Among other things, you’ll find that you’re not the first one who was ever confused and frightened and even sickened by human behaviour. J D Salinger.
IR35 came into effect in 2000. Before the days of IR35, the most common way of operating as a contractor was as a self-employed individual. In the late 1980’s, HMRC introduced a new rule making any recruitment company engaging in self-employed workers, liable for any unpaid Tax if they failed to deduct full PAYE prior to payment to the contractor.
Almost overnight, every recruitment company refused to deal with self-employed contractors as they saw the risks, debt transfer and potential costs were too great. This forced contractors to set themselves up through their own limited companies, as recruitment companies did not hold any liability for unpaid taxes where they dealt with a limited company.
Contractors quickly became familiar with this new regime of working and recognised the additional opportunities it represented in maximising their returns by putting through ‘business’ expenses and utilising other limited company benefits.
HMRC, shortly after making these changes, realised that their tax take home from contractors and recruitment agencies, had reduced significantly. This was a direct result of contractors maximising their returns. In an attempt to regain some of these losses, HMRC introduced IR35, also known as the Intermediaries Legislation.
Do you see the pattern here?
Those who are genuinely a limited company should not be adversely affected by the IR35 changes. However, some, through blanket bans and technicalities may find themselves worse off and we have genuine sympathy for those workers.
Let’s have a look at why the changes have been brought in.
Many limited companies were borne from HMRC scrapping travel and subsistence in 2016 for those affected by SDC. Having a major Tax relief stamped out overnight, made contractors working through recruitment agencies look at limited companies and the ability to off-set certain business expenses.
Now we should look at different limited companies. Take say a plumber with a van, tools, protective equipment etc. Making his own appointments for inspection, providing quotes for new jobs such as a new bathroom install or fix a problem or fault, ordering stock, managing projects and emergency call outs. Then providing invoices chasing payment, collating all receipts, sorting company insurance, making sure they are up to date with their industry knowledge and arranging and paying for training courses. VAT returns and if they are VAT registered for threshold, they have to compete with pricing jobs with those not VAT registered. The list goes on.
Then take a driver, working through a recruitment agency, using the end clients vehicle and their insurance but being his own limited company. They get told what client and when, go to work. Completed the contract timesheet weekly and submit it to the agency with an invoice plus VAT (most likely flat rate VAT as they will have very little to offset). Then puts through expenses to his accountant such as a private car that is used solely from home to place of assignment, mobile phone, internet, clothing, a spouse as an employee and pays his accountant £30 a week to process this.
This is the reason why the legislative changes have been brought in. One is not the same as the other. Those exploiting the system have ruined it for many others.
It is not surprising that these changes have had to be made and all those in the supply chain supporting these practices will now face an impact, one way or another. The worker who is having to now close their limited company and complaining about their take home pay should thank themselves lucky that HMRC do not investigate all those falling inside the ruling and that some will have got away with such high take home pay versus those on PAYE.
That said, those genuine limited companies will still receive these benefits, as they are properly self-employed.
Many temporary workers and contractors are the backbone of Britain, you cannot take that away from them. However, avoidance is avoidance and it should be a level playing field for all those doing the same job.
If you would like to discuss how ePayMe can help agencies and contractors in this transition, please call us on 01252 863700 or contact us here.