your last post, it's probably better if I don't respond. I don't think we should clutter this page any further with our disagreement as I don't think we are likely to make any progress. Chris King 10:24, 2 January 2006 (UTC)
In response to the above from CJKing, I think you are the only person that doesn't see that IR35 does indeed result in higher levels of tax for those inside IR35 versus employees. Accordingly, I have added back the Wikipedia section saying that IR35 results in higher taxation.
You may wish to refer to this [article] which explains it quite well. The article has a slight inaccuracy in the calculation in that it shows the Employers NI (ER NI) being charged on the full 95% of gross (after the 5% allowance) whereas in the calculation HMRC devised the ER NI is actually treated as being included in the rate as paid by the end client (and the ER NI is then separated out by the calc).
Furthermore, in response to Chris King's comment at the top of this section, the statement "...because it results from an unbelievable premise: that clients/agencies would generally agree to precisely the same rate regardless of whether or not they were going to be liable for employers NI on the payments.".
This is itself the faulty premise. The fact that a worker is engaged via a limited company is in itself a guarantee to the agent/client that they will NOT be responsible for employers NI.
Indeed, this is part of the injustice - some agencies who engage workers through Ltd Cos are able to duck their responsibilities for some workers who are clearly employees of the agency (rather than employees of the client, which is the stated concern of IR35). An example might be secretarial temps who go from one assignment to another, under the direction and control of the same agency - as distinct from professional freelancers who normally use a very large number of agencies for introductions to clients and as a result they will rarely work through the same agency more than once, let alone on consecutive pieces of work. TTD911 17:24, 29 May 2012 (UTC)
Number of investigations and are those caught Are they actually employees
A Press Release by the Professional Contractors Group gives the number of Investigations into IR35 by those represented by various advisors as 1161 investigations and only 3 where the taxpayer was found within the regulations. Average length of these investigations is 2 years and they have lasted from a few months to over 4 years. The PMG has consistantly claimed that figures are not kept most recently on the 29th of November in response to a question by Norman Lamb MP - "To ask the Chancellor of the Exchequer how many people have been investigated by HM Customs and Revenue to determine whether IR35 applies to them in each of the last five years; how many of these were found to fall within IR35; what the (a) total cost and (b) average duration of such investigations was in each year; and what estimate he has made of the additional tax revenue raised as a result of those investigations in each year." To which she answered "HMRC does not routinely collect data in respect of specific types of employer obligations from the PAYE system. It is therefore not possible to isolate how many investigations have solely related to the intermediaries legislation." This can be found on Hansard here; http://www.publications.parliament.uk/pa/cm200506/cmhansrd/cm051129/text/51129w16.htm#51129w16.html_wqn10 So the PCG figures remain the only published figures available.
As for the actual employment status rather than deemed employment status. There are a few cases in this area. One O'Murphy v HP involved an IT Contractor who claimed that he was employed by Hewlett Packard. In this he was found not to be because no contract existed between the worker ( O'Murphy ) and the notional employer ( HP ) (see http://www.egos.co.uk/cases/omurphy_v_Hewlett_Packard.htm for the judgement).
There was a contract between The company O'Murphy and an agency, and the agency and HP. It is these contracts which IR35 seeks to set aside in determining if the worker is caught under the regulations. So while the EAT (Employment Appeals Tribunal) will consider there to be no contract between the worker and the notional employer. The IR maintain there is a notional (ie not existing in reality) contract between the worker and the employer. For this reason it is perfectly feasible for a person to be caught and taxed as an employee without actually being one. In the event their services are not required (even if this occurs before the end of the contract) no redundancy would be owing by the client. Something that an employee would expect (except when fired, even here there is a difference. To fire an employee requires a reason, for most freelancers this is not the case). PaulSC 23:28, 14 December 2005 (UTC)
A Limited Company Contractor has successfully made a claim for employment against his client. A Copy of the judgement can be found here. Controversy still exists even now over exactly what this means to the caught contractor. Some believe that the caught contractor may actually be a de facto employee, others that the extreme nature of the situation means it does not. The only certain thing is that each case turns on it's own merits and as has been the case with IR35, confusion reigns.
The figures on tax investigations v those who ended up paying now stand at 1,251 to 3.
This idea is making my head spin a little bit, and forgive my ignorance - but is there a specific tax form that was created to be applicable to this situation? If so, is it possible for someone in the UK to find a picture of it? If there is, I'll add it to the requested images. Verloren Hoop 20:53, 11 July 2006 (UTC)
There is no specific form for IR35. You are asked on the P35 if any tax is due under The intermediaries legislation. As for it making your head spin. don't worry it does for those of us who have lived with it for the last 6 years.
The comment(s) below were originally left at several discussions in past years, these subpages are now deprecated. The comments may be irrelevant or outdated; if so, please feel free to remove this section., and are posted here for posterity. Following
|==WP Tax Class==
Start class because not enough references.EECavazos 04:06, 4 November 2007 (UTC)
==WP Tax Priority==Mid priority because important within a country.EECavazos 04:07, 4 November 2007 (UTC)
Last edited at 04:07, 4 November 2007 (UTC). Substituted at 18:40, 29 April 2016 (UTC)
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